Silver Symbiosis: ReOrienting Mexican Economic History

In 1904 Finance Minister José I. Limantour ordered a monetary census in preparation for Mexico’s conversion to the gold standard. In it, Porfirian bean counters found only one hundred million of the four billion-plus pesos of various sorts reportedly minted over the centuries. Even assuming a significant undercounting, in that time Mexico had exported at least 3.5 billion pesos; in short, the peso was the most widely circulated coin in history.1 In a previous study, I suggested that the economies of nineteenth-century Mexico and China were linked in what I termed a Sino-Mexican symbiosis in which Mexican miners seemed to coin silver in response to Chinese demand for specie.2 While commodity peso prices followed those of silver bullion, I cannot find a clear correspondence between peso exports and silver prices; rather peso exports increased when the Porfirian economy slowed and declined when it grew. This relationship is revealed in figure 1.In effect, every peso export peak indicates a slowdown in the Mexican economy and vice versa. Indeed, this relationship was commonly known at the time and no one was surprised that Limantour found it necessary to negotiate with the Manchu government in making the conversion to gold.3 But my initial work left the hows and whys of the Sino-Mexican symbiosis unanswered.This article extends my earlier analysis of Mexican economic history to the longue duree from the sixteenth to the mid-twentieth century. In tracing the evolution of the silver symbiosis, I assume a Sinocentric perspective on the early modern world system popularized by Andre Gunder Frank in his cleverly titled ReOrient in which he emphasizes the role of silver flows in organizing the world economy around China.4 Despite Richard Von Glahn’s caution that estimates of Chinese silver imports are “significant more as an order of magnitude than as a precise measure of quantity,” from the seventeenth century it seems that over half of Europe’s American silver went east to China, with another 2 million pesos (over 50 tons) arriving annually from the west by way of Manila.5 The rise of Western industrial capitalism from 1800 recentered the world system on the Atlantic nations, dissolved the old silver price structure, and reduced the Sino-Mexican symbiosis to a commodity trade in pesos. Mexico’s 1905 conversion to the gold standard shredded even this vestige, depriving Mexico of a major market for its silver, eroding the living standards of its popular classes, and paving the way for the 1910 revolution. It is this process that John Mason Hart termed “global causation” in his controversial classic subtitled The Coming and Process of the Mexican Revolution.6My argument is guided by stock demand monetary theory and describes how silver flows linked the world’s fragmented regional economies. Stock demand is an updating by Dennis O. Flynn and other economists of Adam Smith’s observations about money and its circulation. In The Wealth of Nations, Smith treats money as a commodity, which although used to denominate the prices of other commodities, responds to market forces like any other commodity. “Wealth does not consist in money, or in gold or silver, but in what money purchases [for] if gold and silver should at anytime fall short … there are more expedients for supplying their place, than that of almost any other commodity.”7 Stock demand (also called the buffer stock model) describes specie movement as the consequence of a dynamic conjunction of international and domestic demand for money. Thus a country’s monetary stock reflects a balance between its real income (GDP) and world demand for its money. That is, when the money supply exceeds the needs of the domestic economy the surplus will be spent abroad and replaced with domestic instruments of exchange for which there is little international demand. When a market exists for specie, then it is just another commodity to be exported in settling trade balances This is the monetary approach to balance of payments.8It is said that money is “the human artifact that confirms the impossibility of disentangling the cultural and the symbolic from the economic.”9 Because all human actions are embedded in institutions of culture, any study of money markets must recognize that economic development is affected by putatively non-economic cultural-historical factors.10 Despite their obvious differences, the substantive political rationality of Chinese and Mexican cultures directed the employment of wealth in similar ways. The elite (gentry bureaucrats/caudillos) and their personal factions of family, friends, and followers (muyus/camarillas) disdained commerce and industry while exacting tribute (kuilu or squeeze/mordida or bite) from their own productive classes and from foreign merchants who were integral to the conduct of long-distance trade and finance.11 These interlocking, multilayered relationships were not superceded as a result of state-sponsored modernization in the nineteenth century; rather these programs provided the elite with new opportunities for rent-seeking and produced tributary forms of capitalism now known as “amigo” or “crony” capitalism.The markets of Mexico and China displayed noteworthy structural similarities. With regard to China, Albert Feuerwerker writes,Feurerwerker’s description applies equally well to Mexico where thousands of periodic local markets operated in conjunction with the daily intermediate markets of urban hinterlands (patria chicas). These in turn formed distinct economic regions (dis)connected by a transportation system so poor that its traffic has been likened to the African caravan trade.13 The arrival of foreigners produced similar effects in Chinese and Mexican markets. Although the imposition of the treaty port system better integrated China’s economic regions, it connected them more closely to the international economy than to each another. In Mexico, American-built railways greatly reduced transportation costs and created a rudimentary national market, but relatively high domestic freight rates impeded its integration while comparatively low international rail rates connected its regions more closely to the international economy than to one another.14This study traces the metamorphosis of the Sino-Mexican symbiosis within a matrix of culture, contingency, individual choice, structure, and economy. It addresses the three major challenges identified by Gilbert Joseph for his new cultural history project to (1) “locate discrete foreign-local encounters within a broader historical context of hemispheric and international affairs, state formation and societal transformation,” (2) “historicize and decenter these encounter (and) trace out the broader patterns of power, ” and (3) “connect cultural imperatives with the process of social conflict generated by these encounters.”15 It also addresses persistent questions in Mexican and world economic history. Did the rise of Europe create a capitalist world system that in turn spurred the growth of American silver mining, as Fernand Braudel and Immanuel Wallerstein suggest? Or, did European hegemony arise belatedly and solely as a result of the massive transfer of American silver, as geographer James Blaut insists?16 Did shortages of American silver precipitate the fall of the Ming Dynasty, as Gunder Frank warrants? Or, did China’s economic and political crisis cause silver imports to decline, as Von Glahn and Flynn suggest? Did Bourbon policy drain Mexico of its specie causing its pre-independence economic decline, as Enrique Cárdenas, John Coatsworth, and Richard Garner argue? Or, did those policies prevent runaway inflation, as David Brading and Richard Salvucci contend?17 Did the export of specie constitute capital flight, foreign debt service, import payments, exported earnings, and other remittances that slowed development during the national period and Porfiriato, as conventional wisdom holds?18 Or, was it a profitable commodity trade in pesos with the Orient? And finally, was a global causality indicated by the simultaneity of upheavals in Iran, Russia, and China in first decade of the twentieth century, as Hart has proposed?19Culture makes a difference, agreed. The historian’s job is to show how, when, and why.—Charles TillyStrictly speaking, there is no economic motive, but only economic factors conditioning our striving for other ends.—F. A. HayekGunder Frank’s model of a Sinocentric early modern world economy has provoked a vigorous, sometimes rancorous debate over the origins of capitalism and the rise of Europe. It is no exaggeration to say that until recently traditional and progressive historians alike accepted as self-evident that Europe organized the world around itself by its invention of capitalism in the sixteenth century.20 European exceptionalism, as this consensus was called, described the emergence of nation-states from the decay of feudalism and the rise of Renaissance rationality, culminating in the appearance of a culturally based work ethic that promoted economic growth and more productive investment. Traditionalist Eric L. Jones dubbed this The European Miracle.21 Progressive Immanuel Wallerstein also accepted the premise of European exceptionalism in modeling his modern world system, but he was not celebratory. Rather he differentiated between the “dominant but optional Western ideology” of Eurocentrism and its actuality as an “all embracing epochal event.”22The consensus foundered, however, in disagreement over the economics of European exceptionalism, specifically the application to the whole of Europe of Earl J. Hamilton’s price revolution hypothesis for the decline of Hapsburg Spain. Hamilton adapted Irving Fischer’s tautological equation MV = PT (quantity of money X velocity of circulation = prices X transactions) to describe a two-phase price revolution consisting of a long sixteenth-century “A” cycle of expanding American silver imports, economic growth, inflation, and imperial wars, followed by a mid-seventeenth-century “B” cycle of declining silver imports, diminishing royal revenues, economic depression, and military defeat.23 From this, he extracted the following scenario for the emergence of European capitalism: profits rose because wages lagged rising prices concentrating capital in the hands of northern (mainly Protestant) entrepreneurs whose investments produced the Industrial Revolution. Predictably, proponents of the price revolution were criticized for emphasizing a single external factor at the expense of multiple internal factors. Their detractors pointed out that inflation preceded the arrival of American silver and attributed rising prices to “real” factors—demographic growth, increasing demand, and lagging production—in brief, a shortage of goods not a surplus of money. Over decades the back and forth of this debate produced an extensive general European economic crisis/price revolution literature.24Whatever its flaws, Hamilton’s work established the preconditions for Wallerstein’s world system by demonstrating that silver flows linked prices in different countries and markets.25 Wallerstein employed Braudel’s syntax of historie total to create a world system model that folded the general European economic crisis historiography into a neomarxist surplus value interpretation of quantity of money theory utilizing structural concepts of core and periphery derived from Gunder Frank’s interpretation of dependency theory. Wallerstein’s European capitalism was financed by surplus value extracted at the periphery through forced labor and transferred to the core as silver. Europe’s domination of silver markets produced underdevelopment in the peripheries and transmitted its seventeenth-century economic crisis to the rest of the world.26 Despite numerous complaints that he had not paid enough attention to regional particularities, Wallerstein’s insights had sufficient force to initiate a new field of world systems.Wallerstein’s model assimilated a wide range of historiography.27 It easily incorporated the Borah-Chevalier-Chaunu hypothesis with its Braudelian description of a faltering Mexican colonial economy, self-sufficient haciendas, declining silver production, labor shortages, and demographic disaster.28 The debate over the seventeenth-century depression (“myth or reality”) produced some of the best Mexican historiography: studies of indigenous civilizations and populations; of haciendas, merchants, and miners; of silver production and export; and of collapse and rebirth at the imperial center. After decades of disputes over data and interpretation, the following statements seem safe. Miners diversified into land and agriculture, either in pursuit of profits or as retrenchment; manufacturing expanded and diversified to replace unavailable European goods. Silver production fluctuated over the century, but the general trend was up; more silver stayed in Mexico for administration and defense, but smuggling also surged.29 Thus a question remained; if contraband offset the decline of registered imports, then where did all the silver go? It went East.Paradoxically, during Europe’s sixteenth-century inflation, there were chronic shortages of silver coin even in Spain. By quantity of money theory, prices should have fallen if silver was in short supply, thus tracking bullion flows became a major scholarly project. Braudel’s early assertion that specie drained constantly eastward in exchange for luxury goods was confirmed by Pierre Chaunu’s search of official Spanish registers that revealed that China absorbed one-third of American silver production.30 Michel Morineau and Woodrow Borah went further. Since by 1630, smuggling was so wide spread that only the Crown registered silver they reasoned, official registers reflected but a fraction of the Philippine peso trade.31 Sinologist William Atwell applied the insights of the general economic crisis literature and of Wallerstein’s world system model to the Chinese experience. He concluded that American silver imports had been the motor of Ming economic growth and that a reduction of those imports as part of a global seventeenth-century crisis had precipitated the dynasty’s fall in 1644.32 Other scholars, however, found that silver imports actually rose during the late Ming.33 How was that?In the early 1980s, Flynn addressed both the Ming and Hapsburg cases in a series of articles that defined the problem not in terms of declining silver imports but of evaporating profits as silver’s market value fell to its American cost of production. “A fall in the purchasing power of silver,” he wrote, “is price inflation by definition, since price historians have converted nominal (that is, observed) prices into ‘silver content’ prices.”34 As silver’s decline eliminated profits, entrepreneurs responded rationally by smuggling. For Flynn, the mystery was why silver prices and profits and had not fallen faster. He found a solution in stock demand theory. Silver flows were indeed the transmission mechanism of the early modern world economy, but the silver-denominated global price structure was not shaped by American production but by demand in silver’s major end market, Ming China where it was worth almost twice as much as in Europe.35 “Rather than depicting the flow of silver into China as a passive effect of disequilibrium in non-monetary trade,” Flynn and coauthor Arturo Giraldez concluded that “it is better to recognize that disequilibrium within the silver market itself was an active cause of global trade… . There is no doubt that Europeans played an important role as intermediaries, facilitating the movement of tens of thousands of tons of silver around the globe, but the most critical element of dynamism in this case should be attributed to the end-customer, China.”36 Although it demolished the economic underpinnings of Eurocentrism, Flynn’s work was neglected by Euro-centrism’s most active critics.Janet L. Abu-Lughod, Gunder Frank, James Blaut, Christopher Chase-Dunn and other scholars inspired by Wallerstein but dissatisfied with his singular, capitalist, Eurocentric world (with a hyphen) system rejected what Blaut characterized as the Eurocentric colonizer’s model of the world. Instead they proposed a series of multiple, multipolar, (pre)capitalist world systems centered well east of Europe and dating back perhaps to the late neolithic period.37 In discussions of Eurocentrism carried on in cyberspace, there emerged among progressive scholars what may be characterized as the Blaut-Gunder Frank hypothesis. Its proponents are economic empiricists who dismiss weberian, marxist, and all other civilizational typologies as presupposing, not proving, European exceptionalism.38 But their economic model is not taken from Flynn’s stock demand that puts dynamic China at the center of the world economy. Instead they present a more extreme form of Wallerstein’s neomarxist interpretation of quantity of money theory, attributing Europe’s rise to world hegemony solely to the transfer of surplus value in American silver. They deny absolutely that European capitalism was a product of its unique rationality arguing instead that the only European miracle was fortunate geography that put it in the best position to conquer and exploit America.In response to the Blaut-Gunder Frank cyber coup de main, David Landes launched a defense of the dominant Eurocentric interpretation of world history in his Wealth and Poverty of Nations. Gunder Frank’s Sinocentric manifesto, ReOrient appeared soon after and what became known as the Landes-Gunder Frank debate crystallized around issues dealing with the relationship of money to wealth and the role (or non-role) of culture in the origin of capitalism.39 Landes rejected Gunder Frank’s neo-bullionist monocausality. He argued that American silver was but one factor in the rise of European capitalism; equally important was the manner of its employment, a function of Europe’s unique historical experience and culture of formal rationality and innovation. Gunder Frank dismissed this argument out of hand as lacking empiricism and rigor. With Blaut, he took a monetarist position eerily reminiscent of Milton Fried-man and his Chicago Boys. The resulting ideological either-or debate mirrors another debate in Mexican studies among progressive proponents of the “new” cultural history (who rely on moribund dependency economics) and empirical practitioners of the “new” economic history (who are unwilling to admit that market forces they extol as impersonal actually operate within cultural webs).40 In fact, it is entirely possible to reorient the early modern world system and reject ideological Eurocentrism without supposing that economics operate outside of culture. The balance of this essay examines the Sino-Mexican symbiosis as a practical demonstration of the unified field of economics and culture.When a country is governed well, poverty and mean condition are things to be ashamed of. When a country is governed poorly, riches and honor are things to be ashamed of.—Confucius, AnalectsThe mind of the superior man is conversant with virtue; the mind of the base man is conversant with gain.—Confucius, AnalectsThere are few clearer examples of the inseparability of culture and economy in history than the long-term results of the policies of the Ming dynasty founder, Emperor Hung Wu. As Timothy Brook recounts in The Confusions of Pleasure: Commerce and Culture in Ming China, although the emperor sought a moral economic of “closed rural communities ruled by a little elite,” he also assured the provisioning of the cities by curbing exactions on the productive classes by the elite and by allowing merchants freedom of movement.41 His protection of peasant producers and artisans sparked sustained economic growth and increased demand for money upsetting the Confucian agrarian moral order. Because money was seen as a corrupting influence, the emperor closely regulated it by issuing paper currency and closing China’s silver mines, thus setting in motion events that would make China a black hole for silver.Silver’s commercial role expanded steadily, imperial policies notwithstanding. No merchant was without his clippers and scales to cut and weigh the 1.2-ounce ingots known as sycee taels. When later Ming rulers faced reality and eased mining restrictions, silver production continued to lag domestic demand. High Chinese silver prices stimulated Japanese mining and, by 1528, there was a brisk silk-for-silver traffic disguised as Korean tribute. After 1542 overseas trade was conducted openly by Portuguese middlemen in defiance of the Emperor’s prohibition, and after 1565 Spain’s establishment in the Philip-pines linked Chinese demand for silver directly to its major producer. Within two years, China ended its prohibition on overseas trade.In 1581 the Ming instituted the Single-Whip Reform, commuting labor and land taxes into two annual silver payments. This official silverization of China’s huge domestic economy produced a dynamic disequilibrium between its silver prices and those of the rest of the world. China’s silver-to-gold ratio was 6 to 1, compared to 8 to 1 in India, 10 to 1 in Persia, and 12 to 1 in Europe, and it absorbed the bulk of American and Japanese production.42 As China’s silver stock grew sufficient for its economy, its bimetallic ratios aligned with those of the rest of the world and silver denominated commodity prices increased. Silver imports continued to rise in the first decades of the seventeenth century, but the large arbitrage profits once reaped by European middlemen vanished. Thus, although silver imports fell immediately prior to the Ming’s collapse in 1644, it is unlikely that this caused the dynasty’s demise. Inflation indicated an abundance of silver, not a shortage and available stocks were sufficient to cover imperial expenditures had the Ming indexed taxes to reflect silver’s declining purchasing power.43Given the Orient’s gravitational pull on a world price structure denominated in silver, Europe’s general economic crisis may well have been an effect of China’s economic and political turbulence on the West rather than the other way around. European profits shrank as China’s silver prices fell and demand for silver dropped as war, drought, and famine wrecked its economy and reduced whole regions to starvation. Dispossessed peasants and unpaid soldiers formed desperate bandit armies while ineptitude and political infighting paralyzed the imperial court. When the bandit chief, Li Tzeching, captured Peking and proclaimed himself emperor, Ming military leaders asked for Manchu assistance to evict the usurper and restore order. The Manchu took this as an invitation to conquest, captured Peking, extended their control south and west, and claimed the Mandate of Heaven for their young emperor. To finish off Ming loyalists hanging on in the southeast, they banned maritime trade and evacuated thousands of coastal towns and villages. Deflation and depression hit China and lingered for a decade.44 After the Emperor K’angshi lifted the ban in 1685, China recovered, pulling Europe along with it. By 1730 prosperity had returned.This view from China provides a fresh perspective on seventeenth-century Mexico. As noted above, when China’s silver stocks grew sufficiently large, inflation brought its silver-to-gold ratio in line with the rest of the world, lowering world silver prices and squeezing profits. Mexico still shipped pesos to China, however, because silver denominated prices there, though rising, allowed greater profit than did Europe. A cargo worth one million pesos in Manila brought over two million in Mexico; few such profits were possible in trade with Europe. Thus the reduction of silver shipments to Europe was not “a form of economic aid to New Spain from the metropolis” as John TePaske and Herbert Klein suggest, rather it reflected lower metropolitan profits for silver.45As predicted by stock demand, coin not required by local economy was exported and replaced domestically by credit instruments and near money. This did not impede economic development, however; in fact the peso trade through Manila supported an expansion of Mexican textile manufacture. In addition to porcelain, lacquerware and other finished goods, a typical Manila ship might carry 12,000 or more bales of raw silk to supply local weavers. The cheapness of locally woven silk gave rise to the china poblana fashion among mestizo popular classes and was the basis of a flourishing trade with the other colonies. In 1631, to prevent Mexicans from displacing Spanish merchants in the Peruvian trade, the crown banned New Spain’s participation entirely and cut its mercury allotments by 50 percent. Yet six years later, some 14,000 Mexican workers were still employed weaving silk cloth to be traded for silver and, one presumes, contraband Huancavelica mercury.46 The fall of the Ming ended China’s tight control of foreign trade. Piracy and free trade flourished and shipments of Chinese mercury, previously restricted, reached Mexico contributing to the resurgence of silver production from 1670.47The Sino-Mexican symbiosis entered its fullness as China’s population and domestic economy recovered and Mexico replaced Peru as the world’s major silver producer. China’s demand for silver coin increased substantially with its annexation of Central and South East Asia into its tributary system. Again there was dynamic disequilibrium in the precious metals markets and again China became the world’s silver sink.48 Because China was able to absorb sufficient quantities to maintain European and American profit margins, rising silver production did not result in steady price increases in the eighteenth century; rather periods of inflation were interspersed by periods of relative price stability.49Although in Bourbon Mexico prices rose little and things were prosperous, “growth did not translate into development.” Thus when the economy declined after 1780, it produced “pauperization” that fed popular discontent prior to Hidalgo’s rebellion.50 There is agreement that Bourbon development lagged but disagreement over the role inflation played in precipitating the economic downturn. The lines of debate are similar to those drawn in the general European crisis price revolution literature. Did expanded silver production increase the quantity of money and cause inflation? Yes, say Arij Ouweneel and Catrien Bijleveld, who also emphasize the effect of protoindustrialization in increasing money’s velocity of circulation thus generating inflation on both sides of the MV = PT equation—more money and more active money.51 No, says John Coatsworth, who cites specie shortages throughout the period as evidence that inflation was not due to plenitude of money, but to commodity scarcity.52 Yes, says Richard Salvucci, who finds that “silver mining itself inflated the Mexican price level.” The peso’s overvaluation in Europe relative to Mexico made imported cloth cheap and sent its obrajes into decline while simultaneously encouraging mining and silver exports (described as capital flight).53 No, says Richard Garner, who attributes Bourbon Mexico’s non-development to “the continuing and growing diversion of capital from [Mexico’s] internal economy toward the imperial system.” Without sufficient capital growth, agriculture and manufacture barely kept pace with the population while “a rise in world market prices made some of Mexico’s imports more expensive.” But Garner acknowledges his findings are tentative and admits that “its almost as if [Mexico] had so much silver that currency exports did not matter.”54David Brading, however, finds that silver exports mattered quite a lot. Mexico’s silver production was so great that, “had the colonial authorities not shipped this fiscal surplus abroad, Mexico would have been obliged to double its imports from Europe or else cut its silver production by half: the alternative would have been a collapse in the internal value for silver.”55 Brading correctly defines the problem but from a completely Eurocentric perspective. He assumes Mexican silver production and exports responded to European demand through Spain. In reality, pesos were exported in response to price signals from silver’s major end market, China, then experiencing an unprecedented prosperity at the height of its imperial expansion.56As Chinese silver prices aligned with those of the rest of the world after 1790, its merchants became willing to exchange silver and tea for furs, textiles and, of course, opium. The outflow of Chinese silver to Europe though the British East India Company touched off a powerful inflation.57 Yet, according to Brading, inflation was “modest” in Mexico. Why?The worth of a thing is what it will buy.—Seventeenth-century British proverbWhat is present is used for profit. But it is in absence that there is usefulness.—Dao De ChingThe metamorphosis of the Sino-Mexico symbiosis into a commodity trade in pesos was assisted in two ways by the emergence of the United States as an independent commercial power: Yankee ships replaced those of Spain in the Manila-China trade, and U.S. Mint policies maintained the flow of pesos to China despite the disruption of production by Mexico’s wars of independence.In 1792 the U.S. Congress set its mint ratio of silver to gold at 15 to 1 when the world ratio was 15.61 to 1. This overvaluation created a dynamic imbalance in bullion markets. In accordance with Gresham’s Law, gold flowed out of the United States and silver poured in—so many pesos in fact that Congress declared them legal tender. In 1806, the mint discontinued dollars and struck only fractional coin, mostly 50-cent pieces. From 1792 to 1813, commodity prices rose over 95 percent, but thanks to U.S. demand silver prices also rose 28 percent. The real decline in the peso’s