"Every perception is to some degree an act of creation, and every act of memory is to some degree an act of imagination."

-- Gerald Edelman, Second Nature: Brain Science and Human Knowledge
7 China’s Lessons and Its Ways of Operating9 China’s Lessons and Its Ways of OperatingChina’s Lessons and Its Ways of OperatingChapter 6: The Big Cycle of China and Its Currency2020-10-09JournalIn China in the mid-1930s two currencies existed—one that was fiat paper that was used domestically and one that was gold and silver that was used for international payments.  The fiat paper one that was used domestically was printed abundantly and devalued a lot, even as the government issuing it controlled less and less territory as it lost the civil war, which is why we see the hyperinflation shown in the chart during that period.  Remember, as a principle, get out of fiat currencies during debt crises and wars because they will be printed a lot to fund debt payments, which will lead them to be devalued and to high or hyperinflation.  As shown in the chart below, after the turbulence of World War II and the civil war, in December 1948, the first RMB was issued as a fiat currency that was kept in limited supply to end the hyperinflation.  In 1955 a second issuance of RMB was made, and in 1962 a third was issued.  From 1955 to 1971 the exchange rate was fixed at 2.46 to the US dollar.  From 1972 through the late 1970s, China did a better job of restraining money and credit.  You can see another round of high inflation from the late 1970s to the early ’90s.  It was caused by the global devaluation of money against gold in 1971, global inflationary pressures, China phasing out its price controls, easy credit, and lack of spending controls among state-owned enterprises.  In 1996 convertibility was allowed for current account items but not for the capital account.  From 1997 until 2005 the exchange rate to the dollar was kept at 8.3.  In 2005 the peg with the dollar was ended. Continue reading…