We use counterfactual simulations based on an estimated dynamic stochastic general equilibrium model to demonstrate why China was affected less than other major countries during the first two years of the Great Depression. We show that being on a silver standard insulated China from the adverse consequences of the Great Depression by saving the country both from a tightening of monetary conditions and from a detrimental internal deflation. Without the insulation of the silver standard, China might have suffered from a cumulative output loss of between 11% and 23%, and its inflation might have become deflation.
