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Preface
Historically, in August 1948, the Kuomintang regime on the verge of collapse began the reform of the Golden Yuan in Shanghai, and in just three months, the economy of the Kuomintang regime collapsed, and the remaining army was forced to retreat to the Yangtze River, and two months later, Chiang Kai-shek was forced to resign as president of the Nationalist Government. The time of the existence of the Kuomintang regime on the mainland has officially started the countdown.
Many blame the KMT's failure on the reform of the Golden Yuan, but this is actually an inversion of cause and effect – the failure of the 1948 Reform was not the cause of its economic collapse, but the straw that broke the camel's back.
This process of continuous deterioration and decay began with the full-scale outbreak of the Anti-Japanese War, and eventually led to the overall weakening of the Kuomintang government and army, for many reasons, but the most important was runaway inflation.
As the Nationalist Government devalued the currency and circulated throughout the country, it was like a toxin spreading through the veins of the whole body, so that all the components of the regime - the army, the government, the economy, and society - were completely exhausted and had to come to an end.
Catastrophe and origin
In order to give readers a more intuitive impression, the following two sets of data are not made up by me, but from the book "China's Wartime Finance and Inflation, 1937-1945" written by Arthur Young, an economic adviser to the Nationalist government and an American financial adviser.
In 1937, social retail sales rose by about 40 percent. Subsequently, each year rose sharply on the basis of the previous year: in 1938, 49 per cent, in 1939, 83 per cent, in 1940, 124 per cent, in 1941, 173 per cent, in 1942, 235 per cent, in 1943, 245 per cent, in 1944, 231 per cent, in August 1945, 251 per cent.
In July 1937, the Nationalist Government issued 1.455 billion yuan of legal currency, equivalent to 1.390 billion yuan before the war.
In 1941, 15.133 billion yuan of legal currency was issued, equivalent to 765 million yuan before the war;
In 1944, 189.461 billion yuan of legal tender was issued, equivalent to 250 million yuan before the war;1
In August 945, 556.907 billion yuan of legal currency was issued, equivalent to 210 million yuan before the war.
In December 1945, 1,031.932 billion yuan of legal tender was issued, equivalent to 415 million yuan before the war.
It looks shocking, but in fact, compared to later, this is nothing - at the end of 1947, there were 34 trillion fiat currency in circulation, and half a year later, the value of the currency in circulation increased to 250 trillion. Then, in just one and a half months, that number skyrocketed to 600-700 trillion...
On the eve of the reform of the Golden Yuan in 1948, the necessary means of transportation for citizens in big cities were not bicycles and cars, but wheelbarrows - otherwise hundreds of pounds of banknotes could not be carried when shopping...
Let's talk about the farce of the Golden Yuan in the next story, and today we will talk about how terrible the harm of inflation in the Kuomintang is.
The primary cause of this catastrophe is war. Before the war, the bulk of the Nationalist government's revenues came mainly from commerce and the urban economy – customs duties, salt taxes, and commodity taxes accounted for 80 percent. When the government retreated into the interior, the big coastal cities were overrun by devils, and most of these sources of tax revenue were lost – government revenues plummeted by 63 percent.
As soon as the cannon sounded, there were ten thousand taels of gold. As soon as the war broke out, the expenditures of the Nationalist Government skyrocketed, and in the first two years a great deal of money was spent on the resettlement and redevelopment of the relocated industries;
The original Nanjing government, as well as the current Chongqing government, have never established an effective political system for managing the countryside. The authority of the government has never been experienced by the peasants at the bottom, and it is the powerful and large landlords in various localities who manage these huge numbers of peasants. Because of this, the central government, which has lost most of its urban sources of tax revenue, simply cannot effectively collect taxes from the countryside.
What to do if you don't have money? I had to borrow money from four government banks, and these four banks couldn't get any decent collateral, so they began to print a lot of money to meet their financial needs, and inflation naturally appeared.
To add insult to injury, the Kuomintang regime relied on imports for most of the means of production, and there was a shortage of machinery, metals, electrical equipment, fuel, chemicals, and so on along with the loss of coastal ports;
For example, after the fall of Guangzhou and Hankow in 1938, the price of imported goods soared by 72 percent, and after the fall of Nanning in 1939, the price of imported goods doubled.
And that's not all, because of the shortage of raw materials, the productivity and operating rate of the factory are not rising, and as a result, there is a serious shortage of goods on the market. What's more, when the factories were relocated to the mainland, the government only relocated 10% of the textile and consumer goods factories in order to squeeze out the transportation capacity and ensure that 80% of the military factories and 40-50% of the heavy industry could be relocated smoothly.
The Nationalist Government was right to do so, preferring to ensure the most basic combat supplies for the army in the ragged clothes of the Chinese people for years to come. However, apart from clothing, there is no shortage of daily necessities such as medicines, paper, light bulbs and candles, and although some small factories have been set up and put into operation in the mainland, their production capacity is far from sufficient.
One way to solve the problem is to be surprised by everyone, and that is to import consumer goods from the Japanese-occupied areas. At first, both the devils and the Kuomintang banned this trade, and later, the pressure of consumer demand was too great. The Chongqing government had no choice but to legalize trade with the exception of a few scarce goods.
Gasoline, cloth, medicines, tires and other vital materials were sold to the central government by countless smugglers, and in contrast, tungsten ore, tin ore and antimony ore were also transported to the devil's military factories.
The situation of the war gradually became stranger, and letters from Chongqing could be sent to the major cities occupied by the Japanese as usual, and letters from the Japanese-occupied areas could also be sent back to Chongqing; officials in Chongqing often sent money to their families stranded in Shanghai or Beiping, and then angrily learned that their property had been invaded by the Japanese.
Soar into the sky
Before 1940, inflation in the Kuomintang was not so terrible, mainly due to the bumper grain harvest of 1939, and the people's demand for clothing and housing was not so urgent, so life seemed to be passable.
No one could have imagined that in 1940, due to a poor harvest, food prices began to skyrocket, and from 1941, the Chongqing government began to implement the expropriation of land taxes, which directly led to two consequences:
First of all, the amount of food entering the free market has decreased sharply, and the balance between supply and demand has been completely broken.
Second, because of the poor harvest, peasants and landlords, including merchants, began to store grain instead of currency. Suddenly, the price of food in the market skyrocketed more than 100 times, and in order to ensure the livelihood of government officials, workers, and soldiers, the government issued a large amount of money again – and inflation became more and more uncontrollable.
The Chongqing government also took a number of measures to avoid printing new banknotes in large quantities, initially by selling public bonds and foreign exchange reserves, but this did not last long before the government returned to the old way of indiscriminate banknotes.
It was only after prices skyrocketed in 1941 that the Chongqing government realized that if they wanted to avoid losing the war due to currency devaluation, they had to increase government revenues and cut spending.
Chiang Kai-shek's regime, based on an urban economy, was obviously unable to control the rural economy, but at that time, 80-90% of China's means of production were provided by the countryside, and in the end, the Chongqing government's tax reform was extremely ineffective, barely taking care of 17% of government spending.
As I described in my article "The Kuomintang's Road to Self-Destruction (6): Knocking Out the Bone and Sucking the Marrow, the Great Famine and Starvation Everywhere", the Kuomintang government obtained a secure source of food through the expropriation of land, but at the cost of the peasants being exploited and complained, and at the same time, corruption became common among the government, which can be regarded as a way to quench thirst.
Although the development of new tax sources has not been successful, the Chongqing government has done so in terms of limiting spending, but the consequences are difficult to describe:
The Government's approach is to effectively freeze the increase in the salaries of government employees and officers and soldiers. By printing huge amounts of money, the salaries of government employees were barely kept at the same rate as prices were rising, at the cost of an 85-94 per cent drop in the real purchasing power of wages and military pay.
The single employees of the government were crammed into cramped dormitories, shivering in their coats during the day in offices without fires, and using their coats as quilts at night. Every month, the government distributes a few bales of rice and sells salt, oil, coarse cloth and firewood at affordable prices to maintain a minimum living standard. This little bit can barely guarantee that these employees and their families will not starve to death. But the big men can't guarantee their survival.
The low salary, which is difficult to guarantee even basic survival, has prompted the vast majority of government officials and military officers to start looking for side jobs to make extra money, and there is no doubt that all these means and ways of making money are illegal and illegal. This includes, but is not limited to: smuggling (mainly for the Japanese-occupied areas, because there are many channels), leakage, speculation, embezzlement of public funds, embezzlement and self-enrichment, etc.
The truly effective way is to reduce the size of the government and the armed forces, which can not only reduce expenditures but also improve efficiency. However, due to political considerations, this path is absolutely unworkable.
What many people don't know is that the bulk of the government's financial spending is actually to supply the growing US military in China. By the end of 1942, there were only 1,255 U.S. troops in China, most of whom were officers and men brought over by General Stilwell to supply Lend-Lease supplies, and by August 1945, the number of U.S. troops in China had swelled to 60,369.
American soldiers stationed in Kunming.
Just looking at the number of people, it seems that it is not much, but the standard of supply of living materials for these Yankees far exceeds that of the vast majority of Chinese, and they must ensure enough meat, eggs, and milk every day, as well as comfortable barracks, rich entertainment facilities, and enough alcohol. The Chongqing government calculated that the consumption of one American soldier was enough to cover the cost of 500 Chinese soldiers, which shows how bad the treatment of Chinese soldiers was at that time.
By the later years, inflation had seriously damaged the living standards of all the KMT regime's rank-and-file personnel, and although the professors, students, and government workers in the cities were able to enjoy a pittance of government subsidies, it was a drop in the bucket.
It turned out that those high-minded intellectuals gradually discovered that meat and cooking oil had completely disappeared from their lives, some people even had to eat two meals a day as a luxury, and many students and teachers were generally malnourished and were on the verge of starvation for a long time. In order to increase their modest incomes, some professors traveled back and forth between the two schools, and many more were forced to sell their treasured ancient books, paintings and calligraphy. Or put down your body and help others engrave stamps or write books.
Arthur Younger once told a story about a couple who saved a large sum of money for their children every year to pay for their children's future college tuition. When the child reaches the age of 18, they take out all their savings and buy the child a birthday cake...
The middle class, including the professors, had hoped that the Nationalist government would build a modern, stable China that would allow them to realize their ambitions, but inflation had dashed their dreams completely.
This was a disastrous effect on Chinese intellectuals, and it was at this point that their ideals became disillusioned like soap bubbles, and opposition to the government grew.
As for the government workers, by 1943 the real purchasing power of wages had fallen to 1/10 of what it was in 1937! Although they were able to receive food subsidies from the government, the living standards of the vast majority of the people were close to "abject poverty." Bachelors can barely survive on their salaries alone, and those who have families are in despair.
The only exception is a handful of hoarders and corrupt officials who, in their cars, whizz through the streets of Chongqing, armed with beautifully dressed women, smuggling perfumes, cigarettes, fresh fruit and other luxuries from abroad.
Large-scale banquets are sometimes held in government departments, and half-starved employees are the only time to have a good meal, and only a few are brave enough to stand up for what they believe in and watch their families malnourish, and many more become corrupted in collusion with their superiors.
Farmers who built houses on rammed earth
As the leader of the National War of Resistance, Chiang Kai-shek has always tried to set an example, he lived a simple life, a clean style, did not smoke or drink, and lived a life like a Puritans - but, as the people with a clean heart say, a person who has what he wants, of course, can live a very self-disciplined and "incorruptible" life - because the government provides all the things.
The Chongqing government had been reluctant to actually raise wages because doing so would mean soaring government spending and a direct quadrupling of the budget – until 1944, when the Kuomintang regime, which was no longer able to suppress internal discontent, agreed to a small increase in real wages – but it was too late and too small to be of much significance.
By 1944, prices were already soaring like rockets, and the government and the army were generally corrupt, morally corrupt, and irretrievably decaying. This total decay was irreparable until the Kuomintang was finally driven out of the mainland.
A different path
All foreign journalists and observers who criticized the Kuomintang regime invariably drew a stark contrast between the failure of the Kuomintang and the success of the Chinese Communist Party.
But in reality, Yan'an also faced the most serious and long-lasting economic crisis during the Anti-Japanese War. Beginning in 1939, the Central Committee of the Kuomintang began to take a series of measures to restrict the Chinese Communist Party, and the armed conflict in it, which the Communists euphemistically described as "friction".
It was also from this year that the Kuomintang regime began to impose a total blockade of the southern and western borders of Shaanxi, Gansu and Ningbo, and by the end of 1939, the blockade had reached 400,000 troops, including the well-preserved Central Army under the command of Hu Zongnan.
The military blockade not only prevented the further expansion of the liberated areas, but also directly cut off the direct contact between the communists in Shaanxi, Gansu, Ningbo and Xinjiang, and it was during this period that the chairman's younger brother, Mao Zemin, was killed.
The economic blockade was more severe than the military blockade, and in 1939 the Chongqing government cut off financial subsidies to the Shaanxi-Gansu-Ningbo Border Region, and trade between the border region and the rest of China was almost completely suspended, which was a rather heavy blow to the border region, which was unable to provide for many basic necessities.
The grain harvest failures of 1940 and 1941 not only led to the great famine in Henan the following year, but also had a great impact on the Shaanxi-Gansu-Ningbo border region. Because the Kuomintang government cut off the supply of fiat currency, the border region lost the main source of common Chinese currency. The Communist Party had to issue its own currency to cope with internal circulation, while stockpiling scarce fiat currency to import almost all of the industrial goods that could not be produced locally.
The severance of the main source of income and the rapid deterioration of the terms of foreign trade caused massive inflation in the border areas, and the prices in the border areas were even much higher than those in the Kuomintang areas: from 1937 to 1944, prices in Chongqing rose 755 times, and in Yan'an they rose by 5,674 times!
Chairman Mao later recalled this period: "At the beginning of the war, we still had food to eat and clothes to wear. Then it gradually became difficult, to the point of great difficulties: there was not enough food, not enough oil and salt, not enough clothing, not enough money. (Selected Works of Mao Zedong, Vol. 3)
Mao's response was to emphasize the importance of self-reliance – if goods could not be traded smoothly and there was a lack of currency to trade, the frontiers would be self-sufficient.
In the early days of the war, most people in the border areas were not required to pay taxes, but during this extraordinary period, the party was helplessly forced to tax almost the entire population of the Shaanxi-Gansu-Ningbo border region. The levy included taxes in kind – grain, hay and wool – as well as some monetary taxes. The tax on cereals is levied on the basis of actual production rather than the amount of land owned.
But as a supplement, the Communists began to actively support the development of handicrafts, agriculture and commerce - "the starting point of our work is not to ask for the people, but to give." What do we bring to the people? Under the current conditions in Shaanxi, Gansu, and Ningbo, what we can do is to organize, lead, and help the people produce and increase their material wealth. In this way, the peasants will gain more than they lose. ”
Although the peasants in the border areas had to pay much more taxes than before, they would not be subjected to the terrible exploitation of the peasants in Henan, who were forced to hand over the last grain of grain and then starved to death with their families.
The Communists succeeded in stopping the deterioration of the economy and stabilizing it through the mass production campaign:
Between 1937 and 1944, Yan'an's grain output increased by nearly 40 percent, cotton production was zero at the beginning of the war, and by 1944 it had reached 3 million catties of lint, and in 1937 the output of cloth was 7,370 horses, and by 1943, the output had increased 14 times to 105,000 horses!
In addition to this, salt, coal, primitive oil and gas wells, irrigation, pasture and afforestation have all been actively developed. By 1944, although the border areas were still facing many problems, the economic crisis had been largely overcome, the revolutionary ranks felt much more secure, and the people had regained their recognition and support for the Communist Party.
The Communist Party's policies and actions in Yan'an, which pulled Shaanxi, Gansu and Ningbo out of the brink of collapse, were in fact a reminder to the Kuomintang government of how to overcome difficulties and improve relations between the government and the people through its own efforts in the midst of a growing economic crisis.
This was a completely different option from the Chiang Kai-shek regime.
When the hardships of life in the Kuomintang areas continued, and unequal treatment was everywhere, the Communist Party's approach provided new hope and a tangible model for the broad masses of the people.
Whether it was the Kuomintang government in Chongqing or the puppet government in Nanjing, they only used harsher means to control the people under their rule, the people's lives were distorted beyond recognition, and the vast majority of the people survived in despair, impermanence and fear, and their only hope was that the war would end before China collapsed on its own.
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