The Inflationary Spiral: The Experience in China, 1939-1950

By Kia-Ngau Chang | Go to book overview

Chapter 6
Prewar Government Finance

Weakness of the Prewar Structure

The origin of China's wartime financial woes can be traced significantly to the country's prewar structure of public finance. As military expenditures in wartime inevitably increase the money supply if deficit financing prevails, the dual problem in war finance, given the military needs, is to avoid an oversupply of money in relation to the output of civilian commodities and services and to distribute the financial burden of the war equitably. While proper fiscal measures alone cannot accomplish these two objectives, they can nevertheless play a key role. Among the necessary conditions for successfully financing war without destroying economic stability are a rational pattern of expenditures, an equitable taxation system, and facilities for direct public borrowing. Unfortunately, none of these elements was present in China's prewar financial structure and none was provided subsequently. Specifically, the government's financial weakness lay in three distinct but related fields: the prewar pattern of government expenditures, reliance on indirect taxation, and mismanagement of the domestic bond market.

The finances of the central government of China were in deficit every year from the time of the founding of the Republic in 1911 to the outbreak of war with Japan in 1937. Until 1927 incessant internal strife produced chaos in government finances, and no budget could be drafted because revenues legally belonging to the central government were retained by local warlords. After the Nationalists came to power in 1927, the central government attempted to enforce its tax claims by direct central collection. In the decade before the outbreak of the

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