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

By Kia-Ngau Chang | Go to book overview

Chapter 7 Government War Finance and Expenditure

1. THE BUDGET

Principles of War Finance

At the outbreak of war the Chinese government, which for two and a half decades had barely sustained itself by borrowing, was presented with the task of financing preparations for resisting a formidable military power. Huge sums were required to equip and maintain fighting units, to construct roads and railways in the interior, to transplant industries of the coast to inland centers, and, in general, to mobilize the resources of unoccupied China for the purposes of war. Moreover, with the government's financial requirements growing daily, it lost the greater part of its revenues from salt tax, customs duty, and commodity taxes as a result of the invasion of North China and the subsequent occupation of the central and southern coastal areas. With the incidents of the early thirties as a reminder of the imperialist ambitions of the Japanese, perhaps it should have been foreseen that the subjugation of the coast or a blockade of the major ports would deprive the government of much of its revenues. Once the war had started, there was little hope of developing alternative sources of revenue in the interior. The taxable capacity of the inland provinces was extremely limited because of the general poverty of the peasant farmers and the lack of developed secondary industries; and there was no capital market for the government to exploit as it had the Shanghai market in prewar days. In these circumstances of dwindling revenues and mounting expenditure, the most serious financial crisis the Nationalist government had yet experienced arose.

There was a sharp divergence of views on the appropriate financial policy China should pursue during the period of war emergency.

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