The Money Market and Private Credit
The preceding chapter has outlined how the tremendous increase of disposable money income in China, resulting from the large and rising volume of government expenditures and the inadequate tax program, constituted a major factor in the increase of aggregate demand. This chapter will deal with the second major stimulus to aggregate demand, namely, the expansion of private credit.
Before the war, credit facilities in the interior of China were exceedingly poor while there was a heavy concentration of financial resources and institutions in the Treaty Ports. Thus, when the tide of war turned against China and it was necessary to fall back upon the interior for continued resistance, a liberal credit policy was adopted by the government to facilitate the relocation of industry from the coast and to stimulate the establishment of new enterprises and the production and movement of goods in the interior. Credit was made available to finance industry's moving costs, new enterprises, and purchases of finished goods and other materials for shipment to the interior. The immediate impact of this policy was to increase the aggregate supply of goods in Free China and, at the same time, to hold inflationary pressures to moderate dimensions.
However, toward the end of 1939 the supply of capital goods and raw materials in interior China had dried up as a result of the enemy blockade and the unresponsiveness of the region's primitive productive apparatus to external stimuli. Specific shortages developed. The liberal credit given to industry, by which the government had expected to increase the supply of goods, now merely helped competitors to bid