War Inflation: 1940-1945
The year 1940 marked a turning point in inflation in Free China. Prices of imported goods and goods from other provinces led Chungking price levels in the early years of the war, and the comparatively slow advance of prices of consumer goods was a stabilizing influence on the economy. In 1940, however, Free China experienced a severe crop failure, and the prices of foodstuffs rose dramatically. The summer rice crop in the fifteen provinces of Free China in 1940 was 20 per cent below the previous year, although winter harvests of wheat were kept the same. Consequently, the output of agricultural foodstuffs during 1940 fell by an over-all amount of 10 per cent; and the Chungking price index for rice, the most important single item in the price structure, rose from 213 in May to 1,004 in December. The decline in food production continued through 1941, when output of agricultural commodities decreased by another 13 per cent to 9 per cent below the prewar average.
The sudden drop in agricultural output in 1940, eliminating most of the factors that had operated to restrain the rate of price rises in the first stages of the war, accelerated the process of general inflation. Farmers, who had previously suffered a loss of real income because of the lag in agricultural prices behind the general price level, began hoarding their products in anticipation of further gains in prices. Flourishing black markets in the provincial towns pushed prices of foodstuffs far beyond the "fair price" quotations of the local guilds and agents of the government. There was an upsurge in consumer