Postwar Govermnent Finance
China's national finances were perilously close to complete collapse when the war ended. It was critically necessary for the government to give serious consideration to the dangers of an acutely inflationary situation, and to adopt strong measures to balance the budget and to prevent further monetary expansion. Unfortunately, the leaders of the government welcomed the victory as an automatic solution to the problem of inflation. The government would control the wealth of both Manchuria and Formosa, as well as valuable assets in the form of enemy property in areas formerly occupied by the enemy.
Besides, the successful conclusion of the war had raised China's status in international affairs, and had temporarily unified the Chinese people under the Nationalist government. It was maintained that these circumstances in themselves constituted an adequate invisible reserve against the note issue: that such abundant assets not only would provide backing for the existing volume of currency in circulation, but could also render harmless further increases in the note issue up to several hundred per cent. This tremendous over-optimism provided the basis for unrealistic postwar fiscal policies of the Nationalist government, which, in the hour of victory, advanced China on the road to economic disintegration and political disaster.
At the end of July 1945, immediately before the cessation of hostilities, the note issue of Free China stood at CNC $462,327 million backed by the unused portion of American Treasury credit, a second substantial credit with the United States in respect of Chinese govern-