Fiscal and Monetary Policies
During the war period, 1937-1945, governmental expenditures totaled CNC $2,626,343 million. The fact that only CNC $158,470 million, or 6.0 per cent, of this amount was raised through taxes is dramatic evidence of the extent of the government's failure to use its fiscal powers to relieve inflationary pressures. Two factors made it evident that China needed a vigorous tax policy right from the start of the war in order to absorb the surplus purchasing power of her citizenry. One was that the total mobilization of the country's economy for a modern war was bound to create an unprecedented flow of income to individuals; the other was that, under the then prevailing conditions of the underdeveloped economy, mobilization was bound to create real scarcities as distinct from artificial or temporary shortages, thus building up discrepancies between supply and demand sooner than in countries more advanced economically. A vigorous tax policy was the only practical way to stop inflation.
As if the backwardness of the economy of Free China were not enough of a problem, during the period of wartime stress first priority had to be given to the removal of equipment and goods from the areas being occupied and to the installation and utilization of the equipment. Commercial and industrial buildings also had to be erected quickly, as well as housing for government employees and refugees streaming into Free China's interior, a condition which exerted a severe upward pressure on the wage level of transportation and construction workers. The second phase in the progress of inflation was marked by increased retail trade brought about by the rising level of consumption of these workers and by the population influx,