The Great Chinese Inflation

By Ebeling, Richard M. | Freeman, December 2004 | Go to article overview

The Great Chinese Inflation


Ebeling, Richard M., Freeman


Inflations have undermined the cultural and economic fabric of society, bringing social chaos and revolution. One example is the Great Chinese Inflation of the 1930s and 1940s. Indeed, the destruction of the Chinese monetary system during this period helped Mao Zedong's communist movement triumph on the Chinese mainland in 1949.

In the nineteenth and early twentieth centuries, imperial and then republican China had no central bank. The monetary system was based on a diverse network of private banks operating in the various regions of the country. While copper was widely used in coins, the primary medium of exchange was silver, and the entire Chinese economy functioned on an informal silver standard for most of this time. A year after Chiang Kaishek's Nationalist Party came to power in Nanking in 1927, the Central Bank of China was established with its headquarters in Shanghai, and the country was formally put on a Chinese silver-dollar standard.

For the first two years of the Great Depression, beginning in 1929, China not only weathered the international financial and economic storm, but actually experienced an export boom, with many domestic prices rising while the rest of the world suffered a serious price deflation. But in September 1931 Great Britain went off the gold standard and a growing number of countries engaged in currency depreciation, which adversely affected the value of the Chinese silver dollar on the foreign-exchange markets.

The fatal blow came in 1933 and 1934, when, under Franklin Roosevelt's New Deal, silver was remonetized. The U.S. government went on a silver-buying spree at a price above the world price in an attempt to push up prices in the United States. As the export price for silver rose in the financial center of Shanghai, silver flowed from the Chinese countryside to the main port cities on the coast, followed by a massive export of silver from China to the United States. A resulting catastrophic price deflation severely hit both Chinese agriculture and industry.

In October 1934 the Nationalist government imposed foreign-exchange controls on silver exports. Then in November 1935 the Central Bank of China officially took the country off the silver standard, made its bank notes legal tender, and placed the country on a fiat currency with government in full control of the quantity of money.

With no restraint now on the power of the Chinese government to turn the handle of the printing press, Central Bank policy soon led to monetary disaster with the coming of China's war with Japan.

The war between China and Japan lasted eight years, from July 1937 to September 1945. The Japanese army occupied more than one-third of China, including virtually all of the country's leading port cities and industrial centers. Over ten million Chinese civilians lost their lives in the fighting.

The end of the conflict only reopened the longstanding civil war between Chiang Kaishek's Nationalist government and the large communist forces led by Mao Zedong. The civil war raged across China for four years, until Mao's communists were triumphant on the mainland and the remnants of Chiang's Nationalist army withdrew to Taiwan in late 1949. Another five million innocent civilians lost their lives in the civil war.

In the war years Chiang's government resorted to the printing press to finance the majority of its spending, covering 65 to 80 percent of its annual expenditures through money creation. …

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