Brief History of Inflation in China 9781844641475, 9781844641468

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Acknowledgements

We sincerely appreciate the hard work of the translator Chen Mirong, as well as the final polisher Alastair Robert Wilson. Without their diligent work this English version would not exist. We also sincerely appreciate Social Sciences Academic Press. They have done much work in arranging the preparation of the English version.

March, 2013

Contents Introduction ...................................................................................................................................... 1 1 Ch’ing Dynasty and Inflation .......................................................................................................... 2 1.1 The Issuing and Breakdown of the Big Coin, the Official Note and the Treasure Bill .......... 3 1.2 The Abusive casting of the Copper Coin and its devaluation ............................................ 15 2 The Beiyang Government, Local Warlords and Inflation .............................................................. 23 2.1 The Suspension of Banknotes Redemption ....................................................................... 23 2.2 Abusing the Minting of Copper Coins and Fractional Silver Coins .................................... 27 2.3 Abusing the Issue of Copper Coin Notes and Pseudo-Currencies ..................................... 32 2.4 Various Banknotes and Miscellaneous Military Notes ...................................................... 36 2.5 Infamous Examples of Inflation ......................................................................................... 39 3 Three Inflation in the Japanese-backed Puppet Regime-Controlled Areas .................................. 57 3.1 The Puppet Central Bank of Manchuria ............................................................................ 57 3.2 The Puppet Joint Reserve Bank of China and Joint Reserve Banknotes ............................ 62 3.3 The Puppet Central Reserve Bank ..................................................................................... 66 4 The National Government and Inflation ...................................................................................... 78 4.1 The Mild Inflationary Period ............................................................................................. 78 4.2 The Hyperinflationary Period ............................................................................................ 80 4.3 The Intensification of Hyperinflation and Collapse of the Legal Tender System ............... 87 4.4 Gold Coin Banknotes ......................................................................................................... 90 4.5 Short-lived Silver Dollar Banknotes ................................................................................... 95 4.6 Credit Inflation and Currency Inflation ............................................................................ 100 4.7 Polices on Foreign Exchange and Gold and Inflation....................................................... 103 -i-

4.8 Capital Flight and Inflation .............................................................................................. 114 4.9 The Redistribution of National Income in the Process of Inflation ................................. 117 References ..................................................................................................................................... 128

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Introduction When looking back at the Chinese economy over the last 100 years or so, we can see that, although always fluctuating, there are definite trends in inflation① that emerge along with social changes, shifts in the economic system, and major changes in economic policy. There have been periods during which the economy has been bedeviled by inflation causing great damage to it whereas at other times inflation has seemed to be under control, only to reappear to wreak more misery. To subdue this dangerous and destructive economic monster, we must use past experience to identify its causes, explore its nature, and study effective counter-measures to learn from the painful lessons of history. In this way, we can use this knowledge to control inflation in order to promote the reform and development of the economy.

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Inflation: in economics, it is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. -1-

1 Ch’ing Dynasty and Inflation The period towards the end of the Ch‘ing Dynasty twice witnessed large-scale inflation. The first inflationary period, which lasted for more than one decade, appeared during the reigns of Xianfeng ① (咸丰) and Tongzhi ② (同治) and its appearance was mainly attributed to the over-issuing of Official Notes③ (Guan Qian in pinyin, 官钱) and Treasure Bills④ (Bao Chao, 宝 钞), and the excessive casting of Big Coins⑤ (Da Qian, 大钱) made of copper and iron during the farmers‘ rebellion. The first inflationary period happened, then, as a consequence of Ch‘ing‘s exploitation of the economy to finance military intervention. The second inflationary period happened after the Eight-Power Allied Forces (Baguolianjun, 八国联军) invaded Peking to quash the Boxer Rebellion⑥ (Yihetuan, 义和团) which resulted in the signing of the Boxer Protocol⑦ (Xinchoutiaoyue, 辛丑条约). The huge war reparations insisted upon by the Eight-Power Allied Forces caused an unprecedented financial crisis which the Ch‘ing Empire reacted to by giving orders to replicate the production of Zhiqians⑧ (制钱) by coastal provinces after seeing the beneficial effects of its casting in Guang Dong (广东). Hearing of the great success of the Zhiqian, each province readily agreed to set up factories to start large-scale production of Zhiqians. Initially, people were happy to use the Zhiqian as the main currency, but as the number of the casting factories and the amount of coins increased, the second severe inflation occurred.

Xianfeng (咸丰) was born in 1831, crowned in 1850 and died in 1861. He ruled Ch‘ing for 11 years. Tongzhi (同治) was the son of Xianfeng, and was born in 1852. He was crowned in 1961 and ruled Ch‘ing for 14 years. ③ Official Note (Guanqian, 官钱) also called Silver Note. It was first issued in 1853 by Ch‘ing Empire and it is one of the most important examples of early paper money produced in China. ④ Treasure Bill (Baochao, 宝钞) was a type of paper money used during Ch‘ing. It was produced in 1853. ⑤ Big Coin (Daqian, 大钱) was issued in 1853 due to the lack of military resources. It was made of copper or iron. ⑥ Boxer (Yihetuan, 义和团) was a mass movement against foreigners in China and the spread of Christianity, aiming to help the Ch‘ing Empire clear out foreigners. The Boxer Rebellion occurred in the late nineteenth century. ⑦ Boxer Protocol (Xinchoutiaoyue, 辛丑条约) was a treaty signed with Great Britain, United States, Japan, France, Germany, Italy, Belgium, Austro-Hungary, Spain and Holland after the Eight-Power Allied Forces invaded Peking in 1901. ⑧ Zhiqian (制钱) was issued in 1644 and it was made according to the monetary regulations of Ch‘ing to distinguish the currencies of former dynasties. ① ②

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1.1 The Issuing and Breakdown of the Big Coin, the Official Note and the Treasure Bill During the early years of Xianfeng‘s reign, the Ch‘ing Empire‘s economy was ailing and finance was tight. To raise money to fund the military expenditure for the suppression of the Taiping Rebellion① (Taipingtianguo, 太平天国), the government did its utmost to ―appropriate the expense from less urgent events and draw money in advance‖, but this still failed to cover the war expenditure. What is worse, the armies on the frontline were in desperate need of money and requested a larger allocation of funds. By then, the forces of the Taiping Rebellion had occupied the middle and lower reaches of the Yangtze River (长江), meaning that land tax, salt tax, tariffs and various other taxes could not be collected, and as a consequence even less money was available and all kinds of taxes existed in name only. In the third year of Xianfeng‘s reign, with the continual expansion of the conflict zone, the areas under the control of Ch‘ing shrunk day by day, and the average amount the of the various taxes collected was just 4% or 5% that of the days before the war, and this at a time when the financial expenses of the Ch‘ing government were multiplying. As a result, the Ch‘ing Empire began to sell officer positions and bartered royal titles to raise money. Three years after ―Sell and Barter‖ (Juanshu, 捐输, the selling of officer positions and the bartering of royal titles), income was again heavily reducing. Sell and Barter couldn‘t be relied upon anymore so the Imperial Household② (Neiwufu, 内务府) was the next thing that caught the eye of the Ch‘ing government. As many golden bells and bronzes as possible were melted in bulk and then added to government coffers. In addition, more than ten other measures were adapted to make the ends meet such as to abolish the policy of encouraging honesty with high salaries, the mining of more silver, and the attempt to generate income from pawn broking and taking over rent shops. Some of these measures were thought to be ―just worth a try‖ or would ―take time to see the effect‖. However, despite all these measures the government‘s income could not meet the huge costs of the war. The financial situation was unprecedentedly severe, and was made worse by the fact that supplies of Dian Copper (Dian Tong, 滇铜, a kind of copper produced in Yunnan) were blocked leading to a shortage of the raw materials used for casting coins. To address this problem, senior government officials brought forward the idea of reforming the monetary system to generate income from the general population. The Ch‘ing Empire adopted the proposals which included the Taiping Rebellion (Taipingtianguo) was a large scale movement against Ch‘ing by peasants from 1850 to 1851. The Imperial Household (Neiwufu, 内务府) was a government department; it managed all palace affairs, and resembled a miniature government within the Forbidden City. ① ②

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issuing of Official Notes, Treasure Bills, Big Coins, and new regulations regarding inflation to help pay for military expense. The federal government began to churn out large amounts of Big Coins, Silver Notes and Treasure Bills that could not be cashed in at banks, and were forced into use by government edict. In March of the third year of Xianfeng‘s reign (1853), the Ch‘ing Empire began to produce Big Coins of Dang Ten (当十, a unit of money, which equaled ten Zhiqians), which weighed six Qians (钱, a unit of weight, which equals 5 grams). Compared to a Zhiqian of the same value, the Dang Ten Big Coin was lighter by 40% to 50% in weight. About one year after that, ten more types of Big Coin were cast in succession, including the Dang Five (当五, equal to five Zhiqians), the Dang Shi, the Dang Twenty (当 20, equal to twenty Zhiqians), the Dang Fifty (当 50, equal to fifty Zhiqians), the Dang One Hundred (当 100, equal to one hundred Zhiqians), the Dang Two Hundred (当 200, equal to two hundred Zhiqians), the Dang Three Hundred (当 300, equal to three hundred Zhiqians), the Dang Four Hundred (当 400, equal to four hundred Zhiqians), the Dang Five Hundred (当 500, equal to five hundred Zhiqians) and the Dang One Thousand (当 1000, equal to one thousand Zhiqians). In addition, Big Coins made of iron and lead were cast in three different values –the Dang One (当 1, equal to one Zhiqian), the Dang Five and the Dang Ten. Outside of Peking, provinces like Heibei (河北), Shandong (山东), Henan (河南), Fujian (福建), Guangxi (广西), Gansu (甘肃), Shanxi (陕西), Yunnan (云南), Hunan (湖南), Hubei (湖北), Rehe (热河, one of the old provinces in China, located between Hebei and Liaoning), Sichuan (四川), Jiangsu (江苏) and Zejiang (浙江) successively joined the group of provinces producing Big Coins and the casting of Big Coins reached its peak in 1854. Generally speaking, the bigger the currency value, the bigger profit the caster would make. This can be seen from the comparison between the cost of making and the currency value of the Big Copper Coin (Big Coin made of copper). Taking the Big Coin of Dang One Thousand as an example, its currency value equaled one thousand Zhiqians, while it cost only thirty-eight Zhiqians to make, which means the Board of Revenues① (Hubu, 户部) gained 886 Zhiqians from the casting of this coin. The net profit was 7.8 times of its cost, with the Dang One Hundred it was two times, and with the Dang Fifty the profit was one time its cost. The government, then, was able to report that it had made substantial profits from the casting of Big Coins. The Big Iron Coin earned the biggest profit because of the lower price of iron. According to government records, disregarded the cost of the iron, the lead and workers‘ pay, the daily income of one casting machine was twenty thousand or thirty thousand Zhiqians.

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The Board of Revenues was a government department, which collected taxes and duties; paid nobles and civil servants; audited the accounts of central/provincial treasuries and granaries; kept records of territories and population; regulated currency/coinage and determined the standards of weights/measures, etc. -4-

Meanwhile, the Zouzhe (奏折, also called the Memorial to the Throne) asked for the continuing military expenses to be met promptly which made the Ch‘ing Empire hastily issue paper money in the third year of Xianfeng‘s reign (26th, January, 1853). Emperor Xianfeng commanded Hua Shana, the Left Censor-in-Chief① (Zuoduyushi, 左都御史), and Wang Maoyin, the Censor-in-Chief in Shanxi Circuit② (Shanxidao, 陕西道) to negotiate the regulations with the Board of Revenues, who then released the regulations regarding the Official Note one month later. The regulations of the Treasure Bill were issued in November of the same year. The Official Note, also called the Silver Note, was based on the unit of Kuping Liang (库平两, one Kuping Liang equals 37.301 grams, which is called Liang for short), while the Treasure Bill, also called Money Bill (Qianchao, 钱钞), was based on the unit of Zhiqian. The two as whole were called ―Official Note and Treasure Bill‖ or ―Silver Note and Money Bill‖, ―Note and Bill‖ for short. Henceforth, Note and Bill became the name for paper money in daily life, which added a new word to the Chinese economic dictionary. The pilot Silver Note regulations were drafted by the Board of Revenues and obtained permission for implementation on 5th, April, 1853. After a series of tense negotiations, the printing of the Silver Note began and the first 120,000 Liang were produced on 4th, August. The Silver Note, which was made of Korean paper, was divided in to four different values—one Liang, five Liang, ten Liang and fifty Liang, and each were named Heaven (Tian, 天), Earth (Di, 地), Space (Yu, 宇) and Time (Zhou, 宙) according to the order of One Thousand Character Primer③ (Qianziwen, 千 字 文 ). The four sides of it were decorated with a blue Longshui pattern (Longshuiwen, 龙水纹, a pattern which includes dragons and waves), and at the top middle was printed ―Hu Bu Guan Piao‖ (户部官票, Official Note issued by the Board of Revenues) in both Manchu and Han characters. Below it was written the currency value of the note in capitalized characters. At the left was the date of production, while at the right was the producer and the production number, both of which were written in ink. At the bottom was a square, which read ―Official Note issued by the Board of Revenues, anyone can exchange the Official Note into cash to the same value of silver and exchange tax must be paid according to the regulations of Revenues; any counterfeiter will be punished mercilessly‖. A square seal stating ―Official Note of the Board of Revenues circulates forever‖ was printed over the currency value, and during ①

The Left Censor-in-Chief (左都御史) was one of two censors of the Censor (Duchayuan, 都察院), which guarded against wrong doings for the Emperor and kept surveillance over the entire civil and military establishment. The other censor was Right Censor-in-Chief; they stood on either side of the Emperor in government meetings. ② Censor-in-Chief in Shangxi Circuit (Shanxidaoyushi, 陕西道御史) was one of thirteen censors under the leadership of the Censor. ③ One Thousand Character Primer (Qianziwen, 千字文) is an ancient Chinese verse, composed of one thousand characters, which was first written between the years of 502 to 549. -5-

production, on the junction of two notes was printed ―Official seal of the Board of Revenues for Official Note‖ in a rectangle, and the two seals were written in both Manchu and Han characters. As the initial 120,000 Liang of Silver Notes were issued, the army of the Taiping Rebellion had passed the natural barrier of the Huanghe River (黄河) and approached at high speed, which meant the military expenses of the Ch‘ing army had to be met without delay. With no time to gauge the pilot results from the Silver Notes that had already been issued, the Board of Revenues sped up the issuing of more Silver Notes to the value of 2, 000,000 Liang printed on a total of 180,000 notes, and in addition, a new Note Three Liang (3 两) was also issued. On 25th August of the same year, after the approval of Emperor Xianfeng and some modifications to the previous regulations were agreed, the Board of Revenues officially issued the Silver Note nationwide. First, the Silver Note was directly granted by the Board of Revenues to the Army Provision① (Liangtai, 粮台) of each province and had five different values, one Liang, three Liang, five Liang, ten Liang and fifty Liang, each named Ren (仁), Yi (义), Li (礼), Zhi (智) and Xin (信)；the notes handed out by the Government Repository② (Fanku, 藩库) of each province also fell into five different values, named Gong (宫), Dian (殿), Pan (盘), Yu (郁) and Lou (楼), and the value of the note was determined according to the red seal of each province. Second, the Silver Notes granted by the Board of Revenues to Army Provision were to the value of 250,000 Liang, printed on 22,500 individual notes in total; the Notes issued by the Government Repository were to the value 1,750,000 Liang, 1,575,000 notes in total. Altogether, 2,000,000 Liang printed on 1,800,000 notes were issued. Third, the proportion of withdraw and deliver was changed to half Silver Note and half Treasure Bill. Fourth, to maintain the initial value of the Silver Note, the silver prepared for the circulation of the subordinate government apartments were moved to the official bank to be used as the capital of exchange. However, only Zhiqians could be exchanged according to the regulation (later, people could only exchange Silver Notes for Big Coins which had devalued), which meant people with Silver Notes could not change their notes into real silver at official banks, but the exchange of real silver and Zhiqians in private banks was allowed. However, due to the lack of silver, it was difficult to exchange even the Zhiqians in official banks. The issuing of Note and Bills got off on the right foot. Not long after the Silver Note was issued, the Deaconry③ (Jishizhong, 给事中) reported: ―The Silver Notes recently granted by the Board of Revenues are to the value of about 60,000 to 70,000 Liang. At first, businessmen and peasants took delight in using the notes but, as the official banks refused to cash in the notes due ①

Army Provision (Liangtai, 粮台) was a government department, which managed the food of the army and it was set along the official road. ② Government Repository (Fanku, 藩库) was the store of food and money belonged to Financial Commissariat. ③ Deaconry (Jishizhong, 给事中) was the name of an official who supervised various government departments. -6-

to the lack of capital, businessmen hesitated and the users gradually decreased.‖ The holders of Silver Notes went to remonstrate with the official banks to ask for exchange, but the banks claimed they could not exchange the notes while they awaited an announcement from the Board of Revenues. As expected, the Board of Revenues soon issued an official notice saying that the official banks were not permitted to exchange the Silver Note. The people therefore lost confidence in the Silver Note and soon abandoned it as currency and the Silver Note consequently devalued into waste paper. The powerful households in Peking who had Silver Notes lost nothing because they could pay taxes with it, whereas for the working classes who depended on a salary paid in Silver Notes had to sell their notes to unscrupulous businessmen as they were not accepted elsewhere. Soon after its issue, then, the Silver Note had stagnated, but this fact failed to sober the officials who thought they just needed more laws to enforce its use. Some officials even proposed printing more Silver Notes of smaller currency value as the notes of bigger value were inconvenient for trade. On 20th October the same year, a meeting was held to discuss the issuing of new Silver Notes with the attendance of Mian Yu (绵愉) the Duke of Hui (Huiwang, 惠王), councilors of the Grand Council① (Junjichu, 军机处) and the major officials of the Board of Revenues. The meeting led to decision to produce more Note and Bills to relieve the shortage of silver in circulation. The Emperor approved it right away and ordered the Board of Revenues to print Note and Bills to circulate along with the current ones, and issued them both domestically and abroad. On 17th December of 1853, the Board of Revenues detailed a new bill with 18 clauses which was called the Regulation for Treasure Bill, which was ratified by the Emperor on 24th December and authorized huge amounts of Treasure Bills to be produced. Aimed at plundering the wealth of the people, the Treasure Bill was officially issued early the next year in inexhaustible supplies. Made of white thick paper, commonly known as the "Double Bill Paper" (Shuang Chao 双钞), the Treasure Bill had four different currency values: 500 Wen (Wen 文, is a unit of money, 1 Wen is one Zhiqian), 1,000 Wen, 1,500 Wen, and 2,000 Wen, and the currency value was printed in the mintmark. Following the character rank in One Thousand Character Primer, the bills were named Tian, Di, Yu, Zhou, for each of which 10,000 notes numbered from 1 to 10,000 were produced. The process was repeated for a new set of bills named Ri 日, Yue 月, Ying 盈, Ze 昃, the next characters in One Thousand Character Premier. Different patterns decorated the bill: a dragon pattern took up the upper rim, while on the opposite rim was a wave pattern. The left and right ①

Grand Council (Junjichu, 军机处) was set up in 1729 as an advisory body, it was in charge of the recommendation policies that pertained to military affairs, frontier defense, finance, taxation and diplomacy; it handled confidential palace memorials addressed to the Emperor; it appointed or dismissed officials at or above the 3rd rank. -7-

rims both had a cloud pattern. On the front was printed "Treasure Bill of Ch'ing Empire", and on both sides was written "Universal Calculating" and "Maintenance of Value". Both the waves and characters were printed in blue. In the middle was the value of the bill, to the left of which was the number and the producer sealed with ink, while on the right was the date of production sealed with blue ink. Under it was a rectangle reading "This bill substitutes for the Zhiqian, and it is allowed to pay for a certain proportion various taxes. This bill can be cashed in various banks outside of Peking and 2,000 Wen equals to One Liang Official Note.‖ Due to the low cost of producing the Note and Bill, the profit was inestimable. For instance, a Treasure Bill note cost only 1.6 Wen, which meant 1,000,000 Treasure Bill notes could gain 1,000,000 Wen. Unsurprisingly, more than 1,000,000 Treasure Bill were delivered by the end of February. The difficulty experienced of maintaining these huge currency values and the different kinds of money, whether Big Coin or paper money, was definitely contributed to by the arbitrary enforcement of federal authorities. Once these currencies were issued, the federal government regulated the use of them on an exchange rate with silver and the Zhiqian, which was the rate commonly used before the war. According to the law, the Big Copper Coin, the Zhiqian and the Treasure Bill complemented each other. The Big Iron Coin was still calculated in units of Zhiqian. Two thousand Zhiqians equaled 1 Liang real silver, and equaled One Liang Silver Note, and was also equivalent to 2,000 Wen Treasure Bills. The law also dictated that a proportion of various taxes, such as land tax, money and food tariff and salt tax, must be paid in Silver Notes or Treasure Bills, the remainder could be made up with Big Coins of Dang 100 and Dang 50. Salaries for officials and funds for various projects would be paid for with a certain proportion of Silver Notes and Treasure Bills. As for the delivery and exchange of Big Copper Coin, Big Iron Coin and Zhiqian, the exchange ratio had been defined in advance. Actually, the strategy adopted by the federal government was to "deliver more, accept back less, or even refuse to accept‖. The law initially provided that the combination of 50% real silver and 50% Note and Bill was allowed in tax collection, which then was changed to 70% real silver and 30% Note and Bill, aiming to collect as much silver as possible and accept back less Note and Bills, or even none at all. In fact the tax collecting departments in Peking, who intended to gain more real silver, refused to accept the stated proportion of Note and Bills and even refused to accept them when people tried to use them. What is worse, the tariff of Chongwen Gate (Chongwen Men 崇文门), donation of Firearms Camp① (Huoqi Ying 火器营), rent of the Board of Revenues, land and personal tax all refused payments or accepted just 10% or 20% of payments ①

Firearms Camp (Huoqiying, 火器营) was the department for the manufacturing and research of various arms and ammunition. -8-

in Note and Bills. Unexpectedly, officials started to buy Note and Bills with the silver they had collected from taxes. The main reason for this lay in the different exchange rate of Zhiqian, Silver Notes and Treasure Bills. One Liang Silver Note could be exchanged for 2,400 or 2,500 Zhiqians, but 1 Treasure Bill just cost 2,000 Zhiqians in the market, which was to say that through the above two-step exchange, 400 or 500 could be gained. The same thing also happened in Shan Dong, Henan and other provinces in China. Taxes were not allowed to be paid in official notes, only real silver and Zhiqian which were calculated according to the current silver price could be accepted. The position of the Big Coin was not much better: the initial provision - 1,000 Wen tax contained 200 Zhiqians and 800 Big Coins, later changed to 900 Big Coins and 100 Zhiqians. However in Jiangsu, the government only accepted silver and Zhiqians for various taxes, and anyone who tried to pay in Big Coins would have their payment returned, which blatantly exposed their policy of ―only issuing but not accepting back" Big Coins. To promote the Big Coin, Silver Note, and Treasure Bill, the Board of Revenues founded the first official banks respectively named Qianyu 乾豫, Qianheng 乾恒, Qianfeng 乾丰, Qianyi 乾 益 in April 1853, whose popular name was ―Official Banks of Four Qian‖ (Siqianguanhao, 四乾 官号), aimed at paying for the military expense of the Eight Banners ① (Baqi, 八旗). The Zhiqians already cast by the Baoquan Office② (Baoquanju, 宝泉局) of the Board of Revenues and the Baoyuan Office (Baoyuanju, 宝源局) were used to issue Peking Money and Note (Jingqianpiao, 京钱票). For the same purpose, in the fourth year of Xianfeng the second five banks, Official Banks of Five Yu (Wuyuguanhao, 五宇官号), were set up，individually called Yusheng (宇升), Yuheng (宇恒), Yuqian (宇谦), Yutai (宇泰) and Yufeng (宇丰). The business operation mode of the Board of Revenues was copied from the current economic practices of the time. In Peking and other cities, except for Exchange Notes③ (Huipiao, 会票) and Promissory Notes (Benpiao, 本票), many private money shops (Qianzhuang, 钱庄) often issued their own Silver Notes and Coin Notes (Qianpiao, 钱票, which could be exchanged for Big Coin at the bank). Copying the private money shops, the Board of Revenues established five official money shops: Tianyuan (天元), Tianheng (天亨), Tianli (天利), Tianzhen (天贞) and Xitian (西天), with the intention of increasing the income of the Board of Revenues and the royal family via the

Eight Banner (Baqi, 八旗) was officially set up in 1601.It was the social origination form of Ch‘ing. It was named after the color of their flag, which contained eight different groups and in charge of the army of Ch‘ing. ② Baoquan Office (Baoquanju, 宝泉局) was the department responsible for managing the production of money in Ch‘ing. It was a subordinate department of the Board of Revenues. ③ Exchange Note (Huipiao, 会票) had the same functions as today‘s Bill of Exchange. It was a certification for the exchange of money in ancient times. ①

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interest gained from the issuing of money. Therefore, since the setup of the first official money shops, the rulers of Ch‘ing thought highly of the Peking Money and Note - the exchange certificate, which could bring them great fortune and supplemented the shortage of Big Coin, Silver Note and Treasure Bill. Having already considered the great amount of cash exchanged in the initial phrase, they planned a two-step scheme for an empty promise: first they must show people the endless supplies of cash for exchange; then, after the prevailing of Peking Money and Note, they withdrew the prepared capital. Not until the establishment of the second official money shops did the Peking Money and Bill further linked with Big Copper Coin, Big Iron Coin and Treasure Bill, and the combination then led to the extensive issue of the both paper money. With the establishment of the official banks and money shops which were used for popularizing the Big Coin and the Treasure Bill, the Ch‘ing Empire thought of it as a significant policy that enriched both the nation and the ordinary people: ―In the long term, it will endlessly benefit the nation and people‖. Soon the order to ―copy the Peking mode of operating money and practice everywhere‖ arrived in each province, and in May, another order was sent to quickly set up official banks. From 1853 to 1855, lots of official banks of this type were founded to attract businessman to undertake the circulation of Note and Bills, the issuing of Office Notes (Jupiao, 局票) and promotion of the use of Big Coins, Silver Notes and Treasure Bills in important provinces and cities, including Fujian, Shanxi, Jiangshu, Yunnan, Sichuan, Shanxi (山西), Rehe, Hebei, Hubei, Jiangxi, Zhejiang, Shandong, Henan, Anhui (安徽), Juilin (吉林), and Gansu. As a result of the serious devaluation, and owing to corners cut during the casting process, the Big Coin had problems soon after its issue. The coins cast by Baoquan office in June were still shiny and thick, while the ones cast in July were all scratched and many coins were also broken. The Baoji Office (Baojiju, 宝蓟局) in Hebei even cut down the weight of the coin, the previous Dang 1000 weighed 5 Qians but was now 3.5 Qians, and the casting procedure was also simplified. Consequently, when they were delivered, they were rejected by businessmen and soldiers, and even resulted in a strike. Less than a year after its issue, forgeries of Big Coins were common place. The private casting machine in Zhangjiawan (张家湾) of Tongzhou (通州, a county of Peking) and Xishan (西山) near Changxindian (长辛店) openly cast coins without regard for the government rules since the local officials were afraid to investigate for fear of the numerous workers. What motivated people was the different copper content in the Zhiqian and the Big Coin. Once melted, 1000 Zhiqians, which weighed 120 Liang, could produce 60 Liang copper and could be cast into 30,000 Big Coins instead and people went where the best profit lay, and even the air bellows and sand pots used for casting were greatly boosted in price. At that time, private casting and trafficking arose in north China, outside of the Zhengyan Gate (Zhengyangmen, 正阳门, which is called Qianmen now) of Peking, which threatened the

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Ch‘ing Empire. On 18th and 20th July of 1854, Ch‘ing delivered two imperial edicts urging the Board of Punishment① (Xingbu, 刑部) to increase the punishment for private casting and for people who impeded the circulation of the Big Coin. The new laws meant that for those who were caught privately casting Zhiqians up to 10 thousand or less and casted repeatedly, the chief and the caster would be sentenced to death, and the workers and the buyers would be banished to Sinkiang (Xinjiang, 新疆) to be slaves; for those who cast no more than ten thousand Zhiqians, the chief caster and the casters were all banished to Sinkiang to be salves, and the workers and buyers would receive lighter sentences. The two imperial edicts, then, doubled the punishment for both of the offenses. As for the private casting of Big Coins on a scale smaller than Dang 100, if the total amount surpassed 10,000 or the total amount was less but was cast repeatedly, the chief and the caster would be sentenced to immediate death; if cast repeatedly but with a total amount less than 10,000, then the offenders would be sentenced to death, but this sentence would not be carried out until the autumn, giving offenders time to clear their name. Businessmen and citizens who encouraged the arbitrary devaluation of

the Big Coin, received two months‘ cangue, were

flogged eighty times and received two years in prison or were flogged one hundred times, while the followers were flogged sixty times, received one year in prison and one month‘s cangue. However, although Ch‘ing enacted many severe laws, the torrent of private casting never stopped. In 1855, the private casting of Dang 10 Big Coin still existed in Changxindian (长辛店) and Xishan (西山), and offenders were frequently captured in Ba county (Baxian, 霸县) of Tongzhou, Daxing (大兴, one of the districts of Peking), Yulin (榆林, one of the districts of Peking), and elsewhere. As usual, the Big Coin was devalued, officially made Big Coins were 30% devalued, while the private ones were devalued by 50% or 60% and rumors about abandoning the Big Coin spread all over the country. Contrary to this experience, the privately cast money with smaller currency value, whose nickname was Waterwalker (Shuishangpiao, 水 上飘), circulated without hindrance because it was more convenient than the Big Coin. As a result, soldiers and citizens who had nowhere to buy things with the Big Coin lived a miserable life. People were even seen in the street holding Big Coins in their hands crying bitterly on the road. As a result of the inconvenience of the Big Coin and the misuse of Big Iron Coins, events like Soldier Protectors② (Hujun, 护军), Sulas③ (苏拉) and students protesting by blocking the path of the Emperor happened occasionally. Worse still, the royals were targeted by citizens who stole their grain, and the numbers of criminals of this type were countless. ①

The Board of Punishment (Xingbu, 刑部) served as both a criminal court and a civil court at the capital. It enforced punishment inflicted on offenders. ② Soldier Protector (Hujun, 护军) was an senior army official who was in charge of the selection and supervision of army officers. ③ Sula (苏拉) was the name of people who took charge of logistics. -11-

The issuing of the Big Iron Coin, then, resulted in enormous chaos in society, as had the Silver Note and the Treasure Bill. A huge amount of paper money which could not be cashed in was forced into circulation by Ch‘ing government, thus impeding the circulation of money and caused turmoil in the market. Worried that life savings would be turned into waste paper over night, businessmen around Peking spread the news that they were not accepting the Big Coin and either boosted the price of goods or refused to sell them using the excuse of a shortage of stock. As a consequence, people with Note and Bills had to exchange them at discounted rates because they were not widely accepted. The 1000 Wen Treasure Bill could barely be exchanged for 700 or 800 Zhiqians. Living in straitened circumstances, soldiers of the Eight Banners in Peking, who had no other livelihood and who had once brought things compulsively could no longer do so and as a result fighting would easily break out. People jokingly called the Note and Bill the ―Noisy Note‖ (Caopiao, 吵票), as it always provoked chaos and fighting in the market. Yet, the issuing of Note and Bills was a golden opportunity for corruption by various officials. The reason why the officials in Peking and other provinces refused to accept Note and Bills was that they could buy them in at a low price and sell them at a high price by force to gain a good profit. Officials in Peking bought Note and Bills with real silver, then combined them with Zhiqians to sell to the upper class. One Liang real silver could be exchanged for 2,400 or 2,500 Zhiqians, whereas One Liang Silver Note could only be exchanged for 2,000 Zhiqians. The profit was so huge that similar dealings even happened in the Jingtian Office① (Jingtianke, 井田科) of the Board of Revenues. Taxes from farmers were forced to be paid in real silver, but subordinate government departments exchanged the real silver for Note and Bills when delivering them to the central government, which meant the subordinate tax departments could earn revenue from this transaction. In County Jing (Jingzhou, 景州), Hejian (河间) of Heibei, when collecting citizens‘ taxes, the Treasure Bills required by the central government were converted into Zhiqians by the subordinate tax departments at the rate of One Liang Treasure Bill to 4,000 Zhiqians, then the lower tax departments changed the Zhiqians back into Treasure Bills at the rate of 2,000 Zhiqians for One Liang Treasure Bill to be submitted to the central government. The corrupt officials, then, used exchange rates to their advantage and further intensified the exploitation of the peasant masses which eventually provoked rebellion. In 1856, the Heibei scholar, Ma Guoshu (马国枢), refused to collect taxes paid in Treasure Bill in the counties subordinated to Peking, while in Henan, cases of resisting of Gong Liang (公粮, agricultural tax paid in grain), the murder of officials, and unlawful assembly commonly occurred.

① Jingtian Office (Jingtianke, 井田科) was one of the subordinate branches of the Board of Revenues which took charge of the land and field of the Eight Banner and collects yearly tax for the government.

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The circulation of Big Coins and Note and Bills gave rise to severe inflation, especially in Peking. The summer of the fourth year of Xianfeng‘s reign (1854) was rich in wheat, thus one Jin (斤, a unit of weight, which equals half a kilogram) of the wheat flour cost only 16 or 17 Zhiqians outside Peking, but the price was doubled in the city, along with other foods. Peasants, who delivered wheat to Peking were paid in Big Coins which could not be used outside the city because Big Coin circulation was only enforced in Peking, thus peasants hesitated and this led to food shortages in the city, and gradually shops shut down. In north of the city, more than 50 shops closed in just a few days. The unusually high inflation made the lives of soldiers and citizens in Peking miserable, and the naked and the hungry on the streets were uncountable. Soon after its issuing, the Big Coin was devalued in trade or discarded completely. The Dang One Thousand Big Coin was only worth 700, 800, 600 or even 500 Zhiqians and the Dang Five Hundred just equaled 300 or 400 Zhiqians. The Big Coin was discredited on account of the heavy discount and the numerous private casting operations. Together with the Treasure Bill, the Big Coin of Dang One Thousand and the Dang Five Hundred were withdrawn in July 1854, and the production of the Dang Two Hundred, the Dang Three Hundred and the Dang Four Hundred was stopped. Production of the Dang One Hundred and the Dang Fifty were also both stopped in late 1855. After this, only the Big Coin of Dang Five and the Dang Ten still circulated in the market. To enforce the circulation of the Big Coin of Dang Ten, the Ch‘ing Empire announced a decree in 1855, which read: ―hereafter, no matter what kind of transaction, including the redeeming of a pledge and the repaying of debt, it is commanded that the Dang Ten Big Coin be used just as a Zhiqian; no excuses for the refusal to accept it are allowed, especially in the silver trade; re-pricing of the Dang Ten Big Coin is prohibited to stop the emergence of a price gap between Big Coins and Zhiqians‖. Soldiers were sent to supervision and enforce this decree. However, with a variety of excuses, citizens still refused to use the Big Copper Coin in shops and other transactions, and the Big Iron Coin was equally unpopular. This illustrates how concerned about the chaos in monetary policy the general population of Peking was. Due to people‘s reluctance, the Ch‘ing government announced another imperial edict to restate the regulation of the previous year to enforce the use of the Big Iron Coin. It said if the Big Iron Coin was refused in transactions, first-time offenders would be publicly punished with the cangue, while repeated offenders would be banished to the Miasma area to be conscripted as soldiers. Unexpectedly, the regulation was boycotted by Pekingers and many rice and food shops were shut down by a strike. The common citizens suffered the most as they only got inferior goods when paying with the Dang Ten Big Iron Coin. To take wheat flour as an example, if it was paid for with a Dang Ten Big Iron Coin, the price was increased five times more than usual, and the

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flour was even mixed with other things that could not be eaten. This occasionally caused people to commit suicide because their daily salary was hardly enough to pay for food. The Big Copper Coin of Dang Ten encountered similar problems. Heibei province commanded that three percent of all transactions should be in Big Copper Coin but traders just boosted the market price by three percent. Businessmen in Peking were also cautious with the Big Copper Coin and would only accept the 1000 Big Copper Coin at thirty percent of its value. The Ch‘ing government announced a third imperial edict, which meant to force the Big Copper Coin of Dang Ten into circulation by threatening severe punishment for not accepting it. Yet, the common citizens cared nothing of the threat of the cangue or the edict and this situation lasted until the eighth year of Xianfeng‘s reign (1858). Eventually, the Dang Ten Big Coin was used as one Zhiqian in April of the next year. The Dang Ten Big Copper Coin was still in use in the eighties and nineties as two Zhiqians. As for the Note and Bill, due to the policy of ―no cash in and unexhausted supplies‖, it couldn‘t avoid the fate of abolishment either. In no more than ten years, 9,800,000 Liang Silver Notes and 27,113,000 Chuan (串, a unit of money, equal to 1000 Zhiqians) Treasure Bills were delivered. The purchasing ability of One Liang Silver Note was barely equivalent to 2.5 Qians of silver as the price devalued by 75% in the ninth year of Xianfeng‘s reign. Just the next year, each Treasure Bill was priced at three hundred Zhiqians; one Liang of Silver Note was valued at four hundred Zhiqians; two Peking Money and Coins only equaled one Zhiqian. In other words, 1000 Peking Money and Coins actually equaled 100 or 150 Zhiqians, while one Liang Silver Note was worth 200 Zhiqians, both of whose value were devalued by 90%. The Note and Bill devalued more sharply in the provinces in the north of China. In Henan, One Liang Silver Note could only be exchanged for 400 or 500 Zhiqians in the summer of 1855. The Treasure Bill, which could be converted into 800 or 900 Zhiqians previously, only equaled 400 or 500 Zhiqians in the autumn, and the refusal to accept it by businessmen made things worse. In the subordinated area of Hebei, the Note and Bill was mostly held in the hands of businessmen due to the vigorous encouragement of the government. Most of the paper money was devalued in 1857. Three years later, one Chuan of local paper money was valued no more than 100 Peking Money and Coin, which equaled only a few dozens of Zhiqians. Along the riverway of Hedong (河东) around the district of Jining (济宁) Shangdong, Treasure Bills could initially be exchanged for 600 or 700 Zhiqians, which fell to 200 Zhiqians in 1857, and became worthless paper by 1858. Owing to the total failure of the Silver Note and the Treasure Bill, Jinyu, the Lord of Hui, together with ministers of the Grand Council and the major officials of the Board of Revenues, reported to the Emperor to admit that the endless supplies of paper money had caused many problems and they wanted to suspend it, which was approved by the Emperor. Sadly, just as the

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issuing of the paper money had caused problems, the suspension of it also caused great suffering to the ordinary people. First of all, the Board of Revenues put up a notice to abolish the Note and Bill, which caused the worried citizens to dump their Note and Bills into the market, which further caused the Silver Note to devalue to almost waste paper. The exchange rate of the Treasure Bill was reduced to 10 Zhiqians from the former 50 or 60, and was eventually totally abandoned. Secondly, the Ch‘ing government evaded responsibility for taking back the Note and Bill using all sorts of excuses. In 1861, Ch‘ing decreed to fine businessmen who printed Treasure Bills in the name of official banks without regard to the law, and closed the department of Central Office of Treasure Bill ① (Baocaozongju, 宝钞总局). The Treasure Bills were accepted back by the government but at no more than ten percent of their face value due to deliberate manipulation by officials both inside and outside Peking, thus causing enormous losses to traders. In November of the first year of the reign of Tongzhi (同治), the Ch‘ing government officially announced that rather than by Note and Bill, land tax, land rent of the Eight Banners, and various tariffs must be paid in real silver. The Silver Notes that had already been issued would be taken back gradually via the Outer office of Juanna (Juannaju, 捐纳局, which took charge of the donations for official titles). Actually, most of the Silver Notes had already disappeared from market by then, but there were some still in circulation. The whole take-back procedure stopped in the seventh year of Tongzhi‘s reign (1868). In total, 9,221,200 Liang Silver Note were issued, but only 3,280,000 Liang were retrieved while 6,500,000 Liang were not. Claiming the deadline for retrieval had passed, the Ch‘ing Empire officially announced the abolishment of the Silver Note, which saved the Ch‘ing Empire from having to buy back any more notes.

1.2 The Abusive casting of the Copper Coin and its devaluation The casting of Copper Coins (Tongyuan, 铜元) started in Guangdong, and the original intention was to rescue the cash-starved market and maintain the laws on currency which had broken down. In 1900, Guangdong produced the pilot Copper Coin valued at ten Zhiqians, which was well received after its issuing. Then, Fujian copied Guangdong‘s casting of Copper Coins, and also gained great success. On one hand, the Copper Coin was popular on account of its convenience for trading, and on the other hand, the Copper Coin casting organizations could earn 20% to 30% profit, which supplemented the finance of the local government. As soon as they received the command to copy the Copper Coin production in the coastal provinces, they started to ① Central Office of Treasure Bill (Baochaozongju, 宝钞总局) was a government organization supervising the produce of money.

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buy the casting machines and copper from abroad. By 1905, the Copper Coin casting provinces had reached 17, and the casting factories were more than 20. Before 1902, the fund used for copper purchase was no more than 2,000,000 Liang, while this figure surpassed 7,000,000 in 1904, and further increased to 20,000,000 Liang for more than 17,000 Dans (担, a unit of weight equals to fifty kilograms), which led to a sharp increase in Copper Coin production. Even the Ch‘ing Empire itself could not count how many Copper Coin they had produced, only the Board of Finance (Duzhibu, 度支部, established in 1906 to take charge the finance of the country, whose former name was the Board of Revenues) released estimated accounts saying the Copper Coins that had been produced valued more than 100,000,000,000,000 Silver Coins (Yinyuan, 银元). Based on the research of the Board of Finance then, one Silver Coin equaled 135 Copper Coins, which meant the actual number of Copper Coins that had been produced was 18,750,000,000, compared with 14,000,000,000 reported by Liang Qichao① (梁启超).The number reported by the Board of Finance was higher, but it was still far from the actual figure as it had excluded the Copper Coins produced in 1911. According to the investigation by the Board of Finance in 1913, more than 29,000,000,000 Copper Coins had been issued; hence more than 20,000,000,000 must have been cast in the late Ch‘ing Dynasty. So, how much wealth had been accumulated by Ch‘ing Empire from people by taking advantage of the difference between the face value of money and its actual value? Estimated by the Shen Pao (申报, set up in 1872, considered the first modern Chinese newspaper, it is the longest and the most influential newspaper in China), in November of 1903, the profit made by the Copper Coin Office (Tongyuanju, 铜元局) of Jiangshu, and the Silver Coin Office (Yinyuanju, 银元局) of Jiangning from casting Copper Coins was 59.65%, which was similar with the ratio reported by the Grand Coordinator② (Xunfu, 巡抚) of Jiangsu and the General Governor. In another estimate by the Eastern Miscellany③ (Dongfangzazhi, 东方杂志), the ratio was 34.07% in September of 1905, while the estimate made by Liang Qichao in 1910 was 25.19%, which was smaller than the previous ones. The number of Copper Coins was boosted greatly, which caused a fall in its price and the profit was also respectively reduced. When calculated at an average profit ratio of 34.07%, the Eastern Miscellany wrote: ―if one million coins were cast in one day, and there were 320 days excluding holidays, then 320,000,000 Copper Coin could be ①

Liang Qichao (梁启超) was a famous politician, educator, historian, and litterateur. He was the leader of the enlightenment movement in modern China and the leader of the famous Hundred Days Reform (Wuxubianfa, 戊 戌变法). ② Grand Coordinator (Xunfu, 巡抚) was one of the official ranks in Ch‘ing, and was in charge of local military and civil affairs. ③ Eastern Miscellany (Dongfangzazhi, 东方杂志) was a large comprehensive academic journal which has the longest history in China. It was first published in March, 1904 and ended in December, 1948. It is now known as Today‘s Oriental. -16-

produced and this would gain 77,920 Liang silver‖. In that way, the profit on 20,000,000,000 Copper Coins was up to 42,750,000 Liang Caoping Silver (Caopingyin, 漕平银, a unit of weight for silver, one Liang Caoping Silver equals 36.66 grams). Ch‘ing‘s massive production of Copper Coins turned on the green light to private casting. When the industry first began, the Ch‘ing Empire thought it would be too hard for private casters to operate profitably because the casting procedure required high cost machinery, which would put pay to private casting due to the costs involved. However, private casting flourished alongside the mass production of Copper Coins by the Ch‘ing government. At first, it was difficult to unify the raw materials and coin markings because of the high number of casting factories. In Guangdong, the Copper Coin was made of 95% red copper, 4% white lead and 1% tin. While in Fengtian Province (Fengtiansheng, 奉天省), it was 70% red copper and 30% white lead. The dragon and wave patterns were differed in each province, as was the currency value of the Copper Coin. What is more, in order to gain more profit, the mixture of raw materials was changed and the weight of the copper used was gradually reduced, even the patterns on the later coins were not as fine and neat as the older ones. At first, Ch‘ing provided the supplies of red copper for each province, but still some provinces such as Jiangsu, Sichuan and Hunan did not follow the casting rules, and started brass Copper Coin production in 1905 to1906. The number of brass Copper Coins cast in Sichuan was high, up to 200,000,000, and it was this unregulated situation that gave impetus to private casting. The issuing of the Copper Coin, then, was a desperate measure aimed at getting rid of financial the crisis rather than a planned long-term monetary policy. To economize labor, Ch‘ing imported copper plate from Japan that could be quickly put into use to make coins, and thought that this would be a successful strategy. However, the Japanese businessmen unexpectedly and massively purchased Zhiqians from China to make copperplates and then sold them back to China. They also sold China hand operated private casting machines, and they even cast privately on a large scale in the areas which China had conceded to them. The conceded areas of Tianjin and Shanghai publicly transported plentiful amounts of copperplate to be privately cast into Copper Coins. According to market prices, one Liang silver could be exchanged for 130 Copper Coins, but the Japanese businessmen exchanged them at the price of 150 Copper Coins to the Chinese. As for the markings on the coins which represented the name of the producing province, the imitation coins could be cast right away with whichever provinces‘ markings were required. Millions of privately cast Copper Coins were transported by ship and train, and officials and customs officers dared not to investigate them. Thus, the Ch‘ing Empire had lost control of Copper Coin production, and all of the economic activities were under the control of imperial powers.

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Private casting was not only a way to earn a living for poor people, but also a money making strategy of the rich and the powerful, and was also an important component of the economic invasion of China by imperial powers. The Ch‘ing Empire, however, could do nothing about this as they feared any intervention would lead to the negotiations with the foreign ministers of imperialist powers, and it would be difficult to know the results of any such negotiations. When describing the problem of private casting, Yuan Shuxun, the Grand Coordinator (Xunfu, 巡抚) of Shangdong said: ―Government officials‘ wrongdoing will be reported and investigated and citizens that act illegally will be imprisoned, however, the private casters are springing up in an endless stream.‖ The privately cast Copper Coins were made either by the copperplate imported from overseas or by hand operated machines. Beiyang Minister① (Beiyangdachen, 北洋大臣) Yang Shixiang lamented the wide spread use of the hand operated casting machines over the country which cast Copper Coins with the same pattern as the real ones, and were difficult to distinguish. At that time, not only did common people privately cast Copper Coins without the permission of government officials, but local government officials privately produced Copper Coins without the permission of central government. On 21th July of 1905, Ch‘ing published Regulation of Rectification of Coins, which commanded that the casting of Copper Coins was to stop. However, instead of calling off casting, Zhejiang and Fujian sped up the production and the transportation of the Copper Coins three months after the regulations were published. The same thing happened at the Shuzhou Copper Coin Factory (Suzhoutongyuanchang, 苏州铜元厂) of Jiangshu, which produced more than one million of Copper Coins despite the previous command of the Ministry of Finance and the Board of Revenues which regulated the daily output of Copper Coins to 300,000. People were often sympathetic because most of the private casters were ordinary people, but now government officials also joined the practice. The massive production and private casting of Copper Coins caused galloping inflation. According to the statistics of Liang Qichao, one Silver Coin could be exchanged for 80 Copper Coins in 1902 and 1903; it was 88 Copper Coins in 1904, 96 in 1905, 107 in 1907, 110 in 1906 and 120 in 1908. Later, the exchange rate of Silver Coins for Copper Coins increased by ten each month until 1909 when one Silver Coin could be exchanged for 180 Copper Coins. In 1910, the exchange rate was one Silver Coin to 175 or 180 Copper Coins. Compared to four years previously, the exchange rate had doubled. Calculated on the value of Silver Coins, the value of Copper Coins decreased by 50% in four years, and when calculated on the value of Copper Coins, the inflation rate was an alarming 100%. ① Beiyang Minister (Beiyangdachen, 北洋大臣) was one of the three ministers who were in charge of trade with foreign countries. The post was set up in 1861.

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Ch‘ing‘s excessive casting of Copper Coins caused great damage to its people. Firstly, it brought terrible inconvenience to social and economic life. Copper Coins produced by various factories were mostly Dang Ten (Dangshi, 当十, which equaled ten Zhiqians), and a small amount of Dang Twenty and Dang Five were also cast, but only a few Dang Two and Dang One were issued due to their high cost. Due to the lack of small-value currency, the purchasers in Dengzhou (登州), Laizhou (莱州) and Qingzhou (青州) of Shangdong and various counties of Hebei had to pay one Copper Coin for goods valued at one or two Zhiqians, and the seller gave them a piece of bamboo or a credit note, which would be taken back to the seller when the purchaser wanted to spend the rest of the money in the shop. Secondly, it damaged agriculture, commerce and manufacturing. The largest section of the Chinese population was the peasants, and they became the main victims of the high inflation of Copper Coins. Rice and wheat, which made up the largest proportion of agriculture, were sold in Silver Coins and had nothing to do with Copper Coins, whereas secondary products like, firewood, vegetables, chickens, ducks and the salary paid to workers for such jobs as husking, rice planting, mowing and the like, were all paid in Copper Coins. Regions south of the Yangtze River (Cahngjiang, 长江) were rich in rice, however, after paying the rent not many silver coins were left, and the whole household was living by working for a salary to buy secondary products and as the Copper Coins devalued, their income reduced sharply. Thirdly, the suffering of peasants was aggravated by malfeasance by officials who sought to make private gains. When collecting taxes, government officials took only Silver Coins, Zhiqians or Copper Coins which had to be converted at a certain rate. They even took use of the exchange rates to gain more profit by forcibly exchanging Silver Coins into Zhiqians and then into Copper Coins. Just like in 1908, county Qixia (栖霞) in Shandong passed regulations regarding land tax collection, which said: only the Zhiqians will be accepted, but if Copper Coins are used, they will only be accepted at 60% of their face value. While the county Qianshan (潜山) of Anhui (安徽) provided that food tax must be paid in Silver Coins instead of Copper Coins. In reaction to representations made by landlords, the county Guan (固安) of Hebei even commanded that taxes must be paid in Zhiqians, which must first be exchanged according to the value of Silver Coins, and if paid in Copper Coins, they must be converted in accordance with the value of the Zhiqian. What is worse, Jiangsu required that the land tax of the whole province must be paid in Silver Coins. This situation meant that the Ch‘ing Empire had to admit the de facto increase in taxes even though they were not increased in any actual regulations. Businessmen were deeply impacted upon by the devaluation of Copper Coins because due to the higher value of silver and the cheaper value of copper, trading had been shifted from the Copper Coin to the Silver Coin for many years. Only some retail goods such as delicacies from

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south China, alcohol, cigarettes, and paper were still sold in Copper Coins. Stocks of goods for traders had to be paid for in Silver Coins, and this incurred a great loss for traders during the buying and selling process. For example, a daily income of 100 Chuan Copper Coins, which was valued at more than 100 Silver Coins before the devaluation, was only valued at 70 Silver Coins after. If the goods were priced higher, then the sales would decrease, and if reduced value Copper Coins were used, the shops would be lose money and this then led to business strikes. With so many Copper Coins in circulation, businessmen had nowhere to exchange them into Silver Coins due to the lack of silver, and thus money shops could manipulate the exchange rate at their will. Therefore many shops exchanged Silver Coins at rates which caused stagnation and devaluation of Copper Coins, and this caused lots of shops to close due to the lack of finances and smaller retailers were affected more because of the smaller amount of capital they held. As the constant devaluation of Copper Coins continued, the losses of large merchants became bigger, and the smaller retailers were bankrupted. As for the workers, they suffered more than the peasants and businessmen. Peasants had farmland and businessmen had goods, while workers had nothing. With only 100 or 200 Copper Coin as a daily income they had to pay for clothing, food, housing and the living expenses of the whole household. Even when the price of commodities was low and their jobs were secure, they already had difficulty making ends meet. Now that they faced the prospect of becoming jobless, they were at the risk of becoming homeless, becoming vagrants, or even starving to death. Fourthly, the devaluation of Copper Coins aggravated conflicts between regions, conflicts between businessmen and peasants, and conflicts between the government and its people, and led to social chaos. Copper Coins cast in one province were dumped in neighboring provinces, and thereby was deemed as an enemy, and embargos were laid between provinces. With the purpose of solving the money shortage, all the provinces cast Copper Coins and gained huge profits at first, and this was made easier by the low price of copper and the high currency value of money. As a result, more machines were put into use and more Copper Coins were cast every day, and they were exported to other provinces to circulate at a discount. Consequently, this gave rise to market turmoil in the provinces that had coins dumped on them because the Silver Coins greatly appreciated and the Copper Coin were devalued. Copper Coins that came from different provinces were used but at less than their face value. At first, 10 Copper Coins were devalued to 9, then to 8, then to 7 and at last down to 6.5. In 1905, counties both in Heibei Province and Shangdong Province announced an official notice that only the Beiyang Copper Coin (Beiyangtongyuan, 北 洋铜元, a kind of Copper Coin issued by the government) issued by Board of Revenues were allowed to be used, while the Copper Coin cast by provinces south of the Yangtze River were forbidden. All Copper Coins from other provinces were not permitted in Henan Province where

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the domestic ones could be easily identified and were not accepted unless they were domestically made. This situation brought troubles for travelers and affected residents, which interrupted not only economic life but social life as well. The use of Copper Coins at less than their face value intensified conflicts between businessmen and peasants, and consequently led to the worker strikes and business strikes around the country. Workers demanded an increase in salary, just as a governor pronounced ―salaries have been raised again and again but this never satisfies the demands of workers; although workers are dispersed by the government police they will never stop protesting‖. Due to the flood of Copper Coins and the rocketing price of the goods, businessmen in Zhujing (朱泾), Tinglin (亭林) and Yexie (叶榭) of Jinshan (金山), and Songjian and (松江) Huating (华亭) in Jiangshu, negotiated discounting each Copper Coin to 8 Zhiqians, which caused uproar among peasants, who destroyed many shops which in turn caused a strike by business owners. The devaluation of the Copper Coin aggravated conflicts between government officials and common people, which led rebellions against the food tax. The lack of funds during a time when the Copper Coins were devalued and Silver Coins were up-valued caused various local government officials to skillfully exploit the situation to make up the shortfall. Shandong province provided that when collecting land tax 1 Liang silver could be exchanged for 2 Diaos and 400 Zhiqians, but Cahngqing (长清) county increased it to 5 Diaos and 720 Zhiqians. Also some counties collected no Copper Coinsor Zhiqians but only Silver Coins, and the exchanged rate was deliberately set several times higher than the market price by the government which led to a large-scale revolt against the food tax. In 1903, Henan announced that various taxes must be paid in Zhiqians instead of Silver Coins, and the tax rates were raised 1.5 times higher than before, which caused the civil unrest in Meng county (Mengxian, 孟县), where more than 100 thousand people rushed into the government offices to set fires and the Magistrate of the County① (Zhixian, 知县) was beaten up. Eventually, the taxes were collected at the usual rate. During the rule of Xuantong② (宣统), Copper Coins circulated more widely. In the counties of Shandong, food tax paid in Copper Coins increased by 30%, and in 1910, it was boosted up by more 50% in Laiyang County (Laiyangxian, 莱阳县) and Haiyang County (Haiyangxian, 海阳 县). Central government required 1 Liang silver for field tax, which meant peasants needed to pay 3,780 Zhiqians which was completely beyond their means. This caused a massive revolt against the food tax in Laiyang and Haiyang. Almost every rebellion by peasants in the later years of the Ch‘ing Dynasty was bloodily ①

Magistrate of the County (Zhixian, 知县) took charge the affairs of the county. It was the highest official position in the county. ② Xuantong (宣统) was the twelfth Emperor of Ch‘ing and also the last Emperor of China. He ruled Ch‘ing from 1908 to 1912. -21-

repressed with a large number of soldiers. However, this only intensified the peasant rebellions and aroused the sympathy for the peasants from all sectors of the society. In turn, this caused enormous turmoil in society and accelerated the collapse of the Ch‘ing Empire.

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2 The Beiyang Government , Local Warlords and ①

Inflation In modern history, the Chinese government has been incessantly beset with economic problems caused by high inflation. So it was with the Beiyang government, which over-issued banknotes, copper coin notes, exchange certificates and currency notes, and abused the minting of copper coins, resulting in inflation soaring to unprecedented levels. In addition, in order to control the situation, the Beiyang government blatantly went back on its promises and shamelessly deceived the people in customary manners.

2.1 The Suspension of Banknotes Redemption Yuan Shikai (袁世凯) initiated the hyperinflation that came into full swing during the reign of Duan Qirui (段祺瑞), whose practices were followed by Cao Kun (曹锟), Wu Peifu (吴佩孚) and Zhang Zuolin (张作霖), and copied by all warlords nationwide. The galloping inflation was caused by Yuan Shikai‘s attempt to restore the monarchy under the era name of Hongxian (Hongxian 洪宪), for which the enthronement ceremony alone cost 20 million dollars, not to mention the vast amount of money spent on bribing officials to become proponents of the idea. Due to unscrupulous spending, the Beiyang government was in dire fiscal condition with revenues collected by normal means not able to cover one tenth of the potential expenditure. The Yuan Shikai government② basically relied on imperialist capital with most of its fiscal funds from foreign loans. Nevertheless, since the anti-Yuan revolution broke out in Yunnan Province, the imperialist masters had been considering the replacement of Yuan with another puppet regime and suspended new loans. The Yuan Shikai Government therefore faced severe fiscal straits, aggravated even more by uncollected salt tax revenues. Worse still, provincial warlords took a wait-and-see attitude, refusing to offer a penny towards the military defense budget. Yuan Shikai primarily relied on Liang Shiyi (梁士诒), the Secretary General to the Office of President and concurrently President of the Bank of Communications, to administer funds for re-establishing monarchy. Liang had been self-appointed to collect funds since the idea of ①

The Beiyang government, or warlord government, collectively refers to a series of military regimes that ruled from Beijing from 1912 to 1928. ② The Yuan Shikai government , or the Yuan government, refers to the Beiyang government under the rule of Yuan Shikai. -23-

revitalizing monarchy began to ferment. Nonetheless, despite being nicknamed ―the God of Wealth‖, Liang was not an omnipotent savior, but he was a powerful figure controlling the Bank of Communications which funded most of the spending on reviving monarchy and on cracking down on insurgents in Yunnan and Guizhou. The Bank of Communications, with its total capital of 7.5 million dollars, issued exchange certificates worth over 41.6 million dollars and advanced more than 46 million dollars in total to the Ministry of Finance and to provincial governments. The Bank of China was in a better financial condition than the Bank of Communications. Starting with 6 million dollars, the Bank of China absorbed over 40 million dollars of depositors‘ savings, issued 39.14 million dollars‘ worth of exchange certificates and offered about 30 million dollars of loans to the government. Under such circumstances, instead of admonishing the Bank of China and the Bank of Communications (―the Two Banks‖ hereinafter) to desist from aggravating the financial imbalances, the Yuan government further pressed the Two Banks to each issue 25 million worth of banknotes for military expenses to suppress anti-Yuan insurgencies. Since April 1916, the Beijing, Shanghai and Tianjin branches of the Bank of Communications had been swarming with customers who requested withdrawals and exchanges for silver dollars. Given the precarious bank run situation, the Bank of Communications made several pleas to the Ministry of Finance, asking for a prompt appropriation of money to aid the failing financial institutions. Nevertheless, instead of considering ways to cope with the urgent situation, the Yuan government, on 12 May 1916, blatantly ordered the Two Banks to suspend redeeming all types of notes, aiming to extract all the reserves of the Two Banks. Some believed that the suspension decree was a measure of last resort because of the bank run situation, which was indeed a naï ve misreading of Yuan‘s true intentions. Firstly, the Bank of China Beijing Branch still had silver reserves and, secondly, the Bank of China Shanghai Branch issued 3.3 million dollars‘ worth of banknotes when it had 5 million silver dollars and 35 million grams of silver in reserve, fully capable of handling the bank run. These facts suggest that the suspension decree was issued mainly to expropriate silver dollars and silver to prepare military funds for civil wars. As early as 17 April, the Yuan government notified provincial governments that ―the provincial government is fully authorized to suspend withdrawals if any sign of a bank run emerges‖. On 12 May, the Yuan government on the one hand pronounced the suspension decree, and on the other hand telegraphed the Two Banks, ordering bank reserves to be sent to Beijing. On 16 May, in a private conversation with Ariyoshi Akira (有吉明), Japan‘s Consul General in Shanghai, Tang Shaoyi (唐绍仪) disclosed Yuan‘s hidden intentions of secretly commanding all the bank reserves, worth over 10 million dollars, from branches of the Two Banks, since ―the current situation was developing to the disadvantage of the government; even provinces that did not declare independence were in effect unreliable.‖ Yuan planned to issue fiat money if his

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suspension decree was not strongly opposed. However, his wishful thinking did not come true. On 8 May 1916, the Yuan government covertly telegraphed the Two Banks‘ Shanghai branches to move locations from foreign concessions to the Chinese residential area Shiliupu (十 六铺). While looking for new sites in the Chinese residential area, both branches queried the move but received no reply. On 12 May, the Yuan government abruptly pronounced the suspension decree which was, however, immediately defied since the two branches had not yet moved to the Chinese residential area controlled by the Yuan government. The Shanghai Branch of the Bank of China decided to open for business as usual on that day (the Shanghai Branch of the Bank of Communications was unable to honor the banknotes owing to shortage of silver dollars). Other branches of the Two Banks all followed the Shanghai practice and continued the redemption of paper notes, striking a triple blow to the Yuan government. First, the Yuan government suffered desperate financial straits in the wake of the failed conspiracy to amass the whole nation‘s silver reserves. Beijing had merely 5-6 million silver dollars in reserve, 1.5 million of which, moreover, was transferred from the Fengtian branches of the Two Banks by Duan Zhigui (段芝贵). Second, confidence in the Yuan government continued to dwindle since the decree it had issued was disobeyed. Yuan‘s attempt to sell the autonomy of the Two Banks to the imperialist powers in exchange for loans again failed. Foreign banks not only refused to advance the Yuan government any loans, but instead sided with the Shanghai Branch of the Bank of China to proceed with redemption. Third, the rift between local warlords and the Yuan government further widened. Warlords such as Feng Guozhang (冯国璋) and Qi Xieyuan (齐燮元) successively expressed their support for the Two Banks to carry on redemption and demanded immediate repeal of the suspension decree. The Beijing branches of the Two Banks, under direct control of the Yuan government, however, were forced to implement the suspension decree that brought severe hardship to the people afterwards. First, the suspension decree threw the market into a state of tumult as business dealers could not afford new purchases to replenish the stock since all the money they made was in banknotes with diminishing purchasing power. Moreover, grain merchants were deterred from trading in Beijing and coal transport companies refused to deliver coal, because of the devaluing banknotes. Second, the suspension decree gave rise to hyperinflation and prices began to soar in Beijing as the suspension decree took effect. For people buying goods with banknotes issued by the Two Banks, the price would increase by 20% to 30%. When the suspension decree was initially enforced, a one-dollar banknote could be exchanged into 13 Diao and 200 Wen, while a one-dollar silver coin could be exchanged for 13 Diao and 700-800 Wen or so. Later on, foreign banks paid only 80 dollars on a 100-dollar banknote. Food prices shot up quickly: the price of flour rose from 700 Wen per 500 grams to 820 Wen, and millet from 560 Wen per 500 grams to

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640 Wen. Nonlocals who earned salaries lived in more straitened circumstances since the Beijing banknotes, not circulating in their hometowns, became worthless paper unless redeemed into coins. In addition, the suspension decree caused great difficulties to people‘s transportation and communication as the Railway Bureau insisted that all tickets and one third of other fees be paid in silver dollars or foreign currencies, and the Telegraph Office flatly refused to take Chinese banknotes. Despite being under such a severe inflationary situation, the Yuan Government actually ordered the Beijing branches of the Two Banks to advance officials‘ salaries and government expenditure, with 20% of the advances offered in banknotes, which upon going into circulation, added fuel to the already raging inflation in Beijing. Facing such a difficult situation caused by an over-issuing of banknotes, even staff from the General Administration of the Bank of Communications admitted that, ―we are ashamed to face comrades in the banking system and people from all walks of life in society‖. On 6 June 1916, Yuan Shikai died after being plagued by troubles both at home and abroad, but this did not bring an end to the Beiyang government‘s inflationary policies, but instead fuelled the flame. When the suspension decree was first carried out, the total value of banknotes in circulation was just above 25 million dollars, which rocketed to over 46 million dollars in October of the same year as a result of the Beiyang government‘s irresponsible view that banknotes could be issued unrestrictedly as long as they were not redeemed into coins. Meanwhile, the Ministry of Finance kept requesting advances from the Two Banks which could not be provided in the already scarce silver dollars, but were provided in a great volume of banknotes which, upon flooding into circulation, threw Beijing‘s financial system into even greater chaos. The value of banknotes fell even harder as the Railway Bureau raised the proportion of silver dollars required in paying tickets from 30% to 60%; the Chongwenmen Customhouse called for all taxes paid in silver dollars; and later fees paid to other government organs, including even legal costs, all had to be paid in silver dollars. By March 1918, the Two Banks had advanced the government more than 93 million dollars of loans, the real value of which dropped by 30% or so. Under these conditions, the Two Banks urged the government to repay the debts so that they could launch an overhaul of banknotes. Since the Two Banks‘ request was tenable on all emotional, rational and legal grounds, the Beiyang government announced to issue ―the Republic Seventh Year Short-Term Government Bonds and the Republic Seventh Year Long-term Government Bonds, both at an interest rate of 6%‖ on the pretext of collecting money for repayment of loans. In May 1918, the Beiyang government completed the issue of the two types of bonds at an interest rate of 6%, stipulating in express terms that the aim was ―to repay the loans to the Two Banks and to help build up their reserves‖. The

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face value of government bonds was 93 million dollars, equaling the nominal value of Beijing banknotes in circulation plus the deposits, or the value of government loans offered by the Two Banks. It was also specified that ―the government bonds can be purchased with banknotes issued by the Two Banks‖. By October 1919, these two types of government bonds had been sold for 74.202 million dollars, which meant 74.202 million dollars of Beijing banknotes could be recalled, and thereby banknotes in circulation plus deposits would be reduced to 18.897 million dollars. Astonishingly enough though, Beijing banknotes, which still stood at around 70% of their face value prior to the issue of government bonds, dropped to less than 50% of their nominal value. This mystery was not resolved until Representatives forced an explanation from the Cabinet. It turned out that the Two Banks on the one hand sold bonds to retrieve banknotes, but on the other hand offered an extra of 24.5 million dollars in loans to the government. As a result, 37.5 million dollars of banknotes were still in circulation, including those yet to be retrieved and those newly issued. From 29 June to October 1918, the Two Banks lent four million dollars each month to the government, which was to say, four million dollars of banknotes went into circulation each month during this period. No wonder the price of Beijing banknotes kept falling hopelessly despite the issue of government bonds. In response, on 18 September 1918, the Ministry of Finance did make an unfulfilled declaration that ―the Government decides that from the date of 12 October 1918, Bank of China and Bank of Communications shall not be required to make banknote advances to the Government‖. The Zhili Clique seized control of the Beiyang government in Beijing after the Zhili-Anhui War in 1920. On 14 September that year, the Cabinet Council passed a resolution that from October the Ministry of Finance would issue 60 million dollars of short-term government bonds, 36 million dollars of which would be assigned to the Bureau of Government Bond for sale to recall and then destroy the same aggregate nominal value of Beijing banknotes. It was also stipulated that ―for six consecutive months since the release of the resolution, the Bank of China and the Bank of Communications shall provide 800 thousand dollars each month to alleviate the financial stress for the Ministry of Finance, the army and the police force.‖

2.2 Abusing the Minting of Copper Coins and Fractional Silver Coins In addition to debts advanced by the Bank of China and the Bank of Communications, the Beiyang government primarily relied on government bonds and foreign loans to fund civil wars. From May 1916 to September 1918 when Duan Qirui stepped down as Premier, loans granted by -27-

Japan via Cao Rulin (曹汝霖) amounted to over 100 million dollars. However, growing anti-Japan sentiment among Chinese people impelled the Japanese government to announce in December 1918 that ―the Japanese government has decided to terminate loans and other forms of financial assistance to China with a view to promoting peace between the North and the South.‖ Facing difficulties in getting foreign loans, the Beiyang government turned to minting copper coins abusively and over-issuing copper coin notes to collect money. In the late Qing Dynasty, copper coins abusively produced by provincial governments had reached 20 billion, with Cash Ten coins constituting the biggest portion. In times of civil unrest since 1919, provincial mints did not follow required procedures in producing old-molded copper coins, resulting in an ever worsening quality of copper coins. Essentially, a copper coin should be made from 95% copper and 5% lead. However, many copper coins contained merely 80% or even 60% copper with the weight reduced by almost 25% compared with the standard. At the end of 1919, a silver dollar could be converted into 136 copper coins, which increased to 140 at the end of 1920 and 150 at the end of 1921. As excessive copper coins led to soaring prices, people from all walks of life demanded the Beiyang government should lift a ban on copper coin creation. Consequently, the Beiyang government in May 1919 imposed limits on the amount of copper coins each province could mint and in June 1921 called a halt to copper coin production. In May 1922, moreover, the Ministry of Customs issued an order to all tax offices that ―all raw materials and equipment used in producing copper coins should be detained‖. However, these edicts had little effect for the following reasons. Firstly, the Beiyang government itself was saying one thing and doing another. While launching an overall ban on copper coin production, the Beiyang government secretly ordered mints in Nanjing and Wuchang to resume production and to allocate a portion of the profits to administrative expenditure. Zhili Province and Hubei Province, which were domains originally controlled by the Zhili Clique before it took control of Beijing, were treated as special regions where the ban was inapplicable, and Anhui Province became the first to rescind the ban. On 16 September 1922, the General Department of Taxation received the No. 1279 Edict, stipulating that ―tax offices should detain all materials and equipment to be used in producing copper coins regardless of the carrier‖. On September 19 of the same year, the No. 1288 Edict arrived at the General Department of Taxation. The edict stated that ―Since Cao Kun, the Patrolling Supervisor① in charge of Zhili, Shandong and Henan, relied on the Tianjian Mint for relief fund and soldiers‘ pay and provisions, it is advisable to suspend the detention order to let it transport copper to Tianjin‖. Secondly, provincial warlords were independent local powers strong enough to disobey orders issued by the Central government. For example, governments of Anqing ①

Patrolling Supervisor, (xunyueshi,巡阅使)refers to a warlord head who controls more than two provinces. -28-

and Kaifeng, having had closed the Copper Coin Bureau (tongyuanju, 铜元局) at the order of the Ministry of Finance, resumed copper coins production shortly afterwards. Though new charters were suspended as a result of the detention order, ships and vessels went on smuggling copper coins without stop and the mints originally granted with charters, could continue to transport large volumes of copper coins to other places. Besides, provincial warlords all sought to benefit themselves at the expense of neighbouring provinces, which was to encourage the export of copper coins and to prohibit the import. Anhui Province, taken as an example, secretly copied the mold of copper coins circulating in Jiangsu in order to sell copper coins there. Wang Chengbin (王 承斌), the Military-Governor (dujun,督军) of Zhili Province, set up the Exchange Bureau in order to collect light-weighted copper coins to send to the Three Eastern Provinces①. In this way, the rise and fall of local warlords became intertwined with the outflow and inflow of copper coins. The influx of copper coins into Beijing remained at a relatively low level before the First Zhili-Fengtian War since rules and penalty provisions were strict then. After the defeat of the Zhili Clique in the Second Zhili-Fengtian War, the Fengtian Clique took over the Central government, the ban on copper coins transportation into Beijing was virtually removed. In addition, the Tianjin Mint churned out copper coins unceasingly, contributing to Beijing‘s inflationary market rife with copper coins. Profit-driven means taken by local warlords eventually sparked off the crisis of copper coins, characterized by an ever-changing exchange rate between silver coins and copper coins, varying from place to place, fluctuating from morning to noon. Taking the situation in Baoding as an example, one silver dollar could be exchanged into only 150 copper coins at the beginning of 1921. The number roared to an astonishing 317.70 by the spring of 1922 due to large influxes of copper coins into Baoding from Hankou and Changchun. In Shanghai, the value of copper coins needed in exchanging for a silver dollar rose from 1,500 Wen to 1,800 Wen in one year, exposing the people into abject poverty. The slump in the price of copper coins had immediate impact on the working class. Workers in Beijing were normally paid in copper coins, the amount of which usually remained unchanged for several years meaning that their actual purchasing power diminished day by day. Even when they occasionally got a pay raise, the raise was still not enough to offset the effects of inflation. Employed peasants, also largely paid in copper coins, suffered from worsening living conditions since their income and purchasing power were also subject to the fluctuating exchange rate. As for the tenant farmers, they were worse off since they had to pay rents that rose along with the soaring price of silver dollars. Even small business traders were hit hard as they could barely make any profit even by raising the prices of merchandise since they bought in goods with silver dollars and ①

Three Eastern Provinces, or Manchuria, refers to the three Northeast provinces in China, which is roughly equivalent to today‘s Heilongjiang, Jilin and Laioning. -29-

sold them priced in copper coins. When the devaluation of copper coins showed no signs of abating, copper coins in Tianjin were traded at unimaginably low prices for silver dollars. On 1 September 1926, the Governor of Zhili Province set 220 as the maximum amount of copper coins that should be needed in exchanging for one silver dollar, but in fact copper coin holders could not buy one silver dollar with even more than 240 copper coins. Shop owners refusing to accept copper coins triggered petty fights and grievances, and complaints grew rampantly in the streets. People protested indignantly against the policies of the Beiyang government that had spawned such galloping inflation. Workers from all sectors in Tianjin asked for a pay raise and teachers from all public schools in Beijing, after a fruitless request to have their salaries paid in silver dollars, all went on strike. When in 1924 Yuan Zuming (袁祖铭) was appointed as the Border Supervisor of Chuan and Qian, he launched a fund raising campaign to collect Cash Two Hundred copper coins, which was met with strong opposition from merchants and residents there. Yuan was impelled to destroy the copper mold to quell the strike upheaval. In addition to copper coins, the Beiyang government minted fractional silver coins (FSCs hereinafter) as well, also named Yinjiao (银角) and popularly called Maoqian (毛钱), Haoyang (毫洋) or Xiaoyang (小洋). As early as in the 16th year (1890) of Emperor Guangxu‘s reign, Guangdong initiated the minting FSCs in denominations including a half-dollar, two cents and one cent, concurrently with silver dollars. Later, the practice of minting FSCs spread to other provinces. The then Qing government had formed no regulations governing the minting of either FSCs or silver dollars and as a result, all provinces went on their own way. Since FSCs had lower silver content for the same denomination, it was more lucrative to mint FSCs than silver dollars. Various provinces engaged in an abusive minting of FSCs, leading to frequent fluctuations in their prices. In the 33th year (1907) of Emperor Guangxu‘s reign, the Qing government set standards on the silver content in coins and dictated a decimal system of currency, requiring that 10 cents should be equivalent to 1 dollar. These prescriptions, however, never came into effect. Driven by profits, each province manufactured FSCs in excessive amounts and as a result, FSCs became entirely subject to market-driven pricing. Often, one silver dollar was equal to 12 cents FSCs or so, making the decimal currency system exist in name only. Things did not get better even after the founding of the Republic of China. The Regulation of National Currency (guobitiaoli, 国币条例) was promulgated in 1914, stipulating that a FSC in the denomination of 5 cents (0.5 dollar) should weigh 13.3 grams, 2 cents (0.2 dollar) 5.32 grams and 1 cent (0.1 dollar) 2.66 grams, all weighed in proportion to their face value with a one-dollar silver coin weighing 26.6 grams. The Regulation also specified that the silver content in FSCs should be 70% and copper 30%, which complied with the principle that the actual value of

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fractional coins should be lower than the standard coins of the same face value. The newly approved FSCs, which resembled the silver dollars bearing the likeness of Yuan Shikai, were first minted in 1916 in the Tianjin Mint and in the following year in the Nanjing Mint. To ensure the stability of the decimal currency system, the Beiyang government specifically ordered the Bank of China and the Bank of Communications to exchange between FSCs and silver dollars in accordance with denomination and that new FSCs should first be minted in Beijing, Tianjin and Zhili, and then gradually in other provinces. In the first few years, the exchange remained accordant with denominations since the amount of coins manufactured was still moderate. However in 1923, FSCs worth 10 cents could only be converted into one silver dollar with a premium paid. The Bank of China and the Bank of Communications restricted the exchange between fractional and standard coins. The Railway Bureaus and other government organs also accepted FSCs, but at their market prices. Thus, the decimal relation between standard and fractional silver coins was eventually abandoned and FSCs became an independent currency with its value de-pegged from the standard silver coin. From then on, provincial warlords took FSC production as a means of collecting financial revenues and churned out FSCs of worsening quality, throwing the circulation of FSCs into mounting confusion. At that time, FSCs manufactured in the Three Eastern Provinces boasted the highest silver content and therefore enjoyed wide circulation in the Northeast regions with the standard silver coin barely used. The Tianjin Mint turned out the worst coins, which circulated in Beijing, Tianjin and other northern provinces. Mints in Guangdong primarily produced coins in the denomination of 2 cents, called Shuanghao (双毫), which enjoyed overwhelming popularity in the Guangdong market and also circulated in southern provinces and Shanghai. Other provinces produced FSCs that were circulated within provincial boundaries, so there was not a unified system of FSCs that was circulated nationally. The market price of FSCs against the silver dollar fluctuated from day to day and one FSC was priced differently in different places. From this, it is not hard to imagine the chaotic scene at that time. To take the fluctuating price of a Guangdong 10-cent FSC measured by Shanghai guiyuan (上海规元) as an example, a 10-cent FSC was priced highest at 0.665 taels and lowest at 0.592 taels during 1930, with the yangli (洋厘) at around 0.732 taels. Such drastic fluctuations in the price of FSCs, no doubt, had negative effects on the economy, yet the working people were hit even harder. The fact that they were mostly paid in FSCs and copper coins left them susceptible to the fluctuations of such currencies. Chinese people had a low standard of living. At that time, a standard silver dollar was a unit of currency too large for people‘s daily life. Ordinary people often used FSCs and copper coins, and it would have been very helpful if the government could have stabilized value of these coins. Nevertheless, since the end of Qing Dynasty, no matter whether it was during the rule of the

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Beiyang government or the Nationalist government, monetary reforms had been launched several times only to make the situation even worse, failing to address FSCs and copper coins problems that were of the greatest concern to the people. In principle, FSCs, as nominal money, should have less intrinsic value than their denominational value, which had become universal practice. The silver content of a FSC should have nothing to do with its conversion into the standard coin by decimal rules, provided that it was minted according to a unified standard of coinage and that the Central Bank and the minting institutions acted in cooperation to regulate the issuance and circulation processes. Nonetheless, the prices of FSCs dropped unceasingly because the then government was so corrupt and incompetent that old and new warlords set up separatist regimes and collected military funds by the unregulated minting of FSCs and dumping those of inferior quality to neighboring provinces. In addition, money houses, which were old-style Chinese private banks, engaged in profiteering and speculative activities, adding further confusion to the already chaotic currency situation. As a result, FSCs had gradually disappeared from the market, with fractional currency notes emerging as the substitute.

2.3

Abusing

the

Issue

of

Copper

Coin

Notes

and

Pseudo-Currencies Apart from copper coins and fractional silver coins, the Beiyang government also unrestrictedly issued copper coin notes in order to resolve its fiscal straits. To print copper coin notes became an increasingly preferred option since it was much more time-and-cost saving than minting copper coins. The institution in charge of the issue of copper coin notes was the Pingshi Currency Bureau, established in 1914 with scarce capital and headquartered in Baoding, with subsequent branches set up in Jingzhao, Tianjin, Jinan, Kaifeng, Xuzhou, Yantai, Qingjiangpu, Jiujiang, Rehe and Zhangjiakou. The Pingshi Currency Bureau was initially founded to aid the production of fractional coins to the convenience of the people. However, in less than a year, the price of the notes it issued dropped to 60%-70% of their face value due to excessive issuance and suspended redemption. Although the price of the notes rebounded when redemption was resumed on 1 November 1919, excessive issuing showed no signs of abating and eventually gave rise to the bank run of copper coin notes in 1923 in Beijing, which, though directly caused by excessive issuance, was at root a product of Cao Kun‘s bribery activities in running for the presidency. After the Zhili Clique won the first Zhili-Fengtien War, Cao Kun, the head of Zhili Clique, began to covet the post of the President. In order to collect funds for the election, he ordered the Ministry of Finance to grant large-and-medium-sized commercial banks with special charters, -32-

allowing them to issue three million dollars‘ worth of banknotes. These banknotes became government loans with copper coin notes as the pledge, thus causing the suspension of the redemption of copper coin notes in Beijing. The Jingzhao Branch of the Pingshi Currency Bureau advanced a large number of loans, amounting to 1.46 million dollars by July 1923. All the advances came in the form of provisional loans from banks on the pledge of copper coin notes, without which an immediate crisis would have arisen. Even so, the Ministry of Finance extracted another 800 thousand silver dollars‘ worth of copper coin notes from the Currency Bureau as a pledge to borrow from banks. In the loan contracts, it was explicitly stipulated that, ―in cases of default or underpayment, the lender is fully authorized to sell off the pledged copper coin notes for repayment.‖ By the mid-July in 1923, potential risks had begun to unsettle the Beijing market with the inflow of a new series of copper coin notes. Among the four denominations in the new series, copper coin notes denominating fifty, forty and ten were printed clearly while those denominating twenty were dim-colored and vaguely figured. On 3 August 1923, a bank run caused panic in Beijing. Large crowds of people jammed the Pingshi Currency Bureau to redeem copper coin notes; some even lost their lives in the uncontrolled turmoil. Due to lack of copper coins, the Currency Bureau only assigned one staff member to be in charge of redemption and restricted the amount customers could redeem to 10 Diao (which was 500 Wen, or the value of five Cash Ten copper coins) as delaying tactics in order to buy time. Police officers were deployed to maintain order, sometimes resorting to batons and sticks. Profiteers on this occasion refused to accept bank notes, causing greater chaos among the poor. On the evening of 14 August, a one-dollar silver coin could be exchanged for 189 Cash Ten copper coins, or copper coin notes denominating 235 Cash Ten copper coins. The value of paper money, then, had devalued by 46 Cash Ten copper coins, resulting in the paper money being spurned among merchants in the four suburban districts. Shop owners either rejected the paper money, or accepted it at a 20-30% discount. On 26 October when the Currency Bureau announced a termination of redemption, the price of copper coin notes dropped further from 85-90% of the nominal value to merely 50-60%. The reason why such a massive quantity of copper coin notes appeared in the mid-July 1923 was not revealed until 19 October when the Deputy Minister of the Ministry of Justice announced the intention to investigate the Pingshi Currency Bureau for being suspected of abusively issuing copper coin notes. It turned out that the amount of copper coin notes issued in Beijing was 1.558686 million Chuan. The Beijing Branch of the Currency Bureau itself applied for 1.0835 million Chuan in loans, and borrowed another 1.985 million Chuan at the request of the Ministry of Finance, totaling 3.0685 million Chuan. All the loans were pledged with the same nominal value of copper coin notes, from which 2.4524 million Chuan were sold and went into circulation

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due to default. The influx of these copper coin notes, almost twice as many as those in circulation, aroused immediate financial panic and led to another bank run. Worse still, the amount of copper coin notes in circulation was greater than 4 million Chuan if two factors are taken into account. Firstly, the Bureau of Government Bond affiliated to the Ministry of Finance was responsible for borrowing money with copper coin notes as the pledge. The pledge was initially 200 thousand Chuan, but later the Minister of Finance took over the power and personally authorized loans with copper coin notes as pledges without any records left. Secondly, the new series of copper coin notes were poorly churned out by Jinghua Printing and Heji Printing, and therefore could easily be faked and privately printed. Both factors above contributed to a larger circulation of copper coin notes than the estimated 4 million Chuan (or 80 million Diao). The order to terminate redemption issued by the Beijing Branch of the Pingshi Currency Bureau tarnished the credit of other branches as well. On August 20, the Jinan Branch banned the circulation of copper coin notes, drawing large crowds to the Currency Bureau to redeem their notes. Copper coin notes in Henan Province, which were worth 20 million Chuan, had depreciated to 40% of their nominal value and continued dropping. Ordinary people were hit hardest in the Beijing suspension turmoil. Goods priced in copper coins all rose by 20-30%, with food price rising the fastest. Half of the working people were paid in copper coin notes and could barely afford a full meal at normal times. It is not hard to imagine their impoverished conditions in such a period of inflation. The suspension decree issued by the Beijing Branch of the Pingshi Currency Bureau evoked tremendous repercussions in society, forcing the Beiyang government to make its stance clear and recall the banknotes. However, the government was not sincere in fulfilling its promise. The Ministry of Finance borrowed 600 thousand dollars from four Banks –the Bank of China, the Bank of Communications, the Salt Industry Bank and the Kincheng Banking Corporation. The loans were said to be earmarked for addressing the copper coin notes issue (the circulation of these notes amounted to 1.3-1.4 million dollars or so in silver). Yet in years that followed, the recall project never became reality and the funds borrowed were used for other purposes. Consequently, copper coin notes, losing their credit as a currency, were spurned and discarded like waste paper. The Pingshi Currency Bureau not only issued copper coin notes, but at the same time issued pseudo-currencies which upon becoming unredeemable, caused even greater damage due to far larger volumes being issued. After the First Zhili-Fengtian War, the Beiyang government was in dire financial situation, with military and police forces in the outskirts of Beijing to be provided for and personnel in administrative organs to be paid. However, the Treasury was unable to take out loans from domestic banks since its credit was totally ruined in the redemption suspension

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turmoil. Foreign banks took advantage of the Treasury‘s financial difficulties and offered advances with very stringent loan clauses. In June 1922, the Beiyang government issued fixed-date exchange certificates, totaling two million dollars and subsequently issued short-term interested exchange certificates, interested currency notes and interested special currency notes respectively in October 1922, February 1923 and July 1923, totaling eight million dollars. The four types of certificates and notes added up to ten million dollars. It was then announced ―the four types of certificates and notes shall be redeemable either upon issuance or one year after issuance, paid in 10 consecutive months at a monthly interest of 1%. It was also specified that ―all funds used for payment came from residual revenues of salt tax. Therefore these certificates and notes are highly reliable‖. It was also clearly printed on the back of the note that these certificates and notes could be used to pay half of required fees to the bureaus affiliated to the Railway Bureau, the Telegraph Office and the Telephone Office and that any organ mentioned above refusing to accept the bearer‘s payment would be accused of disrupting finance. Nevertheless, the Beiyang government broke its promise to feather its own nest. Except for the first two million dollars of fixed-date exchange certificates (not fully redeemed until 1925), the redemption of the other three types of certificates and notes, totaling eight million dollars, was habitually delayed by the Ministry of Finance due to ―insufficient net revenues of salt tax‖. However, when in October 1923 the Ministry of Finance obtained the salt tax revenues, it actually assigned the money for other purposes without paying any interest on the exchange certificates for June, July, August and September, totaling 800 thousand dollars, nor on the special currency notes for July, August and September, totaling 900 thousand dollars. By 1925, funds for repaying the principal were still nowhere to be found and payment for the interest had been delayed for 10 periods with the money needed for repayment amounting to 6.8 million dollars. By 1926 when Duan Qirui stepped down as the Provisional Chief Executive, all claims of an overhaul by the Ministry of Finance turned out to be untrue. The Ministry of Finance once stipulated that payment to all Beijing branches affiliated to the Railway Bureau, the Telegraph Office and the Telephone Office, as well as tax offices, cigarette & wine offices and stamp duty offices under the administration of Chongwenmen Bureau could be paid half in certificates and notes. Nonetheless, except for the Chongwenmen tax offices which accepted one fifth of the fees to be paid with such certificates and notes, all other government organs did not follow the stipulation. When the certificates and notes first came into circulation, the market prices reached as high as 70-80% of their face value. After delayed repayment occurred, prices began to drop incessantly, in March 1923 to lower than 60%, in August to 20-30%, in April 1924 to lower than 20% below and in June 1925 to lower than 10%. The bearers of these notes were so aggrieved that some even committed suicide. When the Ministry of Finance issued exchange certificates and

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currency notes, the Ministry of Communications issued fixed-date payment vouchers and the Ministry of Interior issued salary vouchers. According to Jia Shiyi (贾士毅), ―the total sum of default on the principal and interest of both special and non-special certificates and notes reached 59.1143 million dollars by the end of 1925.‖ All these unredeemable pseudo-currencies were means by which the Beiyang government squeezed enormous wealth out of the people. While inflation brought tremendous disasters to the Chinese people, the Beiyang government also suffered despite the enormous wealth it had wrested. Firstly, the Beiyang government exhausted all unfair means to extract wealth, a deed similar to catching the fish by draining the pool and as a result, galloping inflation was engendered, the credit of financial institutions was marred, and its own material foundation for survival undermined. Originally, funds for fiscal and military spending could easily be obtained providing that bank notes were in sound circulation, and as long as the credit of bank notes were stable, applying for loans would become unnecessary. However, the Beiyang government abused the issue of bank notes and the minting of copper coins, leading to a nationwide rejection of these currencies. It had to turn to foreign banks for loans, further deepening its reliance on imperialist powers. Meanwhile, the soaring inflation led the imperialist nations to believe the Beiyang government was incapable of dealing with both political affairs and economic matters. As a result, they gradually withdrew their support, which was an important reason for the downfall of the Beiyang government. Secondly, the hyperinflation aroused great resentment and indignation among the people who were angry about the slump in the banknotes prices and revealed their determination to fight against the warlord government. The Beiyang government‘s bloody oppression on the ordinary people exacerbated the conflicts between the Beiyang warlords and the people. Class conflicts were aggravated to an unprecedented severity which led to revolutionary rages culminating in the Northern Expedition①. The resentment of the people towards the tyrannical government was the major reason for the fall of the Beiyang government.

2.4 Various Banknotes and Miscellaneous Military Notes Just as the Beiyang government issued an excessive amount of banknotes, in a similar manner, local warlords printed a variety of banknotes. Consequently, paper money was devaluated dramatically, and local warlords frequently threatened to terminate redemption, and in this way unscrupulously exploited the people. Examples of Banknotes Devaluation: ① Northern Expedition, (1926–27) campaign of the Chinese Nationalist army (then allied with the communists) that advanced north from Guangzhou (Canton) to the Yangtze River (Chang Jiang) battling warlord forces.

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The Financial Bureau of Jiangxi Province issued 8 million dollars of provincial bonds which could be only converted into provincial banknotes at 10-20% of their face value; Rehe Province issued unredeemable paper money with a total face value of over 80 million dollars. Such an excessive amount of notes being forced into circulation subsequently caused a sharp decline in price: in 1928 a note with the denomination of 500 dollars could be exchanged for only one silver dollar; Shanxi Province over-printed copper coin notes which depreciated to such an extent that a one-dollar silver coin, which should have been worth 3,000 copper coins, could be exchanged for copper coin notes with denominations larger than 7,000. While the market saw a severe shortage of coins, it was glutted with copper coin notes in nine denominations of one, two, three, four, five, ten, twenty, thirty and fifty, a phenomenon unseen in any other province; Provincial Bank of the Three Eastern Provinces in Fengtian issued approximately 700 million dollars‘ worth of banknotes and redeemed only 3-4% of their face value in April 1928; Bank of Jilin Yungheng issued over 8 million dollars‘ worth of silver dollar notes and 15 million dollars; worth of Xiaoyang notes. In August 1928, these notes were converted at 60% to 70% of the face value; The Jilin branches of the Bank of China and the Bank of Communications issued Harbin Silver Dollar Notes worth over 41 million dollars and the redemption price remained around 80% to the face value in August 1928. Examples of Termination of Banknotes Redemption: The Official Currency Bureau of Hubei issued over 2 million dollars of copper coin notes and stopped redeeming these notes after October 1926; Hankou branches of the Bank of China, the Bank of Communications and the Central Bank issued 80.5 million dollars of notes and stopped redemption after November 1927; The Provincial Bank of Jiangxi issued banknotes and copper coin notes worth 12 million dollars and terminated redemption after declaring bankruptcy in 1927; Guangxin Company of Heilongjiang issued 3 million dollars of Heilongjiang Notes in 1927 but discontinued the redemption in 1928; The Provincial Bank of Zhili issued banknotes worth 16 million dollars, but was ordered to suspend the redemption by Chu Yupu (褚玉璞); The Provincial Bank of Shandong issued 23 million dollars of paper notes which saw a devaluation of 75% in March 1928 and were prevented from being redeemed in May by Zhang Zongchang (张宗昌). Paper notes flourished and varied by province with various issuers, names and conversion prices. Take the city Jining in Shandong Province as an example: in the spring of 1928, copper

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coins almost disappeared from market and gave way to paper notes, some of which were issued by the government bureau of the county and others by commerce associations. Difficult to be converted into coins, these notes only brought new burdens to farmers who barely had any silver dollars or copper coins to pay taxes. Some provinces never saw a pause in the falling of currency prices with copper coins and banknotes taking turns to depreciate. From January 1927 to May 1928, Jiangxi and Henan successively declared the suspension of redemption and after that continued to issue paper money to ease money shortages. This phenomenon immediately affected the pawn market which had direct influence on peasants‘ living. In 1910, the Southern region of Hunan witnessed as much as 1.62 million dollars‘ worth of unredeemable notes and in Hengyang and Binzhou, countless pawn shops closed. In 1927, lots of pawnshops in Jinan closed down as paper money slumped in price. Japanese businessmen seized this chance to open pawnshops which accepted only hard currency. Loans, with a duration of two months and at a 100% monthly interest, were immediately granted and redemption could be demanded at any time. Envious of the lucrative business by Japanese pawnshops, former pawnbrokers gathered to resume the pawnshop business, lifting the monthly interest from 25% to 30% and shortening the loan duration from 24 months to 18 months. Obviously, peasants were squeezed even harder by higher interest rates and shorter loan periods. Compared with banknotes, military notes brought even greater sufferings to the people. Warlords in North China often abusively issued military notes to raise funds for wars and threatened to ―punish by military law‖ those who refused to use them. Cao Kun, the warlord head of the Zhili Clique, initiated the issue of military notes in North China. In July 1920, he issued a total of 500 thousand dollars‘ worth of Zhili Army Notes in the denomination of one dollar. The Bank of Henan, under the direct control of the Zhili Clique, also printed an excessive number of military notes and by 1923 the value of notes issued reached 12 million dollars. After the defeat of the Zhili Clique in 1924, the price of the notes it had issued underwent a sharp fall. Shandong Province issued an even greater number of military notes. Assuming the post as the Military-Governor of Shandong Province in 1925, Zhang Zongchang set up the Provincial Bank of Shandong, and printed military notes which flooded the market to the exclusion of other currencies. By June 1926, military notes slipped to 40% of their face value. That same year Zhang Zongchang allied with Chu Yupu to build a coalition force to fight against the National Revolutionary Army. In order to fund the army, the Zhili-Shandong military notes were issued, but were just the old notes issued by Pingshi Currency Bureau with the inscription ―Zhili-Shandong Military Notes‖ stamped on them. There was no time limit for the circulation of such notes, nor a specified means of redemption. The amount to be issued was set at three million dollars but

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actually reached 10 million. After defeating the National Revolutionary Army, Zhang Zongchang and Chu Yupu enforced the circulation of military notes in Beijing and Tianjin regions. People went on strikes to resist these notes and their price soon plunged to 20-30% of their face value. In the winter of 1927, to combat the Northern Expedition Army, Zhang Zongchang made a similar effort to print millions of unbacked military notes but battlefield setbacks further eroded the value of military notes and the drop in price frequently disrupted the financial order. Undisciplined soldiers using the military notes were not easy to reason with and fists flew at the slightest dissatisfaction. Frequent fights over the value of military notes vexed merchants and average citizens. In one incident a shop refused to take military notes, and when this reached Zhang Zongchang‘s ears, he arrested the shop owner, tortured him and shot him to death. More seriously, except for the provincial government, all the counties issued military notes in their own ways, from tens of thousands to millions and consequently caused commodity prices to soar upwards.

2.5 Infamous Examples of Inflation The Devaluation of Fengtian Bills. In the 1920s in Northeast China, six Chinese banks had the authority to issue currency, which were: Provincial Bank of the Three Eastern Provinces, Bank of Jilin Yungheng, the Guangxin Company of Heilongjiang, the Bank of China, the Bank of Communications and the Frontier Bank. The head office of the Provincial Bank of the Three Eastern Provinces in Shenyang issued exchange certificates, and the Harbin Branch issued the Harbin Silver Dollar Notes. Bank of Jilin Yungheng issued the Jilin Official Notes, Yungheng Silver Dollar Notes and Xiaozhi Notes. The Guangxin Company of Heilongjiang issued the Heilongjiang Official Notes, the Harbin Silver Dollar Notes, the Heilongjiang Silver Dollar Notes, Silizhai Notes, and Copper Coin Notes. The Shenyang Branch of Bank of China issued the Fengtian Silver Dollar Notes and its Harbin Branch issued the Harbin Silver Dollar Notes. Bank of Communications issued the same notes as Bank of China. The Harbin Branch of the Frontier Bank issued the Harbin Silver Dollar Notes and its Shenyang Head Office issued silver dollar certificates. Later, banks and money houses in Shenyang organized a Joint Issuance Reserve which also issued silver dollar certificates in the name of the Frontier Bank. Among the six banks above, Bank of China and Bank of Communications were under strict supervision and the Frontier Bank issued relatively fewer notes since it was not long established. It was the three provincial banks that issued the largest amount of banknotes which enjoyed a circulation wide enough to profoundly influence people‘s lives. In 1924, Provincial Bank of the Three Eastern Provinces was formed by the merger of -39-

Provincial Bank of Manchuria and the Three Eastern Provinces Bank. After an overhaul of the currency system, the standard currency was fixed on exchange notes issued by Provincial Bank of the Three Eastern Provinces, Bank of China and Bank of Communications; and the fractional currency was decided on Copper coin notes issued by Kungtsi Bank of Fengtian. All the previously issued silver dollar notes and Xiaoyang notes were recalled. Exchange notes and copper coin notes were collectively referred to as the Fengtian Bills. Exchange notes were issued by Provincial Bank of the Three Eastern Provinces in denominations of one, five and ten dollars in the old series and one, five, ten, fifty and one hundred dollars in the new series, and by Bank of China and Bank of Communications in denominations of one, five and ten dollars. Copper coins notes issued by Kungtsi Bank of Fengtian denoted five, ten, twenty, fifty and one hundred copper coins. The currencies listed above totaled nineteen kinds. One-dollar Xiaoyang equaled 100 copper coins and one silver dollar equaled 120. Xiaoyang was the commonly used currency unit in daily transactions. A Xiaoyang dollar referred to a Xiaoyang note in the denomination of ten cents or a copper coin note in the denomination of one hundred. The Suspension of Fengtian① Bills Redemption. In April 1918, Zhang Zuolin entreated the Beijing government to allow for an overall moratorium on Fengtian Bills redemption by declaring war against Germany and Austria-Hungary as a ploy because he was unable to handle the urgent request for redemption by Japan and Great Britain. In fact, the suspension of redeeming Fengtian Bills actually cleared the way for an excessive issue later. After the suspension of redemption, commodity prices soared and foreign currencies skyrocketed. Facing this situation, Zhang Zuolin named ―the money beetles and villains as social degenerates who profiteer by misleading people and fueling rumors‖, and therefore ―they should be cracked down by the police force‖. However, arresting the profiteers did not help much with controlling the soaring prices. People were living hard lives, and businesses were operated in bleak conditions with shops elevating prices to try to compensate for losses. Silver dollars were barely circulating in the market. The banking system required that one silver dollar should be exchanged for one dollar and six cents Fengtian Bills, yet government organs charged about one dollar and seven cents Fengtian Bills for one silver dollar. Eventually, silver dollars became so scarce that paper money could hardly purchase any, resulting in a nearly 40% depreciation of Fengtian Bills. As

Fengtian Bills became irredeemable, banks

extravagantly issued banknotes, finally leading to an unstoppable devaluation of Fengtian Bills. The Cause of the Over-issuance of Fengtian Bills. The over-issuance of Fengtian Bills was the result of close links between Provincial Bank of the Three Eastern Provinces and the Fengtian government which had entrusted it to handle all money matters for the government since the ①

Fengtian: refers to what is now known as Liaoning Province. -40-

bank‘s founding. As the government‘s fiscal deficits grew extremely large due to massive military spending, the only thing the bank could do to tackle the money shortage was to print banknotes at full speed, eventually leading to the constant devaluation of Fengtian Bills. Apart from military expenses, banknotes were churned out mainly to engage in grain and soybean business. Grain and soybeans were major exports of the three Northeast provinces. Provincial Bank of the Three Eastern Provinces made use of the profitability of these two agricultural products and printed money to buy in large quantities to sell to other provinces at higher prices, profiting from the price differences. Each time Provincial Bank of the Three Eastern Provinces purchased grain and soybeans, people knew a wave of banknotes would soon flood into circulation and Fengtian Bills would see a sharp fall in price overnight. The devaluation of Fengtian Bills was in the end the product of wars between warlords. During the First Zhili-Fengtian War from April to May in 1992, the Fengtian Clique experienced great financial difficulties due to increased military spending. The provincial bank, as the sole organ to provide for military spending, issued large numbers of banknotes to engage in the buying and selling of agricultural products, the profit gained from which was used to finance military supplies. In September 1924 when the Second Zhili-Fengtian War broke out, the circulation of Fengtian Bills increased rapidly, with their prices falling to two-dollar Fengtian Bills for less than one silver dollar, rallying a little the next year. As Zhang Zuolin took control of Beijing, the political advantage the Fengtian Clique gained did not help relieve the financial difficulties, which were mainly caused by increased military and administrative spending that came along with the victory. As a result of the excessive issue of Fengtian Bills, the price of the bills hit a historic low at 14.3 dollars against 1 silver dollar in 1927, dropping 148% for the whole year. In reaction to this situation, the Fengtian government issued 50 million dollars government bonds and forced banks to purchase them, but the banks, instead of buying the bonds in silver dollars or gold certificates (jinpiao, 金票), issued further large-denomination bills of 50 and 100, throwing the market into mounting panic. On 24 June, the conversion price of Fengtian Bills against silver dollar hit a historic low at 72 dollars bills to 1 silver dollar. Great Suffering of the People. Prior to the Second Zhili-Fengtian War, Provincial Bank of the Three Eastern Provinces issued 103.56 million dollars‘ worth of Fengtian Bills, Kungtsi Bank of Fengtian 53.83 million, the Bank of China 25.28 million and the Bank of Communications 1.23 million, totaling 141.02 million silver dollars and 53.83 million Xiaoyang. After the war, financial straits, aggravated by the need for weapons, hastened the printing of paper money. By the end of November 1925, banknotes in circulation totaled 352.04 million silver dollars and 83.86 million Xiaoyang, among which 253.84 million dollars was issued by the Provincial Bank, 83.86 million by Kungtsi Bank of Fengtian, 45.56 million by the Bank of China and 52.63 million by the Bank

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of Communications, increasing by 200 million dollars compared to earlier times. In addition, these bills, circulating in Zhili, Rehe and Shandong, fluctuated in price since they were issued against inadequate reserves. Before 1926, one silver dollar could buy 1.4-1.5 dollars Xiaoyang at its lowest and 1.7-1.8 at its highest, and one yen gold certificate could exchange for 1.2-1.3 dollars Xiaoyang at its lowest and 1.5-1.6 at its highest. Prior to the Second Zhili-Fengtian War, silver dollars and gold certificates maintained comparatively stable prices despite periodical rises in value. However, after the war, notwithstanding vigorous actions taken by the General Headquarters of the Fengtian Army, the Fengtian Governor‘s Office and the Police Agency, the price of silver dollars and gold certificates began to surge unchecked. By July 1927, one silver dollar could be exchanged for five Fengtian dollars and one yen gold certificate for 4.7 to 4.8 Fengtian dollars, stirring up unstoppable panic among merchants and the ordinary people who were completely defenseless against such hyperinflation with prices climbing as high as three to four times. Neither people in the countryside nor small business dealers dared to take the Fengtian Bills, which virtually ceased to circulate due to its ruined credit. The general public, including most of the merchants, seized every chance to buy silver dollars and gold certificates, while some dishonest traders profiteered in the financial panic to reap exorbitant gains. As the government‘s effort, diluted by perennial warfare, to stabilize the Fengtian dollar proved virtually ineffective, the Fengtian Bills dropped hopelessly to 12 dollars of bills to one silver dollar. Lack of confidence in Fengtian Bills led to the widespread adoption of silver dollars as the medium of exchange in both non-government and government activities, and taxpayers using Fengtian Bills needed to pay a premium. Moreover, personnel in Provincial Bank of the Three Eastern Provinces, notwithstanding their ranks, flocked to buy silver dollars in great quantities with Fengtian Bills, in a way speeding up the devaluation of Fengtian bills. The Fengtian Clique extracted tremendous wealth from the general public via inflation, amounting to 442 million yen (counted in gold certificates) from 1922 to 1928 according to statistics. People living in the three provinces (Fengtian, Heilongjiang and Jilin), be they locals or non-locals, without exception suffered badly from the over-issuing of Fengtian Bills. If the loss of honest people who were the victims of speculations and financial frauds was taken into account, the actual loss of the people far superseded the 442 million yen gained by the government solely through issuing Fengtian Bills. The devaluation of Fengtian Bills engendered a surge in commodity prices, hitting the working class worst of all. According to surveys, the average price of necessities more than doubled in 1926 compared with the previous year. Superfine polished rice cost 7 Fengtian dollars a dou in 1925 and 15 to 16 dollars in 1926; a bag of flour cost four to five dollars in 1925 and over

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15 dollars in 1926; wood cost only two dollars and five cents per fifty kilograms in 1925 and four dollars and six cents in 1926; soft coal cost two dollars a ton in 1925 and 58 dollars in 1926; anthracite coal cost 50 dollars a ton in 1925 and over 120 dollars in 1926; Kaoliang stalk, used to heat the brick bed, cost eight dollars per cart in the past and no less than 15 dollars in 1926; salt, which used to be the most affordable foodstuff and could be bought for merely two or three copper coins per 500 grams, cost 1.6 cents in 1926; the price of lard rose from five cents per 500 grams in 1925 to 9.6 cents in 1926; the price of beef rose from four cents per 500 grams to 7.4 cents in 1926. However, the most destructive kind of price-surge to the common people was a hike in rental fees. Previously, one room was rented at four to five dollars, however, in 1926, a room cost at least 15 dollars, often with 3 dollars charged in silver dollars. The steep devaluation of Fengtian Bills made virtually every commodity rise in price, inflicting unbearable pain on the common people. The Depreciation of Jin Notes. After Yan Xishan (阎锡山) seized power in Shanxi Province following the 1911 Revolution①, his government was confronted with severe fiscal difficulties. At first, he organized ―fund-raising‖ campaigns and ―borrowed‖ from local millionaires, which helped ease temporary money shortages and promoted the establishment of the Currency Bureau of Shanxi in 1912. However, the silver dollars issued by the provincial bank still could not cover the soaring military and administrative expenditure. Therefore in 1918, after Yan Xishan took up a concurrent post as the Governor of Shanxi Province, he set up the Copper Coin Bureau, which through buying in copper alloys at low prices and melt them to mint new copper coins, realized a substantial profit of 3.6 million dollars in just one year‘s time. Inspired by this means of acquiring wealth, Yan Weifan (阎维藩), manager for the Qixian Dadetong Money Exchange Shop, was assigned to be in charge of forming the Provincial Bank of Shanxi via a restructuring of the Currency Bureau of Shanxi. The Provincial Bank of Shanxi opened officially on 1 August 1919 with a projected total capital of 3 million dollars (the actual amount was 1.2 million), coming from three sources: capital inherited from the Currency Bureau, money forcibly raised by the military government, and funds appropriated by the provincial government. Upon its founding, the Provincial Bank incorporated a general administration in Taiyuan with senior posts including the General Auditor, the General Secretary, the General Manager, the General Accountant, the Note Cashier and the Cashier collectively referred to as ―Four Generals and Two Cashiers‖. In addition to the Taiyuan Branch, other branches and business lobbies were installed in major counties and commercial zones. Yan Weifan, the first president of the Provincial Bank, resigned in less than a year and was succeeded by Xu Yiqing (徐一清), an elder relative of Yan Xishan‘s on his wife‘s side. Later, as Yan Xishan expanded his influence, branches were successively set up in Tianjin, Shanghai, Hankou, Beijing, Shijiazhuang, Baoding and Suiyuan. ①

The 1911 Revolution is also known as the Xinhai Revolution. -43-

Up to 1929, branches established beyond Shanxi amounted to over 40, developing into a financial network stretching in all directions. The mission of the bank, as stipulated in its charter, was ―to regulate finance and to assist industrial progress‖. Its business scope mainly covered deposits, withdrawals, exchanges, gold and silver dealings, recalling undue notes at a discount, factoring debts and preservation of valuables. However, the actual range of business entirely hinged on the will of the Yan Xishan Ruling Group. For instance, the bank was not granted the right to issue paper money or to invest in industries in the beginning. Notwithstanding this, shortly after its establishment, the bank began to issue paper money, generally referred to as ―Jin Notes‖ (Jinchao, 晋钞), and made huge profits by engaging in real estate businesses and investing in industrial projects. In order to establish itself as the sole issuer of currency, the Provincial Bank, by virtue of government decrees, banned private-owned money shops from issuing currency notes and issued banknotes against inadequate reserves. At first, banknotes could be redeemed in full accordance with their respective denominations. However, as confidence in banknotes built up, the Provincial Bank began to churn out notes in large quantities. It was estimated that during 1919-28, 13 million dollars Jin Notes had been printed. After 1929, Jin Notes were issued even more freely in order to support an escalated Anti-Jiang Campaign. At that time, 700 thousand troops led by Yan Xishan, Feng Yuxiang (冯玉祥) and Wang Jingwei (汪精卫) were exclusively fed with Jin Notes and, as Yan Xishan‘s influence continued to extend, the circulation of Jin Notes spread to Beiping, Tianjin, Hebei and Chahar. Between January 1919 and October 1930, the Provincial Bank of Shanxi issued a total of 47 million silver dollar notes and 3.15 million Diao, or 787,500 silver dollars, worth of copper coin notes. Apart from that, Yan Xishan requested four huge loans from the Provincial Bank to cover military spending, totaling over 23.5 million dollars with 6 million in silver dollars and over 17.5 million in banknotes. Taking into account all the banknotes in circulation and in reserves, the total supply of Jin Notes would reach as much as over 96 million dollars. After the failure of the Anti-Jiang Campaign, Jin Notes circulating in other provinces, together with the troops, flooded back into Shanxi, bringing about uncontrollable inflation which was exacerbated by speculative and profiteering activities. The Shanxi government, in order to cover military and administrative expenses, issued a decree on 7 November 1931 that from the day of issuance, people who used Jin Notes to pay the land tax would have to pay with their notes devalued by 50%. This decree further dampened people‘s confidence in Jin Notes. Yan Xishan returned to Shanxi from Dalian in 1931. In that winter, he ordered the Provincial Bank to issue a new series of Jin Notes, one dollar of which could redeem 20 dollars notes in the former series. Influenced by this, the whole Shanxi Province was plunged into a bleak state with

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bankrupt businesses and individuals everywhere. The ordinary people suffered the most because the Jin Notes they worked conscientiously to have earned suddenly became worthless paper, throwing them into a desperate state. Cases of fleeing or even suicides became common. In one example, a retired woman named Gao Xiangxi, indignantly burned all her savings - over ten thousand dollars Jin Notes – and then fell ill and never recovered. In another instance, an old man went to Taiyuan and burned Jin Notes in front of the Provincial Bank, saying to the clerks, ―take this as my offering to your dead‖, with that he left in tears. From these anecdotes, it was not hard to imagine how badly the ruling of Yan Xishan was resented and how heavily the people were hurt by the currency crisis. The Currency Turmoil in Sichuan. During the Warlord Era, people in Sichuan province endured great hardship due to the abusive minting and issuance of currency. The Sichuan Clique was divided into smaller warlord groups, or Defense Zones, separated from each other with distinct military, political and economic boundaries. The circulation of currency was confined to each Defense Zone. Warlords were so obsessed with making their own fortunes that they extracted wealth from the people by churning out substandard coins and over-issuing notes and bills, showing no regard for the well-being of the people. Worse still, as the leadership of a Defense Zone alternated, new currencies were repeatedly issued to supersede the current ones, each time inflicting further pain on the hard-pressed population. In the 29th year (1903) of Emperor Guangxu‘s reign, the Chengdu Mint began to produce copper coins, first in denominations of Cash 10, later of Cash 20, all made from red copper with delicate carvings on both sides, the obverse inscribed with the reign title, date, mint mark and the denomination, and the reverse bearing a dragon design. However, the price of these copper coins kept dropping from Cash 800 to Cash 900-1000 against one silver dollar. If the price fell to one silver dollar for Cash 2000 worth of Cash 10 copper coins (which was 200 Cash 10 copper coins), as estimated by the Statistics Bureau, the profit from minting would drop to zero since these coins were delicately made from copper of high purity. Another institute minting copper coins in Sichuan was the Chongqing Copper Coin Bureau. The Sichuan-Hankou Railway Fund Raising Protocol (川汉铁路集股章程), signed by the Governor of Sichuan Xi Liang (锡良) and local country gentlemen in the 31st year (1905) of Emperor Guangxu‘s reign, stipulated in one article that capital for building the railway would be collected from the revenues of the Copper Coin Mint to be set up in Chongqing. Consequently, 800 thousand taels of silver was allocated to the establishment of the Chongqing Copper Coin Bureau, and Shen Bingkun (沈炳堃) was appointed by Xi Liang as the person in charge. Soon after that, Shen bought 200 Mu (亩) land along the riverbank, and assigned personnel to negotiate equipment purchases with foreign businesses in Shanghai. However, the contract for purchasing

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two sets of equipment, one made by Great Britain and the other by Germany, was not signed until two years later. After the plant was completed, further delays occurred when the German equipment was installed but could not function due to lack of copper and the British equipment was not even properly installed. It was not until in 1913 that the mint plant officially came into operation. In the founding year of the Republic of China 1912, Yin Changheng (尹昌衡), the General of Sichuan, encountered financial difficulties as he expanded the military. The Chengdu Mutiny, in which the provincial treasury and the Bank of Junchuanyuan were thoroughly looted, further aggravated the financial situation. Without other means to resort to, Yin set up the Bank of Sichuan in the exact location of the Junchuanyuan Bank. Without adequate reserves, the Bank of Sichuan eagerly issued the Dahan Military Government Silver Dollar Notes (大汉军政府军用银 票) in denominations of one dollar and five dollars, totaling three million dollars. It was specified on the back cover that these notes could only be redeemed one year later, thus creating a precedent for the Sichuan warlords to issue paper money against inadequate reserves. Yin again ordered the Chengdu Mint to mint 10 thousand Chuan copper coins, degraded in quality and weight because of a copper shortage in post-munity times. Furthermore, the Limin Money Shop was created to issue the Copper Coin Exchange Certificates in denominations of 100 Wen, 200 Wen and 500 Wen, still against deficient reserves. By 1913, the face value of military silver dollar notes which had been issued had reached over 15 million dollars. Unredeemable and circulating in unrestricted quantities, these notes were spurned by both sellers and buyers and became memorials to the collapse of the Bank of Sichuan and the Limin Money Shop. The Chongqing Branch of the Bank of China issued the well-trusted National Currency Note of Sichuan, circulating in Chongqing and adjacent counties. Chen Huan (陈宦), the then Military Governor of Sichuan, borrowed four million dollars‘ worth of these notes from the Chongqing Branch, which were claimed to be used to redeem old notes but ended up in military funds. The notes and certificates issued by the Bank of Junchuanyuan, including the military silver dollar notes initiated by Yin Changheng, were never redeemed. In 1916, Duan Qirui, then Premier of the Beiyang government, ordered the Bank of China via telegraph to suspend the redemption of the Sichuan National Currency Notes, triggering a slump in price to 30-40% of their face value. In the end, the National Currency Note of Sichuan degenerated into worthless paper. In 1915 when Yuan Shikai proclaimed himself Emperor, provinces successively rose to declare independence from the Beiyang government. Luo Peijin (罗佩金) and Dai Kan (戴戡) led the National Protection Army (huguojun, 护国军) into Sichuan respectively from Yunnan and Guizhou and expelled Chen Huan. Luo became the Military Governor and Dai the Governor of Sichuan. When Luo and Dai led troops into Sichuan, they took with them two million dollars‘

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worth of National Currency Notes of Yunnan issued by the Yunnan Branch of the Bank of China and half-dollar coins (钢板半元) as military funds. Meanwhile, Luo and Dai established the Huguojun Bank of China, which issued the National Currency Notes of Yunnan to a total value of four to five million dollars. Liu Cunhou (刘存厚), a Sichuan general, initiated a campaign to throw out Luo and Dai shortly afterward, ending up in the downfall of the Luo-Dai rule and a desertion of the Yunnan currencies. In September 1923, Liu Chengxun (刘成勋), the Commander-in-Chief of the Sichuan Army, together with Xiong Kewu (熊克武), the Commander-in-Chief of the Anti-Enemy Army, founded in Chengdu the Bank of Chengdu and issued 2.955 million dollars in banknotes. In December of the same year, Lai Xinhui (赖新辉), the General Director of the Sichuan Army, set up in Chongqing the Bank of Chongqing and issued one million dollars in banknotes and other miscellaneous notes. All in all, warlords always gained vast wealth while the ordinary people became the victims of exploitation, left in poverty, and in some cases, even deprived of living places. However, this did not mark the climax of the currency turmoil and worse was yet to happen. In the early years of the Republic of China, the Chengdu Mint produced silver and copper coins in accordance with the requirements laid down by the Ministry of Finance in terms of quality and quantity. For example, it was required that a Dragon Coin (Panlong, 盘龙) in the denomination of Cash 10 should weigh two qian, Cash 20 three qian and Cash 50 five qian, all made from high purity red copper; additionally, the quantities of coins to be minted were subject to approval by the Ministry of Finance. Similar and even stricter rules applied to the minting of silver coins. Nonetheless, since the National Protection War (huguozhiyi, 护国之役), Sichuan descended into greater tumult as warlords took control of the Chengdu Mint, which then began to mint substandard coins excessively and in larger denominations. Warlords in other parts of Sichuan all followed the Chengdu precedent, opening new mints to churn out coins of even worse quality and in larger quantities only to overshadow the Chengdu Mint. Consequently, badly minted coins began to swamp the whole of Sichuan. In 1924, Yang Sen (杨森), then Military-Governor of Sichuan Province, came to office in Chengdu and took control of the Chengdu Mint. Using the excuse of ensuring military supplies, Yang ordered the Chengdu Mint to unrestrictedly mint silver and copper coins with silver coins mostly in the half-dollar denomination and predominantly Cash 200 copper coins that weighed seven qian. According to the standard set by the Ministry of Finance, a Cash 50 copper coin should weigh five qian, while a Cash 200 copper coin minted by Yang Sen, with its weight merely two qian heavier, denominated four times the value of a Cash 50 copper coin. Further, considering the compromised purity, it was easy to understand how enticing profitability spawned the large

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quantities of Cash 200 copper coins. The same trick was played in minting the half-dollar silver coins instead of one-dollar ones. The Ministry of Finance required that a standard one-dollar silver coin should contain 90% silver and 10% copper and that a half-dollar silver coin, as a fractional coin, should consist of 70% silver and 30% copper. A half-dollar silver coin in circulation, though of lower purity, could be exchanged with a one-dollar coin according to the denomination, thus making it more lucrative to mint half-dollar coins. Later, driven by profit, Yang Sen minted half-dollar silver coins to the exclusion of the one-dollar denomination. It was worth pointing out that even in minting half-dollar silver coins, Yang Sen played some tricks in the purity of the coins. According to regulations, the silver used in minting coins must be pure. Even silver ingots of as high as 99% purity would not suffice and should be refined to 100% purity. Disregarding such regulations, Yang Sen directly minted silver coins with 71% silver ingots and 29% copper, making the actual percentage of silver below 71%. The silver content in coins had been long kept secret by the mint not only from outsiders, but from its own staff except for few trusted personnel. Although Yang Sen only slightly adulterated the silver coins, he did create a precedent of degrading purity for succeeding warlords. In 1925, Deng Xihou (邓锡侯) occupied Chengdu, took control of the Chengdu Mint, and started to mint Cash 200 copper coins. At that time, copper and iron were too expensive for minting on a large scale. Therefore, with the newly minted Cash 200 copper coins, Deng bought Zhiqian, Cash 10 and Cash 20 copper coins from the market and used them as raw materials from which copper and iron were recycled to churn out Cash 200 copper coins containing merely 40-50% copper. Although many money shops and firms refused to accept such poorly produced copper coins, these coins were forced into circulation via political and military intimidation. As a result, three types of copper coins – the Dragon Coins, the Cash 200 copper coins minted by Yang Sen (or the old 200 Cash) and the new Cash 200 minted by Deng – inundated the market. In accordance with Gresham's law① of ―bad money driving out good‖, soon the Cash 10 and Cash 20 Dragon Coins became obsolete, and even the old Cash 200 coins minted by Yang Sen gradually ceased to exist. Ignorant of such laws, Deng said joyfully, ―Our new Cash 200 are really the best. Other coins have all been driven out of the market. Ours is the choice of the people.‖ Eventually, the coins were subject to law of the market. Minted abusively in large denominations, they were bound to engender inflation in the long run. Taking the price index of physical goods as an instance, in the past a bowl of vegetarian noodles could be bought for four Wen; several scallion strings that one Wen could buy in the past cost a 200 Cash copper coin in the inflationary period. In market transactions, a shortage of small-denomination currency caused real troubles as Gresham‘s law is an economic principle which is commonly stated as "bad money drives out good", but is more accurately phrased as "bad money drives out good if their exchange rate is set by law." ①

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shown by two reports in The People‟s Perspective On 10 February, 1928: “A few days ago, a guest came to visit me. So I gave my servant a half-dollar silver coin, and asked him first to buy some meat, and with the change to buy some vegetables and condiments. However, sometime later, he came back with nothing, saying, „I had decided which meat to take, but the butcher could not find small change so I couldn‟t buy it, not to mention the vegetables and condiments‟.” “A rogue soldier ordered a pulled rickshaw. When he arrived at the Fuxing Street, he took out a 200 Cash copper coin and asked the puller to change 80 Wen. The puller couldn‟t find the change, so they began to quarrel. Then the rogue soldier gave the puller cruel blows, leaving him half-dead ……” These two stories vividly illustrated the difficulty in finding small change and as a result, people began to cut Cash 200 copper coin into two equal halves to each represent 100 Wen, and into four equal quarters to each stand for 50 Wen. Coins privately minted in the Qing Dynasty also appreciated in value: an Eyan, a small-denomination coin that looked like a goose‘s eye, was worth 5 Wen and a Zhiqian 10 Wen. This facilitated transactions to some extent, but the edges of split coins were so sharp that people and their clothes could easily get cut and many complained bitterly about this. Pressed by public indignation, Deng had to mint Cash 50 and Cash 100 copper coins. Profits lost due to smaller denominations were compensated by degraded purity of copper, making Deng even richer to the detriment of the people; where there were profits, there were profiteers. Division commanders and brigade commanders under the three warlord heads – Deng Xihou, Tian Songyao (田颂尧) and Liu Wenhui (刘文辉) – all coveted the lucrative business of minting coins, and with poor equipment began to manufacture Cash 200 copper coins that spread into circulation to all counties in Sichuan. In Shuangliu County, for instance, Cash 200 smaller copper coins came into being; Anxian County and its surrounding areas in Northern Sichuan saw the circulation of Cash 400 copper coins crudely made from inferior copper and even plain coins with only denomination of 100 or 200 engraved on the surface. It even happened that people used machinery to press the Cash 10 and Cash 20 Dragons Coins to certain thinness with the dragon pattern only faintly recognizable to represent 100 Wen and 200 Wen respectively. The flattened Dragon Coins were called ―hammered plates‖ and received wider circulation among people than coins originally denominating 100 or 200 Wen because the plates were made from copper of better quality. However, being of better quality soon made them target for varied mints which recollected virtually all these plates to mint new coins. Finally, the Northern Sichuan was swamped with poorly made Cash 200 copper coins and as a result, commodity prices surged up, plunging the people into an abyss of misery. Having secured huge profits in minting copper coins, Deng Xihou began to mint silver coins,

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following the devious means pioneered by Yang Sen, i.e. to mint exclusively half-dollar fractional coins (then called Chang Coins①). The half-dollar coins contained 50-60% silver, never reaching the required 70% standard. As a result, one had to pay a premium in exchanging two half-dollar silver coins for a silver dollar. The Chengdu Mint manufactured a total of 17.8 million half-dollar coins worth eight million dollars in 1926-28, exceeding the total number of eight million coins it produced during 1912-25. Taking into account the privately minted coins, the quantity of which was actually hard to calculate, half-dollar coins indeed overwhelmed the city of Chengdu. As half-dollar coins continued to come out in greater numbers with deteriorating quality, inflation rose to unbearable levels for the people. To mitigate public anger, in the second half of 1928 Deng ceased the production of half-dollar silver coins to mint one-dollar ones instead. These new one-dollar silver coins were called ―New Character Plates‖ (xinhanziban, 新汉 字 板 ) and successively amounted to 7.68437 million dollars, while the Old Character Plates (silver 90%, copper 10%) were produced by the Chengdu Mint during 1912-22, totaling 55.67646 million dollars. Warlords of varying ranks all rushed to mint silver coins. The number of mints in the near vicinity of Chengdu exceeded ten. To name but a few, there were mints set up by Diao Wenjun (刁 文俊) on Guizhouguan Street, by Deng Guozhang (邓国璋) in Guanxian, by Chen Shunong (陈书 农) in Jianyang, by Xie Dekan (谢德戡) in Wenjiang, by Li Zhudong (李注东) in Eastern Sichuan, by He Zhanru (何瞻如) in Anxian, by Liu Ziqian (刘自乾) in Yazhou and by Zeng Nanfu (曾南夫) on the Sanqiaonan Street. All of a sudden, the market got overwhelmed by varied coins, including the Chuan Plates, the New Chuan Plates, the Steel Plates produced by Liu Yuantang (刘元瑭) in Huili, the Ya Plates by Liu Ziqian in Yazhou, the Zhou Plates by Zhou Xicheng (周西城) in Chishui, the Yu Plates by Liu Fucheng (刘甫澄) in Chongqing and the Hechuan Plates by Luo Zezhou (罗泽州) in Hechuan. Despite their astonishing varieties, these silver coins were without exception produced in a crude manner from impure silver. A popular couplet expression, which literally meant that ―a silver coin poorly made was the last dinner for the three bastard issuers –Deng Xihou, Tian Songyao and Liu Wenhui‖, became widespread in Chengdu. In churning out copper coins, warlords were in such a fever that even brass statues of Bodhisattva were melted for raw materials. At that time on the Chunxi Road in Chengdu, there stood a bronze statue of Sun Zhongshan (孙中山), the founding father of the Republic of China, clenching a fist with the left hand and holding a stick in the right. Some officious people composed a couplet expression for the statue with the meaning that ―Sun, sweat-drenched, feared he might be melted into copper coins. Could it be? Probably‖. This couplet was a stinging satire on the greed-devoured warlords and at once a vivid depiction of the financial ① Chang Coin: (changban, 厂板) refers to coins made by the Chengdu Mint or the Chongqing Copper Coin Bureau.

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disorder in Chengdu. According to The Sichuan Daily at that time, ―since 1928-29, Guanxian County, known now as the City of Dujiangyan, had witnessed quite a few private mints which manufactured several millions worth of half-dollar silver coins with more than one thousand workers‖. These figures again illustrated how private mints had disrupted the market in a profound way. As private minting gained new impetus each day, Deng Xihou‘s interests got severely eroded. He therefore issued several bans on private minting, which, however, were defied by his subordinate commanders. Xie Dekan challenged Deng by asking him to feed the whole brigade if private minting was to be abandoned; Deng Guozhang gave an even fiercer verbal reply, threatening to revolt against the warlord heads if they insisted on the prohibition. Commanders under the other two warlord heads – Tian Songyao and Liu Wenhui – simply ignored the ban. As a result, the ban virtually became empty words and Deng Xihou stopped making an effort to prohibit private minting any longer. The practice of private minting prevailed not merely in Chengdu, but also in Southeastern and Northwestern regions of Sichuan. The Chongqing Copper Coin Bureau also manufactured a huge number of Cash 100 and Cash 200 copper coins which were later recalled when Liu Hangchen (刘航琛) became the bureau Head and a new wave of copper coins went into circulation. While bearing the same denominations, the new copper coins shrank in weight and quality, thus generating heftier profits for the issuer. For this reason, Wang Lingji (王陵基) started a mint in Wanxian County of Chongqing. Since the mint used impure copper and excessive iron as raw materials, copper coins produced there were black in color and got rejected by businesses. Thanks to the timely exit of Wang Lingji from Chongqing, these coins did not come out in large quantities. In Southeast Sichuan, including counties like Xiushan and Pengshui, silver coins were also churned out by devious and crude means, causing an equally chaotic situation as that in Chengdu. Coins of various kinds, differing in size, weight, quality and workmanship, circulated at different prices which, instead of remaining a constant disparity, fluctuated with changing political powers and demand-supply relations. Facing such complications concerning price-influencing factors, ordinary people were totally at loss and could do nothing but to see their hard-earned money under the sway of uncertainties. The chaotic situation, however, provided a prime opportunity for profiteers who gathered around the Anlesi and Zhongcheng Park (now Zhongshan Park and Chengdu Working People‘s Cultural Palace) to speculate in money matters. A ―permit‖ (zhizhao, 执照)①, according to the then Negotiable Instruments Law, was a voucher that aimed to facilitate the reception or exchange of currency. As a guarantee of credit issued by banks and money shops to their customers, a permit, which had a title to whom the ①

Permit: here refers to a promissory note to pay. -51-

payment went, an agreed amount of money and the time due to pay, had enjoyed unfading trust in a long history of business activities. Nonetheless, warlords who had unrestrictedly minted silver coins tainted the credit of permits. They opened banks and money shops to issue permits recklessly, each denoting a fixed amount of money – one, five, ten, fifty, one hundred or two hundred dollars –with only the bearer‘s surname scribed on it. The money promised by a permit could be demanded at any time, making the permits function as a pseudo-currency. The Bank of Kangtaixiang, backed by the Chengdu Mint, issued permits worth 100-200 thousand dollars, far exceeding its initial capital of five thousand dollars. At that time, permits enjoyed wider circulation because Za Coins (杂板)① were poorly made without a unified standard, causing difficulties in reaching a consensus on their value. In addition, banks and money shops deliberately hired people to request permits issued by one or several certain banks, in this way establishing the credibility of their permits. As a result, people preferred to use permits than coins in dealings but the popularity of permits did not last long. Some money shops declared bankruptcy after securing a good profit in releasing permits that they would never be able to redeem; some invested the money made by selling permits into speculative ventures and were at all times ready to withdraw if any loss was incurred. Some warlords even took advantage of this wave of bankruptcy to dispose of Za Coins by faking bankruptcy. There were even cases when the address of the money shop written on a permit actually pointed to a toilet. For instance, Qiangfengrong Money House printed the address of the toilet on the Boji Street facing its North Gate; Tianyuan Money House used the address of the toilet on the Shuyuan West Street. Considering the situation mentioned above, reliable banks like the Bank of China and the Bank of Juxingcheng, as well as time-honored money shops like the Tianchengheng Money Shop and the Jinshengyuan Money Shop were inclined to abandon the depositing business and were even more cautious in accepting permits. Mistrust of permits built up further when the price of permits fluctuated violently at the Anlesi money market. At that time in Chengdu, hundreds of banks and money shops issued a miscellaneous profusion of permits, including permits for silver dollars, Chang Coins, Za Coins and copper coins, finally leading to the permit bank run in the winter of 1927. The Bank of Kangtaixiang, owing to its close ties with the Chengdu Mint, promised to continue redeeming permits around the clock, which reassured the bearers and actually saved the bank from a bank run. In this way, the Bank of Kangtaixiang, together with other well-established financial institutions like the Bank of China and the Bank of Juxingcheng, survived the bank run. Warlords operating money houses had stored a great number of Za Coins which were produced earlier and as people rushed to redeem permits for coins, deluges of Za Coins were dumped into ①

Za Coin: (zaban,杂板) refers to the coins privately produced by local warlords. -52-

the market. Za Coins at once lost purchasing power and shop owners rejected all transactions paid in Za Coins. Trade was virtually ceased at the Chengdu rice market and occasionally, there were chaotic scenes of people fighting and women weeping. Permits and Za Coins were equally unsettling for the ordinary people. The working class and small business owners suffered the most as they had to use all their hard-earned savings – a few Za Coins in small denominations of one or five dollars – to provide for the whole family. The drastic depreciation of Za Coins, then, came as a devastating blow to the whole family‘s livelihood; a family of three living on the Houzimen Street committed suicide together because they could not buy any wood or rice with a half-dollar Za Coin. Many banks and money shops went bankrupt in the wave of bank runs. The Southwest Bank, for instance, set up by Chen Shunong with only 100 thousand dollars as its primary capital, issued 300 thousand dollars‘ worth of permits and with that money speculated in real estate on Chunxi Road and President Street, ending up in bankruptcy due to its inability to redeem the permits issued. The People‟s Perspective (18 January 1928) reported that, ―the Bank of Yukang, having issued permits for silver dollars against inadequate reserves, were unable to handle the bank run. Redeemers therefore ravaged the bank and took away all the valuables; not even a teapot was left‖. Army groups took advantage of the chaos to issue various kinds of military notes, including nine million dollars‘ worth of food vouchers issued by the 20th Army Group in Chongqing, one million dollars‘ worth of silver dollar notes by the 29th Army Group and 1.2 million dollars‘ worth of tax vouchers by the 28th Army Group. Cities and counties other than Chengdu and Chongqing experienced similar confusion. Local tyrants, boasting connections with the army, also abusively issued bills and notes that turned out to be unredeemable, inflicting great pain on the people. During 1911-35, warlords in Sichuan issued a total of 71.7 million dollars‘ worth of permits in the name of the Sichuan government. A miscellany of currencies coexisted in the market without a fixed conversion rate. If a dealer wanted to purchase goods in Shanghai, he had to first exchange his local currencies into ―Shanghai currencies‖, referring specifically to Dragon dollars and Yuan Shikai dollars, which were of superior quality than Sichuan coins. Therefore in buying 1,000 dollars Shanghai currencies, the dealer must pay a premium –usually 40 to 80 dollars, at times even exceeding 300 dollars if the quality of the currency to be converted was much too poor. Dealers had to raise the price of commodities purchased in Shanghai, shifting the burden of cost onto customers. The banking industry in Chongqing had close ties with local warlords. Banks and warlords bought in Dragon dollars, Yuan Shikai dollars and old Character Sichuan Coins in remote regions at a comparatively high price, conveyed them to Shanghai on the pretext of transporting military supplies, and then sold them there as ―Shanghai currencies‖ at an even higher price, making good

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fortunes by pocketing the difference. Sometimes they even bought and sold opium in the same manner. At that time, Beijing had around 2,000 students from Sichuan whose family had to pay for their tuitions and daily expenses. However, Sichuan coins were of such poor quality that postal offices, which were chief organs for remittance and cashing at a time when banks were not common, either refused to accept remittances or took coins with an agio unbearable for many families. As a result, many Sichuan students in Beijing lived in abject poverty, and some even resorted to selling off their clothes and used newspapers as winter quilts. Chaos caused by warlord wars beset Sichuan for successive years and it was estimated that in less than 20 years, dating from the National Protection War to the battle between Liu Xiang and Liu Wenhui, over 400 battles of varying scales took place. While distressed by relentless warfare, people were even more tortured by bad money which threw them into completely helpless limbo. In order to survive, people launched a campaign against bad money and on 4 January 1928, students in Chengdu convened an anti-bad-money meeting at Sichuan Teachers College on Yandao Street, gathering people from trade unions, commerce chambers, teachers‘ unions and other non-government organizations. After impassioned speeches and heated discussions, the meeting passed three resolutions: 1). To plead with the three Army Groups to destroy private mints; 2). To fix the conversion rate between Chang Coins and Za Coins and recall all the Za Coins in circulation in a short period of time; 3). To impose a strict ban on profiteering by selling good coins to other provinces. After the meeting, attendants organized street protests. They shouted slogans, put up posters, distributed pamphlets and delivered speeches, striking great resonance among all Chengdu citizens. In order to earn public sympathy in a growing anti-bad-money atmosphere, the Preparatory Office of the Nationalist Party convened the People‘s Meeting of Chengdu on 8 January. Over 600 people attended the meeting, including representatives from the three Army Groups and Xiang Yuren (向育仁), Chief of the Liaison Office of the Three Army Groups, was elected Chairman of the Conference. On handling the issue of bad money, four solutions were proposed: 1). Each Army Group should deploy a brigade of soldiers to be directed by Xiang Yuren to demolish private mints; 2). The Clearing Bad Money Committee shall be organized with both civilian and military members; 3). Xiang Yuren will be elected as the General Director of the Committee; 4). Several representatives will be selected to assist Xiang‘s work. Students were quite unsatified with the four solutions, doubting how it could be possible for the military personnel who opened the private mints in the first place to destroy their own mints, and questioning how Xiang Yuren, as the vice-commander of the 24th Army Group, could possibly be impartial in directing operations against people of his clique. With all these concerns, students put up stronger opposition and vigorously carried on with demonstrations and speeches.

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An article appearing in The People‟s Perspective first proposed tentative measures to fight against bad money, including: 1). To destroy private mints; 2). To reduce the production of half-dollar fractional coins (applicable to the Chengdu Mint); 3). To unify the authority to mint; 4) To recall bad coins in circulation; 5). To increase the production of one-dollar silver coins (applicable to the Chengdu Mint). However, though these suggestions were perfectly sound in theory, the reality of severe inflation allowed no time for the execution of such proposals. To quell the currency turmoil, the article further suggested some badly needed expedient measures, including 1). Za Coins, except for those of extremely bad quality, should retain their function as a medium of exchange; 2). The value of Za Coins should be fixed; 3). The Chengdu Mint should redeem Za Coins with copper coins; 4). Influx of bad coins from other places should be strictly prohibited. From the compromises made, it is not difficult to sense the fears and anxieties of people in face of the slumping value of Za Coins and the coming of the Spring Festival. In order to alleviate the escalating situation, Deng Xihou, Tian Songyao and Liu Xiang, heads of the three Army Groups, announced a fixed conversion price to recall Chang Coins and Za Coins, which was: a one-dollar Chang coin (or two half-dollar Chang Coins) was worth 8,000 Wen and a one-dollar Za coin 5,600 Wen. The Chengdu Mint was responsible for the conversion, while the amount of conversion was restricted to one dollar each time. Moreover, a strict ban was issued on private minting. Xiang Yuren was appointed the General Director of the Supervisory Committee constituted on an ad hoc basis by three battalions from three Army Groups. The arrangements above were what the three military heads meant by ―the best effort could be made to address the great concern of the people‖. However, the market price was slightly above 7,000 Wen for a one-dollar Chang Coin, and merely 4,000 Wen at most or around 2,000 Wen at least for a one-dollar Za Coin. Peculiarly enough, the fixed price actually went higher than the market price. This was in fact the result of a dog-eat-dog bargaining between the warlord heads and the lower ranks over conflicting interests. Originally, the three heads decided to price a one-dollar Chang Coin at 8,000 Wen and a one-dollar Za Coin 4,000 Wen regardless of its quality. This decision, before made known to the public, was learned by warlords of lower ranks who were running private mints that manufactured Za Coins. They were very unhappy about the decision complaining that the heads priced Chang Coins too high to their own advantage, and that the Za Coins were priced too low which was to the detriment of the common good. The three heads therefore decided to lift the price of a one-dollar Za Coin to 5,600 Wen. Upon releasing the pricing policy, people went into uproar. The Za Coins, having long been rebuffed, suddenly rose to nearly twice their market price. Consequently, instead of using them, people all saved Za Coins for exchange. Za Coins circulating in other counties all flooded into Chengdu, severely disrupting the financial order. The one-dollar, one-time limit put massive

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crowds of people in such a frenzy that each day witnessed quite a few fights and stampede incidents. Some people queued for a whole day without getting a chance of making an exchange. Three days after the conversion took place, only twenty thousand dollars‘ worth of coins had been redeemed. With numerous Za Coins still out in the market and new inflows from other counties, coins in Chengdu were simply impossible to be fully redeemed by current means. Businesspersons said, ―our sales one day may reach tens, hundreds, or even thousands of dollars, all paid in Za Coins. Even if our staff all go out queuing for conversion, we just cannot redeem all the coins we take. Besides, since Za Coins are twice expensive now, goods that used to be two dollars are priced only one dollar in Za Coins. In this situation, we are reluctant to do business any more. It‘s now as if we are going on a strike.‖ The National Gazette (guomingongbao, 国民公报) published an article that attacked this way of ―clearing bad money‖, arguing, ―by this ratio of conversion, the overvalued Za Coins will only encourage more rampant production. This is not a method of recalling Za Coins in circulation, but an incentive to churn out more bad coins‖. When Xiang Yuren led the Supervisory Committee to destroy private mints, the warlords of lower ranks there were fearlessly confrontational: Diao Wenjun‘s brigade set up machine guns; Zeng Nanfu‘s mint was heavily guarded by his brigade; Deng Guozhang and Xie Dekan sent armed forces to escort bad coins to Chengdu. Bad coins hence overwhelmed Chengdu. Consequently, traders ceased trading and money shops closed the exchange business. Since the Za Coins that had already been conveyed to Chengdu could not be sent back, soldiers carried them to the Chengdu Mint, demanding them to be converted into Chang Coins; the mint could do nothing but hurriedly shut its doors to keep them out. Facing such commotion, Deng Xihou had to put an end to the conversion. The year 1930 witnessed the end of the Chengdu Mint. It stopped making Chang Coins because people refused to use them, and copper coins were no longer in production due to lack of profit. Additionally, silver coins could be minted only on an intermittent basis because of silver shortage. Chang Coins in circulation were recalled and melted for silver, soon completely removing Chang Coins from the market. As production on all types of coinage came to a halt, the mint virtually closed down. Strangely enough, the cessation of coin production did not generate any reaction in society. Currency enjoyed far more stability compared with the time when the mint was operating, and this gave full expression to the bad impression the mint had made on the people.

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3 Three Inflation in the Japanese-backed Puppet Regime-Controlled Areas The Japanese imperialists followed the policy of ―Sustaining the War by Means of War‖①during its invasion of China. On one hand, this policy imposed its military expenses on the people in the occupied areas by issuing military banknotes (Japanese military yen); on the other hand, it encouraged inflation through the over-issuing of currency by newly establishing banks, allowing it to loot goods and materials in the occupied areas, which brought enormous suffering to the local people.

3.1 The Puppet Central Bank of Manchuria After the Meiji Restoration of 1868,② Japan gradually turned to militarism and pursued interventionist policies against its neighbors. It repeatedly waged aggressive wars against China during this period and occupied large parts of the Chinese territory by force. In 1927, Tanaka Yoshihito（田中义一）, the then Prime Minister of Japan, convened a notorious meeting known as the ―Eastern Conference‖, at which the principle of taking the north of China by force was determined. Then in 1929, the major capitalist economies were hit by an unprecedentedly severe economic crisis which adversely affected Japan. To mitigate domestic unrest, Japanese military rulers shifted focus from Japan‘s domestic economic crisis by accelerating steps to invade China. In 1931, the Japanese Kwantung Army ③ concocted the Mukden Incident④ in Shenyang and occupied the entire northeast of China thereafter. Further, on March 1,1932, imperial Japan engineered the establishment of the state of Manchukuo, a Japanese-backed puppet regime nominally headed by Emperor Puyi（溥仪）of the Qing Dynasty. Before the Mukden Incident, Japan had harbored a desire to establish a puppet central bank of Manchuria to control the economy and manipulate the finances of northeast China, but until now ①

Sustaining the War by Means of War refers to Japan's policy of ruthless plunder of the Chinese areas under its occupation to meet the expenses of its aggressive war. ② The Meiji Restoration, also known as the Meiji Ishin, Revolution, Reform or Renewal, was a chain of events that restored imperial rule to Japan in 1868 under Emperor Meiji. ③ The Japanese Kwantung Army was an army group of the Imperial Japanese Army in the first half of the 20th century. ④ The Mukden incident took place in Shenyang in 1931.It was plotted by the Japanese Imperial Army to help provoke the Japanese invasion of Manchuria. -57-

this plan had not been enacted. However, after the Mukden Incident, Japan occupied several Chinese cities including Shenyang, Changchun, Jilin and Qiqihar, and took the opportunity to seize a number of economic institutions including the Provincial Bank of the Three Northeastern Provinces①, the Frontier Bank②, the Bank of Jilin Yongheng and the Bank of Heilongjiang (hereinafter referred to as the ―Four Banks‖).In addition, the Japanese occupying force also seized the Provincial Joint Reserve Bank of the Four Banks in Liaoning, the Bank of China and the Bank of Communications together with their affiliated institutions. In Shenyang, the new government convened the so-called Financial Research Meeting, participated in by Japanese Kwantung Army officers, financial experts and Chinese collaborators, to review the Draft of Management Measures on the Bank of the Three Northeastern Provinces and the Frontier Bank. In so doing, Japan took full control of the Four Banks along with other financial institutions and had everything in place to establish a unified fiscal and financial institution in northeastern China. In December 1931, the Japanese Kwantung Army set up and funded the Ministry of Rule and conspired with the South Manchuria Railway Company③ to establish the Central Bank of Manchuria. This scheme was in the charge of Igarashi Yasushi(五十岚), Finance Director of the Ministry of Rule, who convened a conference on establishing the Central Bank. At the conference, documents including Monetary Law and Draft of the Regulations on the Central Bank of Manchuria Relations were deliberated and relevant matters such as preparations for founding the Central Bank, official positions and its personnel system were discussed. On March 15, 1932, a preliminary session on establishing the puppet Central Bank of Manchuria was held in a clothing factory in the city of Changchun and Komai Tokuzo(驹井德三), Minister of the Ministry of Rule, official of the Kwantung Army and Head of the Manchuria State Council, announced on behalf of the Prime Minister of the Manchuria State the decision to establish the Central Bank of Manchuria④, with all government banks and the Frontier Bank merged into one. In addition, Igarashi Yasushi(五十岚) was appointed Chief of the Construction Committee with the other 11 members (7 Japanese and 4 Chinese) acting as councilors or managers of the Four Banks. From then on, the Ministry of Rule of the Japanese Kwantung Army handed over the preparations of the construction of the Central Bank and all formulated regulations to the Construction Committee. The meeting also discussed Monetary Law, Law of the Central Bank of Manchuria, Measures for Organizing the Central Bank of Manchuria and Measures for Clearing Old Currency drafted by the South Manchurian Railway

①

Three eastern provinces of China refer to Heilongjiang Province, Jilin Province and Liaoning Province. The Frontier Bank is a local commercial bank established during the period of the Northern Warlords. ③ South Manchuria Railway Company or SMR is a railway transportation enterprise established by Japanese aggressors to manage the railway rights they seized in northeast China. ④ The Central Bank of Manchuria was the central bank of the Japan-sponsored state of Manchukuo, established on 11 June 1932 as a joint stock company. ②

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Company, the Bank of Democratic People‘s Republic of Korea① and Yokohama Specie Bank, Ltd② in line with the intention of the Japanese Kwantung Army and released on June 11 with the approval of the puppet State Council. After a series of conspiracies and schemes, the Manchuria government elected major heads of the Central Bank of Manchuria: Rong Hou(荣厚), former director of Jilin Finance Department and trusted follower of Manchuria Finance Minister Xi Qia （熙洽）, was appointed President; Yamanari Kyōroku（山成乔六）, General Chief of the Manchuria State Council, Governor of the Bank of Taiwan and relative of Komai Tokuzo（驹井德 三）, was appointed vice-President. Relying on the influences of Komai Tokuzo（驹井德三）, Yamanari Kyōroku（山成乔六） took real control of the Central Bank of Manchuria. The Bank consisted of six directors (three Chinese and three Japanese) and one councilor, with its real power in the hands of the section directors and ministers of the Central Bank of Manchuria. Since major posts of the Bank were almost all taken by personnel from Yokohama Specie Bank, Ltd, the Bank of Democratic People‘s Republic of Korea and the South Manchurian Railway Company, almost all the managers of bank branches in large and medium-sized cities and frontier areas were Japanese. When the Central Bank of Manchuria started business on July 1, 1932, Puyi, Head of the Manchuria State and officials like Manchuria Prime Minister Zheng Xiaoxu(郑孝胥), General Affairs Director of the State Council Komai Tokuzo, Manchuria Finance Minister Xi Qia(熙洽), Head of the Manchuria Legislation Zhao Xinbo(赵欣伯) and Industrial Minister Zhang Yanqing （张燕卿）attended to extend congratulations, from which we can see how the Japanese occupying force and the puppet regime emphasized their control over finance. In its early years, the Central Bank of Manchuria adopted a tight monetary policy. By the end of 1935, the volume of currency issued increased by merely 31% from the end of 1932, but it was after 1936 that the volume began to increase remarkably. By the end of 1941, the volume reached 1.317 billion dollars, an increase of 8 fold compared with 1932. After 1942, with the expansion of the Japanese war, the volume of banknotes issue grew sharply, soaring to over 8 billion dollars in July 1945, an increase of 52 fold compared with 1932. By the time the Japanese imperialists were defeated, the total volume amounted to 13.6 billion dollars, up by90 fold from the opening of the Central Bank of Manchuria. With the increase in the number of banknotes, frequent changes took place in the printing of them. Originally printed in Japan, banknotes began to be printed by the Manchuria government in China from March 1944, because the Japanese imperialists, after suffering repeated military setbacks since 1943, feared that banknotes printed in Japan might fail to be transported to China. Bank of Democratic People‘s Republic of Korea is established by Japan as Korean Bank in Seoul, Korea in 1909 and was changed to Bank of Democratic People‘s Republic of Korea in 1911. ② Yokohama Specie Bank, Ltd, predecessor of UFJ, is established in 1800 in Yokohama. It is the only foreign exchange bank of Japan. ①

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Later, due to a shortage of banknotes with face values of 5jiao, 1dollar, 10dollars and 100dollars, the relief printing method was changed to intaglio printing (rubber) and banknotes with face values of 500dollars and 1000dollars were printed. To simplify and accelerate the printing process as well as to deal with the shortage of raw materials, the original seven-color printing was changed to five- and three-color printing. Coins with face values of 1jiaoand 5 jiao were replaced by banknotes with the same face values and new coins were made smaller and lighter. Later, there even appeared unnumbered banknotes among those with face values above 1dollar. By August 1945, about 1 billion banknotes in the denomination of 1000-dollars were printed which were, however, not issued because of the Japanese imperialists‘ surrender to China. Due to the sharp expansion of currency supply, the Manchuria State fell into hyperinflation. The major reason for this was pointed out by Keida (庆田), Minister of the Investigation Ministry of the Central Bank of Manchuria in February 1945 at a secret meeting: ―One reason for the increase of current currency is the rising military expense, which is closely related to industrial capital, especially to the growing demand for mining industrial capital.‖ Military expenses (including expenses from public order maintenance) of the Manchuria State consisted of two parts: expense from the Manchuria army and police, and expense from the Japanese Kwantung Army. Together, these expenses accounted for 30%-40% of the total annual fiscal expenditure and they increased on an annual basis. For instance, military expenditure in 1943 increased by over 3.8 times from 1932 and as early as March 10, 1932, Puyi, Executive Head of the Manchuria State, promised in his letter to Miyamoto Shoshige(官本庄繁), Commander of the Japanese Kwantung Army, that military expenditure of the Army would be funded by the Manchuria State. This, however, turned out to be nothing but a new form of deception. At first, costs of the Mukden Incident were borne by Japan and the Manchuria State proportionally in the name of ―common national defense expenditure‖ and accounted for in the fiscal budget. From 1934 to 1938, 72.5 million dollars from the common national defense expenditure was spent. In 1939, the Manchuria State created special accounting measures for the North Revitalization Scheme (namely, the Japanese scheme to prepare itself for waging war against Russia) and classified the common national defense expenditure into this special accounting, making the exact costs of the common national defense expenditure impossible to discern. In 1944, the Japanese financial system and economy were on the verge of collapse. In July of the same year, the Japanese Kwantung Army shifted all military expenses onto the people in the occupied areas, and the people in northeast China bore the brunt. The Japanese government ordered Yokohama Specie Bank Ltd. to borrow money for it from the Central Bank of Manchuria under the guarantee of Japanese banks. Afterwards, the Japanese government transferred bank loans to the Japanese army, who then allocated them to the Japanese Kwantung Army soldiers by

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depositing them at the Central Bank of Manchuria in the Kwangtung Army bank account. From July 1945 to August 1945, 3.4 billion dollars of military funds had been raised. After the implementation of the Five-Year Plan for Industrial Development, the puppet government established many monopolized companies and made massive investments. By June 1942, capital submitted to the government reached 3.4 billion dollars, up by over 13 times from 1936. For instance, the Heavy Industry Development Company Limited, Manchuria successfully raised capital of 950 million dollars in north China alone within less than three and half years since its establishment, which inevitably had significant impacts on the inflation in the northeast China. The Japanese imperialists, then, ―raised‖ capital through over-issuing currency for investment, looted resources of the northeast China, and extracted surplus value. A large quantity of industrial, mining and agricultural products were looted or consumed: 1,118 million tons of raw coal from 1942 to 1944; 57.59 million tons of farm produce from 1937 to 1944 and 13.08 million tons of iron materials from 1935 to 1944 (with the volume of refined iron not included). As currency was over-issued, prices skyrocketed. Taking the average of 1932 as the base point, the Wholesale Price Index (WPI) of Xinjing (now Changchun) would be 278.5 in 1942, which rose by approximately 2.5 times by 1944,calculated according to the then open market prices. Despite the existence of open market prices, the market had nothing to sell. From 1941 to 1945, 70% of life necessities were bought and sold in black markets and before Japan surrendered, black market prices were 3000 times higher than open market prices. When Japan surrendered, the open market price of sugar was 39 cents per 500 grams while the black market price was above 100dollars per 500 grams. The open market price of brown rice was 28cents per 500 grams while the black market price was above 70dollars per 500 grams. In such circumstances, the monthly salary of an ordinary worker could only buy 250 grams of brown rice or 3 liang of sugar and they were struggling to feed themselves properly. By contrast, Japan and the Manchurian capitalists made large fortunes as from 1937 to September 1945, the capital of Japanese financial groups, including the wealth extracted from their own people, expanded sharply. Capital owned by Mitsui(三井) financial group rose from 1.18 billion yen to 2.82 billion yen; capital of Mitsubishi （三菱）rose from 850 million yen to 2.16 billion yen; capital of Sumitomo（住友）rose from 380 million yen to 2.82 billion yen and capital of Yasuda（安田）rose from 260 million yen to 2.09 billion yen, presenting an increase of 1.5 to 7 times. Through brutal extraction and amidst price hikes, the Central Bank of Manchuria also shared enormous surplus value. Its annual net profit of 1.9 million dollars in 1936 climbed to 28.23 billion dollars in 1941 and 55.65 billion dollars in 1944. During the 13 years from 1931 when it was established to 1944, the Central Bank of Manchuria reaped a net profit of 209.6 million dollars, over 8 times that ofthe volume it had submitted to the government.

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3.2 The Puppet Joint Reserve Bank of China and Joint Reserve Banknotes After the fall of north China in 1937, the Japanese invaders compelled Chinese collaborator Wang Kemin(王克敏) to form the Manchuria Provisional Government of the Republic of China (or Provisional Government of North China)

①

in Beiping. In an attempt to monopolize the finance

and extract the resources of north China, it also encouraged the provisional government to set up the Joint Reserve Bank of China as both the issuance bank of north China and the bank in charge of all fiscal affairs of the provisional government. The Joint Reserve Bank of China issued joint reserve banknotes immediately after it was established on March 10, 1938. Joint reserve banknotes were equivalent to the Japanese yen in value and belonged to Daily Silver Holding Ltd. They were issued in Beiping(北平), Hebei（河北） , Shandong（山东）, Shanxi（山西）, Henan（河南） and other occupied areas belonging to the provisional government. In a hurry to issue joint reserve banknotes, the Joint Reserve Bank of China resorted to the steel plate papers left by Ta Ch‘ing Government Bank② instead of carving voucher-edition bank notes which was too time-consuming. The provisional government changed the denomination of the banknotes of Ta Ch‘ing Government Bank and replaced the icons—Regents③（摄政王） on the banknotes with Yellow Emperor(黄帝), Guan Yu（关羽）, Yue Fei（岳飞）, Confucius（孔子）and others. Face values of these banknotes included 1 dollar, 5 dollars and10 dollars. As Japan withdrew a large sum of joint reserve banknotes to pay soldiers and purchase goods and materials, inflation resulted and prices soared. In 1942, the Joint Reserve Bank of China further issued 100-dollar banknotes and from 1944 to 1945, it issued a large amount of 500-dollars and 1000-dollars banknotes. Meanwhile, the Joint Reserve Bank of China was also planning to issue large-denominated joint reserve banknotes with a face value of 5000dollars. The huge cost of the Japanese invasion and occupation gradually depressed industry and agriculture in the occupied areas. Joint reserve banknotes lacking in reserves were issued more rapidly. For instance, when the Joint Reserve Bank of China was just established, it had a capital of 50 million dollars, but this figure rose to approximately 1 billion by the time the Pacific War④ ①

The Provisional Government of the Republic of China was a Japanese-backed puppet regime established by Wang Kemin in Beiping (now, Beijing) in December 14, 1937. ② Ta Ch‘ing Government Bank, predecessor of the Bank of China, was the first central bank in China. ③ Regent is an official in Old China that rules the country on behalf of the emperor who might be too young, weak or incompetent to exercise governance. ④ The Pacific War began on December 8, 1941 after the Japanese attack on the USA at Pearl Harbor. -62-

broke out and by August 1945, the volume of joint reserve banknotes issued totaled 132.6 billion dollars, with the actual figure much larger due to the circulation of massive counterfeit banknotes. According to statistics from June 1939, the volumes of joint reserve banknotes circulating in the occupied areas of Shandong Province were as follows: Jinan, 26.871 million dollars; Qingdao, 26.007million dollars; Yantai, 4.55 million dollars; Longkou, 212,000dollars; Weihaiwei, 112,000dollars. According to statistics from December 1939, the volume of joint reserve banknotes circulating in the occupied areas of Shandong Province accounted for 20% of the total volume in north China, second only to Tianjin (33.4%). The total volume of joint reserve banknotes circulating in Shandong Province during the entire Japanese War was still to be worked out, but it was estimated to be at least 60 billion dollars. The over-issuance of joint reserve banknotes led to currency depreciation and price hikes, which triggered hyperinflation throughout the occupied areas. According to statistics, suppose the price index in 1936 was 100, the average public market price index in north China in August1945 would be 36,700 and the black market price index would be 393,805. Take Jinan as one example, if the price index in 1936 was 100, it would be 414.3 in 1940.In 1941, the Japanese-backed Manchuria Government introduced the ―Quota Control System‖ and joint reserve banknotes further depreciated. In 1944, the Joint Reserve Bank of China issued joint reserve banknotes with a face value of 500 dollars and in 1945 it issued large-denomination banknotes with a face value of 3000 dollars. Before Japan surrendered, the Manchuria government went further to issue joint reserve banknotes with a face value of 5000 dollars. As a result, joint reserve banknotes practically became waste paper and the Central Bank of Manchuria was going bankrupt. The inflationary policy, which once helped the Japanese occupying force to amass wealth, gradually went out of control and eventually led to severe economic crisis in the occupied areas. Shortly after the Joint Reserve Bank of China was established in 1938, the Provisional Government of the Republic of China published the Measures for Handling Old Currency, permitting banknotes inscribed with such Chinese characters as 津（jin in pinyin）, 青（Qing in pinyin）and 山东（Shandong in pinyin）issued by the Bank of China and the Bank of Communications and so on(excluding ChinaMinshengBankingCorp. and Pingshi Official Currency Bureau) to circulate along with joint reserve banknotes, and with the same value. But, in less than half a year, the government announced the first depreciation of 10% of old currencies and in February of the next year, it further announced the second depreciation of another 30% of old currencies. Meanwhile, the government deposited and redeemed provincial treasury bills and fractional currencies of the China Minsheng Banking Corp. and Pingshi Official Currency Bureau at a discount and ruled that all bank loans, bank deposits and contracts should be completed with joint reserve banknotes as standard. In March of the same year, the government outlawed the

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circulation and use of all old currencies and stopped depositing or redeeming old currencies. This was because on one hand, Japan needed to establish the joint reserve banknotes standard system (the Yen standard system in essence) to carry out its war policies and purchase goods and materials with legal tender; on the other hand, the policy of converting old currencies into joint reserve banknotes at a discount did not lead to the depreciation of legal tender, which were actually still more valuable than joint reserve banknotes. As a result, a discount of joint reserve banknotes occurred and in response, the Joint Reserve Bank of China had to forbid the use of legal tender. In April of the same year, the Japanese-backed regime promulgated Provisional Law on Punishing Financial Criminals, which ruled that whoever transports or uses other banknotes other than joint reserve banknotes will be sentenced (one month to ten years) or fined (500dollars to 10,000dollars). The Japanese occupying force transported massive amounts of legal tender which they had amassed to KMT (Kuomintang)-controlled areas and purchased goods and materials in the anti-Japanese base areas. In 1941 and 1942 alone, tens of millions or even hundreds of millions of legal tender flowed into the anti-Japanese rear base areas of Shandong Province and goods and materials of corresponding values were purchased by the Japanese with legal tender, which constituted a major cause of the financial difficulty in the anti-Japanese base areas. Around this time, silver dollar notes, yinjiao notes and copper coin notes were still issued by the money shops and ordinary firms of Shandong Province, but they were all recalled and destroyed within a given period of time after the puppet Shandong Government forcibly implemented the Provisional Measures for Cracking down on the Issuing and Printing of Private Currency. By that time, joint reserve banknotes became the major currency circulating in the occupied areas. With prices rising constantly and massive amounts of hot money flooding into the market, the practice of buying and hoarding goods (primarily gold and cotton yarn) and selling them at higher prices became increasingly prevalent in the occupied areas and the private banking industry, heavily hit in early wartime, experienced a transient recovery. Take money shops of Jinan as one example. When the July 7th Incident of 1937① broke out, Jinan had 52 money shops, but by September 1939, half of them closed or went bankrupt and the total capital was 438,000dollars; in 1940, the number of money shops rose to 32 and banking capital reached 978,000 dollars; in 1942, the number rose to 37 and bank loans reached 991,000dollars. The same was true of Qingdao and Yantai. For instance, in May 1942, Qingdao had a total of 17 money shops and offered a loan of 614,000dollars. The practice of purchasing and hoarding goods together with the recovery of private banking industry disturbed, to a certain extent, the controlled financial system introduced by the Japanese-backed regime. In response, the Committee of Government Affairs of North ①

The July 7th Incident, also known as the Lugou Bridge Incident, is initiated by the Japanese imperialists on July 7, 1937.It was seen as the direct cause of the Japanese War. -64-

China① issued Regulations for Outlawing Financial Institutions in December 1941, which ruled that ―only limited liability companies approved by the General Administration of Finance with an equity capital of 500,000 dollars or above can conduct private banking business; banking business in any other form is outlawed.‖On May 15, 1942, the Committee released the Detailed Rules of the Implementation of the Regulations for Outlawing Financial Institutions and specified the method, scope and date for cracking down on private banking industry. Consequently, some money shops were forced to close for failing the ―legal‖ capital requirement. By the end of 1942, the number of money shops decreased from 484 to 268 in north China, from 38 to 28 in Jinan and from 17 to 8 in Qingdao. At the same time, due to the sharp depreciation of joint reserve banknotes, deposit and loan interest rates went out of control and the original interest rate fixed by the Japanese-backed regime were no longer practicable. Besides, dark interest rate②grew rapidly and gradually went beyond control. In April 1944, the Japanese-backed regime held financial meetings in Beiping, Tianjin, Qingdao and Jinan and specified the deposit interest rate as well as its implementation in eight cities of north China (namely, the above-mentioned four cities, Beiping, Tianjin, Qingdao and Jinan plus Tangshan, Baoding, Shimen and Yantai) and set an annual interest rate of time deposit of 2 cents. However, the dark interest rate by this time had risen from 3 or 5 cents in 1938 to 21 or 24 cents. Under the unfavorable circumstance, in December 1944, the Committee of Government Affairs of North China ordered all private banks to increase capital once again and ruled that the minimum capital of 3million dollars must be in place within six months. Consequently, most money shops in the enemy-occupied areas went bankrupt and closed for lack of capital before China‘s victory over the Japanese. Joint reserve banknotes also led to severe inflation in Henan Province. By 1942, the volume of joint reserve banknotes circulating in Henan Province reached over 2 billion dollars. Constant warfare and ubiquitous destruction of the Japanese army inevitably led to a sharp decline in production and a rise in prices in the occupied areas, which at the time only covered Kaifeng and another 42 counties of northern and southern Henan Province. In 1942, the volume of joint reserve banknotes circulating in the occupied areas kept growing and the production of goods continued to shrink. In such circumstances, to stabilize prices is impossible and prices in the occupied areas kept soaring at an increasingly greater speed until Japan surrendered. The purchasing power of joint reserve banknotes issued by the Joint Reserve Bank of China in 1944 halved compared with 1940. In April 1944, when the Japanese troops occupied Luoyang, the price of pork, which was then hard to come by, rose to 2 dollars per 500 grams, about 4 times ①

Committee of Government Affairs of North China is a puppet government committee which enjoyed a high degree of autonomy in the puppet Wang regime. ② Dark interest rate refers to the illegal and usually higher interest rate fixed by individuals secretlyrather than banks. -65-

higher than that in Kaifeng. During the eight-year war with Japan, prices across Henan Province, either in the occupied areas or war areas, rose considerably. Retail prices in the occupied areas rose by about 3 to 5 times from pre-wartime and market prices in war areas were about 5 times higher than those in the occupied areas. The rising prices led to market turmoil and brought great difficulties to business operation. After Japan‘s surrender on August 15, 1945, the Central Bank together with the special financial envoy sent by the national government took over the Joint Reserve Bank of China on October 17, 1945, which marked the demise of this corrupt financial institution. Afterwards, joint reserve banknotes were converted into legal tender at the ratio of 5:1 and dropped out of circulation.

3.3 The Puppet Central Reserve Bank At the end of 1938, Wang Jingwei（汪精卫）openly betrayed China and turned to Japan. In March 1940, Chinese collaborators gathered in Nanjing and established the notorious Wang puppet government. The Wang government was founded by Chinese collaborators in the occupied areas, was backed by Japan and was a shameless accomplice to Japan to extract wealth from the Chinese economy and people. Establishing central Bank and issuing banknotes to confirm the financial foundation of the Wang government was a basic requirement on Japan raised by Wang Jingwei and Zhou Fohai at the establishment of the administration. According to a secret agreement signed by Wang Jingwei and Japan on December 30, 1939, ―North China under the control of the Provisional Government of North China is the only region where joint reserve banknotes can continue to be used and where the joint reserve banknotes system must be recognized; Huaxing Commercial Bank of China① established in Shanghai by the former Reformed Government of China② must continue to exist. If the issuing rights of Huaxing Commercial Bank of China are canceled after the establishment of the new Central Bank and the issuing of new legal tender, the banknotes already issued by Huaxing Commercial Bank of China must be recalled. As for military banknotes, Japan should avoid their over-supply, vigorously maintain their value and pay all imports from China with military banknotes. Proper measures shall be worked out regarding the recall of military banknotes.‖ ①

Huaxing Commercial Bank of China was established in Shanghai in May, 1939 by the Japanese-backed Liang Hongzhi Reformed Government of China. After the fall of the Reformed Government of China, its name was changed to Commercial Bank of China. ② Former Reformed Government of China referred to the Japanese- backed government headed by Liang Hongzhi. It was established in Shanghai in May, 1939. -66-

Huaxing Commercial Bank of China was founded on May 16, 1938 and banknotes issued by it were known as ―Huaxing notes‖. Since Huaxing Commercial Bank of China was nominally affiliated with the Japanese-backed government, Huaxing notes were only allowed to circulate in such occupied areas as Shanghai, Nanjing, Jiangsu, Zhejiang and Anhui, which happened to be the base areas of the Wang central government. Therefore, with the establishment of the Central Bank affiliated to the Wang government and the issuing of new currency, Huaxing notes were forbidden. The ―Military banknotes‖, or ―banknotes for military use‖, were a kind of inconvertible banknote in extreme shortage forcibly introduced by the Japanese army in the occupied areas, aimed at funding its military expenses, combating legal tender, and impairing China‘s resistance forces. Since issuing military banknotes was the major way to fund its military expenditure, Japan insisted that the issuing and circulation of military banknotes must be maintained after the Wang government‘s Central Bank was established and a new currency was issued. Given the nature of Wang regime as a puppet to Japan, it acted upon the occupying force‘s requirements to the letter. On April 11, 1940, the Central Political Committee Conference passed an Act on establishing the Preparatory Committee of the Central Bank and appointed Zhou Fohai(周佛海) and Qian Dakui （钱大魁）President and vice-President of the Preparatory Committee respectively, with people including Chen Zhishuo(陈之硕), Liu Ruxiang（柳汝祥）, Chen Junhui（陈君慧）, Zhang Sumin（张素民）, Mei Zhezhi（梅哲之）, Xia Zongde （夏宗德）and Gu Baoheng（顾宝衡） as members of the Committee. On May 3, Zhou Fohai held the First Session of the Preparatory Committee and decided to change the name of the Central Bank to the Central Reserve Bank, due to be established officially on October 10. On July 15, the Japanese government passed its approval of the establishment of the new Central Bank and announced related principles. According to the principles, necessary adjustments of the issuing right of Huaxing Commercial Bank of China and its functions would be made after further deliberations. To protect military banknotes from the impact of the new currency and to display the financial cooperation between Japan and China in central China, the new Central Bank should contact and negotiate with the Japanese side closely and secretly when it starts business. The following regulations were also specified in the principles. First, the new Central Bank must employ Japanese people as councilors, who possess the supreme decision rights. Second, foreign exchange held by the new Central Bank must be deposited at Japanese banks. Third, China should offer a certain amount of monetary assistance to Japan to help with the implementation of the military banknotes policies. Fourth, China should confirm the measures and policies of Japan on military banknotes and acknowledge Japan‘s right to implement and expand measures concerning the military banknotes policies in the future. Fifth, China should continue its negotiation with Japan regarding the circulation areas and issuing of new legal tender. Sixth, China must negotiate with Japan in advance before taking any

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step that may have impacts on military banknotes policies. Apart from these regulations, the Wang regime was also required to issue a statement at the establishment of the Central Bank ruling: ―The operation of the new Central Bank should not impede military banknotes policies; rather, it should be based on the principle of mutual coordination.‖ That same day, the General Commander of the Japanese expeditionary forces to China drafted Program of the Handling of Currency after the Establishment of the New Central Bank. According to the Program, ―to support the Central Government, the new Central Bank was provisionally permitted to prepare itself for issuing currency as the central government wished. Its operation should not impair military banknotes policies and the new Central Bank should closely contact and negotiate with our side. Moreover, policies for maintaining the value of military banknotes must be reinforced so that everything can proceed smoothly. Further, to display the financial cooperation between China and Japan in central China, the central government is required to take necessary measures regarding military banknotes policies when concluding essential agreements with Japan. If the new legal currency is found to have adverse impacts on military banknotes policies, amendments should be made to the operation of the new Central Bank or the form of new currency.‖ On September 10, the Nipponkoa Institute of Japan① passed Measures for the Handling of Currency in Central China after the Establishment of the New Central Bank at the Nipponkoa Meeting, regulating that: China should establish a new Central Bank with the help of Japan and issue new currency that is equivalent to legal tender in value. In the course of its operation, the new Central Bank should keep close contact and coordination with Japan to lay a foundation for Japan-China financial cooperation. An agreement should also be signed to ensure that the operation of the Bank will not have adverse impacts on military banknotes policies. In addition, the new Central Bank is required to take necessary measures and lay down specific rules on each measure. For instance, the new Central Bank should borrow US $50 million from Huaxing Commercial Bank of China; new currency held by the new Central Bank should be deposited at Japanese banks; at present, the value benchmark of currency issued by the new Central Bank was the same as that of old legal tender, but in case of a remarkable depreciation of old legal tender, separate value benchmark should be adopted. Moreover, to prevent new legal tender from having any adverse impacts on military banknotes policies, the new Central Bank should employ Japanese people as councilors, who can participate in planning major business of the Bank. The committee consisting of members from both China and Japan should be responsible for the management and use of foreign exchanges held by the new Central Bank. Further, China should offer a certain amount of monetary assistance to Japan to help maintain the value of military banknotes. To carry out these ①

Nipponkoa Institute of Japan is an institute set up by Japan in September, 1938 so as to rule the occupied areas of China. It is affiliated with the Cabinet of Japan. -68-

regulations, on October 2, 1940, Japan set up the Committee of the New Central Bank and New Currency Policies (or Committee of New Currency) as the guiding body of the Wang Central Bank. On December 6, the Committee of New Currency Policies introduced Provisional Outlines of Detailed Guidance of the Central Bank based on the Measures of the Handling of Currency in Central China after the Establishment of the New Central Bank made at the above-mentioned Nippokoa Meeting. The Outlines clearly and specifically ruled the functions of the new Central Bank as well as the circulation areas, the coordination with joint reserve banknotes and military banknotes of its currency. Through these regulations, Japan ensured its control over the new Central Bank and maintained the circulation of military banknotes. Then, on December 17, Hidaka Shinrokurō (日高信六郎), councilor of Japanese embassy, signed Treaty on the Establishment of the Central Reserve Bank with Zhou Fohai. The Treaty consisted of eight clauses altogether. Apart from the conditions of borrowing reserve funds, clauses on councilors ruled: according to the agreement signed by China and Japan, China should employ a Japanese man as top councilor as well as several Japanese men as councilors and assistants. Matters like the operation of the Central Bank, major decisions of the Committee, government and public bond capacity, the relationship between foreign exchange and foreign banks, the relationship between the Central Bank and Mengjiang Bank① and banks in north China should all be subject to the consultation and approval of advisors. In other words councilors possess supreme decision rights. Besides, clear specifications were also made on the matters like deposits and lending, management and use of foreign exchange held by relevant banks, the relationship between military banknotes, joint reserve banknotes and the bank notes of the New Central Bank as well as the handling of Huaxing notes. The conclusion of Treaty confirmed the fact that the new Central Reserve Bank was little more than a financial tool of Japan to loot the economy in the occupied areas. It was not until the Treaty had been concluded by Zhou Fohai and Hidaka Shinrokurō (日高 信六郎)on December 17 that the establishment of the Central Reserve Bank (the New Central Bank) became possible. On the same day, the Executive Council Meeting passed Provisional Measures for Arranging Currency and decided the candidates for President, vice-President, the Board of Committee and the Board of Supervisors. According to Measures, the Central Reserve Bank enjoys the privilege to convert currency and issue new legal tender. Taxation, conversion and public and private transactions should all be accomplished with new legal tender, which will circulate along with current legal tender and with the same value until currencies are unified. The Central Reserve Bank appointed Zhou Fohai President and Qian Dakui Vice-president, and formed the Board of Commissioners and the Board of Supervisors, with Zhou Fohai and Qian ①

Mengjiang Bank was the central to Japan‘s economic dominance in the Mengjiang area. -69-

Dakui as President and vice-President of the Board of Commissioners, and Luo Junqiang as President of the Board of Supervisors. On December 20, 1940, Zhou Fohai issued a statement, announcing that ―In order to set up the Central Reserve Bank, we have made great efforts and active planning over the past several months and got everything from reserves, operational guidelines and interior arrangements to the issuing of bank notes ready now. The Central Reserve Bank will be established in Nanjing and is scheduled to start business on January 6, 1941. Branches of the Central Reserve Bank will be set up in China‘s major capital cities.‖ The statement also clarified regulations on the issuing of central reserve banknotes (new legal tender) and its relationship with current legal tender, military banknotes and joint reserve banknotes. On December 21, Zhou Fohai chaired the first Central Reserve Bank Meeting of Commissioners. The meeting approved the candidates for deans and directors of the Bank and managers of Shanghai Branch and sub-branches in Suzhou, Hangzhou and Bengbu and also employed Japanese financial expert Kimura Mashitaro(木村增太郎) as a councilor. On January 6, 1941, the Central Reserve Bank announced its opening, with its head office established on No.1, Zhongshan East Road, Nanjing. Following Nanjing Central Reserve Bank Head Office, Shanghai Branch (on No.15, the Bund) opened on January 20; Suzhou Branch (on No.189, Guanqian Street) opened on February 10; Hangzhou Branch (on No. 2770, Taipingfang Street) opened on March 3; Bengbu Branch (on No.294, Er‘ma Road) opened on May 19. Afterwards, Wuhu, Nantong, Wuxi, Jiaxing, Changshu, Taicang, Yangzhou, Zhenjiang and Tokyo of Japan successively saw the establishment of offices of the Central Reserve Bank. The Central Reserve Bank professed itself as the ―national bank of the Republic of China‖. Its business fell into two categories: special business and ordinary business. Special business included: one, issue certificates of standard money and fractional currency; two, manage the state treasury; three, raise domestic and foreign public loans and manage the repayment of the principal and payment of interest. Ordinary business included: one, accept and pay government deposits; two, manage the reserves of national banks and take charge of transfer and liquidation services of banks; three, manage local public treasury and the payment of public items; four, open bank deposits on behalf of the National government; five, rediscount state bonds, securities, public loans and interest coupons issued or guaranteed by the National government; six, rediscount domestic bank acceptance bills, domestic commercial equity and bills of exchange; seven, buy and sell foreign payment bills of exchange; eight, buy and sell sight bills of exchange and term draft issued by reliable domestic and foreign banks; nine, buy and sell public loans and treasury bills issued or guaranteed by the National government; ten, buy and sell silver, gold and foreign exchange; eleven, offer domestic and foreign conversion services and issue promissory notes; twelve, offer loans with gold and silver as the pledge; thirteen, offer loans with treasury bills

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issued or guaranteed by the National government; fourteen, conduct trust business commissioned by the National government; fifteen, manage the payment of all items on behalf of the National government. On the very day of its opening, the Central Reserve Bank started to issue ―China national reserve banknotes‖, or ―central reserve banknotes‖. It was said that the banknotes were printed in Japan and brought to the occupied areas of China and forcibly issued by the Japanese Army. Patterns and printing techniques of these banknotes were extremely poor. The paper used was so soft and flimsy that it would fluff when folded and would barely produce a sound when fluffed. Therefore, it was satirized as ―spirit money‖ (paper burned for the dead) among the masses. From the crude workmanship and large denomination to the poor material of central reserve banknotes, it can easily be discerned that the principle reason for the Japanese-backed authority to issue these banknotes was to extract wealth from the Chinese people and economy. The circulation areas of central reserve banknotes were confined to Shanghai, Nanjing, Hangzhou and the occupied areas of Jiangsu, Zhejiang and Anhui. The Ministry of Finance issued a statement, declaring: ―from now on, taxation, conversion and all public and private transactions must be completed with new legal tender.‖ Old legal tender still circulating in Shanghai, Nanjing, Hangzhou and the occupied area of Jiangsu, Zhejiang and Anhui ―are provisionally permitted to circulate along with the new legal tender(central reserve banknotes) issued by the Central Reserve Bank and with the same value. Any deliberate damage or refusal of new legal tender discovered will be punished according to relevant laws‖. Finance, Minister Zhou Fohai, made a speech declaring that ―after the issuing of new legal tender, when old legal tender depreciates to below a certain level, new currency system must be stabilized immediately. Appropriate restrictions will be imposed on old legal tender that flow into Shanghai from Hong Kong.‖ The Wang government, which consisted of the treasonous group headed by Wang Jingwei, was a tool of Japanese imperialists to sabotage the Chinese People‘s resistance against the Japanese imperialism politically, and the establishment of the Central Reserve Bank together with the issuing of new legal tender further undermined the Chinese people‘s resistance financially. To boycott the new legal tender, the Chongqing national government① took corresponding measures and the Central Bank, the Bank of China, the Bank of Communications and the Farmers‘ Bank of China in Shanghai Concessions firmly refused the new legal tender. To force these banks affiliated to Chongqing National government to recognize and accept the new legal tender, the Ministry of Finance led by Wang Jingwei sent secret agents to attack these banks, arrest and murder their clerks. Brutally persecuted by the secret service headed by Wang Jingwei, the ①

Chongqing national government: with the expansion of the Japanese war, the national government moved to Chongqing in Nov.21, 1937 and returned to Nanjing May 5, 1946. -71-

above-mentioned four banks (the Central Bank, the Bank of China, the Bank of Communications and the Farmers‘ Bank of China) were forced to declare closure on April 17. Afterwards, on September 1, the Ministry of Finance ruled that tariffs, salt tax, and other central taxes in the circulation areas of the new legal tender must be paid with new legal tender or checks of new legal tender. Local tax in the areas where branches, sub-branches and offices of the Central Reserve Bank had been established must be paid with new legal tender, while in the areas where branches, sub-branches or offices of the Central Reserve Bank had not been established or where new legal tender have not gained dominance, ―tax can be paid with old legal tender for now‖. These measures promoted the circulation of central reserve banknotes to a certain extent, but the Japanese-backed government still failed to forbid the circulation of old legal tender, and it was not until the Pacific War that the status of central reserve banknotes as the only legal tender was fully established. On December 8, 1941, Japan raided Pearl Harbor and triggered the Pacific War. On the same day, the Japanese troops entered into Shanghai concession, where they took forcible possession of the industries of Chongqing national government, shut down the Central Bank, the Bank of China, the Bank of Communications and the Farmers‘ Bank of China and took over industries owned by Britain and America, including HongKongandShanghaiBankingCorporation(HSBC) and City Bank, N.A. As a result, old legal tender no longer had anything to rely on for its survival, which provided favorable conditions for the full introduction of central reserve banknotes. To promote the smooth introduction of central reserve banknotes, Japan also roped in financial capitalists from Shanghai through the Wang regime. On December 26, Zhou Fohai hosted a banquet in Shanghai for managers and governors of Chinese Mercantile Banks of Shanghai like Tang Shoumin(唐寿 民), Zhou Zuomin（周作民）, Wu Zhenxiu（吴震修）, Wu Yunzhai（吴蕴斋）, Ye Fuxiao（叶 扶霄）, Hu Huichun（胡惠春）, to name just a few. Kohara Masaki(小原正树)， Chief of Financial Affairs of Japan and Miyazaki Shigesaburō（崎繁三郎）, Chief of the Secret Agency of the Japanese Army in Shanghai addressed the banquet, announcing work to support the Central Reserve Bank and take charge of the stability of finance. Zhou Fohai asserted that the Central Reserve Bank ―hopes to cooperate with the Chinese financial community internally and make joint efforts with Japan externally to fulfill its mission‖. Soon after, Japan decided to fully ban the circulation of old legal tender. On December 25, General Headquarter of the Japanese Expeditionary Forces drafted Provisional Outlines on Currency and Financial Policies amidst East Asian Wars, proposing to make it a goal to recall military banknotes and establish new currency system in central China. Based on Outlines, in January 1942, Aoki Kazoo(青木一男), the highest economic councilor of Wang regime drafted Outlines for Currency Policies in Central China, putting forward the following two points: first, to

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make the Central Reserve Bank the only issuing bank in central and south China so as to reinforce its influence; and second, to make central reserve banknotes the unified currency in central and south China, differentiate central reserve banknotes and old legal tender in value before March 31, and drive old legal tender to enemy zones to purchase local goods and materials; gradually and forcibly expand the circulation areas of central reserve banknotes and take indirect measures to ban the circulation of old legal tender; fully ban the circulation and use of old legal tender within a given period of time, gradually abolish military banknotes from April 1and use central reserve banknotes only. On March 6, 1942, the Nipponkoa Institute of Japan passed Provisional Program of the Handling of Currency in Central China amidst East Asia Wars. The main points were as follows: set it a goal to crush old legal tender, seize the opportunity to differentiate new legal tender and old legal tender in value; drive old legal tender to enemy zones to purchase goods and materials without strengthening old legal tender and think about measures for forbidding their circulation; restrain deposits in old legal tender and promote their shift to deposits in new legal tender; stop taking old legal tender as the list price benchmark and abolish their function as a medium of exchange while reinforce the function of the Central Reserve Bank as the Central Bank; turn the Central Reserve Bank into an intermediate bank of Japanese military banknotes and other necessary capital. To this end, the counseling system must be adjusted and developed to strengthen Japan‘s control over the Central Reserve Bank so that the operation of the Central Reserve Bank will fully comply with Japan. The meeting also decided to shut down the former Central Bank and the Farmers‘ Bank of China and to reorganize and reopen the Bank of China and the Bank of Communications so as to cut off the connection between the Chongqing national government and the Bank of China and the Bank of Communications. On March 7, Aoki Kazoo(青木一男), highest economic councilor of Japan, drafted Outlines on the implementation of the Central Reserve Bank‘s Restraints on the Conversion of Old Legal Tender into New Legal Tender, scheduled to take effect from March 9. On March 8, Zhou Fohai held a staff meeting of the Central Reserve Bank and decided to carry out Outlines, but before Zhou Fohai notified the branches, sub-branches and offices of the Central Reserve Bank, the Japanese troops had already published Outlines in newspapers. Taking this move of Japan as ―an announcement that new legal tender (Central Reserve Bank Notes) and old legal tender are to part from each other‖, Zhou Fohai hastened to inform branches, sub-branches and offices of Central Reserve Bank by telegram: ―From March 9, no longer deposit old legal tender as central reserve banknotes; all legal tender is deposited as legal tender bank deposits and central reserve banknotes are deposited as central reserve banknotes bank deposits. These two kinds of deposits should be opened independently, allowing of no confusion; one person can swap at most 300dollars old legal

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tenders for central reserve banknotes. The result of Outlines was currency speculation and price hikes. On March 18, the Committee of New Currency Policies of Japan went further to put forward Urgent Measures on New Currency Polices, deciding to abolish the equivalent exchange between new legal tender and old legal tender. On March 21, the Central Reserve Bank notified its branches, sub-branches and offices by telegram that from March 31, they had to stop the equivalent exchange between central reserve banknotes and legal tender (old legal tender). One hundred dollars of legal tender were only to be exchanged for77 dollars‘ worth of central reserve banknotes. Moreover, they were to stop the exchange of legal tender for central reserve notes at the Central Reserve Bank, and this should only be conducted in the designated money shops where quotas on exchange were set for differently in different areas. On 23, while the Central Reserve Bank was carrying out the Measures, the Ministry of Finance ordered that ―Hereafter, tax authorities must collect all taxes in central reserve banknotes only. On March 30, the Ministry of Finance published a bulletin, officially announcing the differentiation of central reserve banknotes and legal tender in value and changed the exchange rate of central reserve banknotes against legal tenders from 1:1 to 77:100. The Ministry also released Provisional Measures for Amending and Arranging Currency, which ruled that ―from March 31, tax and all official expenses must be paid in central reserve banknotes.‖ During the week from May 20 to May 26, the exchange rate of old legal tenders against central reserve banknotes changed constantly, falling from 100:74 to 100:50.On March 27, Zhou Fohai issued a statement, announcing: ―Hereafter, central reserve banknotes will be the unified currency in Jiangsu, Zhejiang and Anhui. Old legal tenders issued by the Chongqing national government can no longer circulate legally, but it can be converted into new legal tender at the exchange rate of 2:1.‖ On March 31, the Ministry of Finance published Regulations on Arranging Old Legal Tender and Measures for Recalling Old Legal Tender, which ruled: from June 8 to August 21, old legal tenders must be fully converted into new legal tender (central reserve banknotes) at the exchange rate of 100:50. Later, the Ministry of Finance went further to forbid the use of old legal tender. Within only six days, the Central Reserve Bank forcibly depreciated old legal tender by lowering its exchange rate against central reserve banknotes from 1:1 to 2:1, leading to an unprecedented price hike. The public went into great panic and the market was in chaos with ordinary people suffering tremendous losses. On July 6, the Guangdong Branch of the Central Reserve Bank was set up and central reserve banknotes came into circulation and use in Guangdong and other occupied areas. Later, Guangzhou and Hankou began the full conversion of old legal tender into new legal tender on July

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10 and August10 respectively. By this time, central reserve banknotes not only circulated in all the occupied areas south to Longhai Road, but also became the only legal currency in circulation. By February 15, 1943, old legal tender was successively banned in Jiangsu, Zhejiang, Anhui and other occupied areas like Guangzhou and Wuhan. Ever since the Japanese-backed puppet government announced the differentiation of central reserve banknotes and old legal tender in value, old legal tender kept depreciating. Undoubtedly, enhancing the exchange rate of central reserve banknotes against old legal tender from 1:1 to 1:2 was as good as stealing from the people in occupied areas by financial manipulation. However, not all old legal tender could be converted into new legal tender. For instance, it was ruled that only those notes issued by the Central Bank, the Bank of China and the Bank of Communications could be converted into new legal tender while those without the inscription in Chinese characters ―上 海‖（pronounced as Shanghai in Chinese）were not allowed to be converted. In addition, deposits above 10,000dollars could only be kept as cash deposits in central reserve banknotes. The Japanese occupying force made central reserve banknotes the only legal currency in the enemy-occupied areas for two purposes: first, to maintain the value of military banknotes; second, to facilitate their appropriation of goods and materials in the occupied areas. The issuing of central reserve banknotes was a simple and convenient way for Japan to obtain military goods especially when it was in an extreme shortage of goods at home and was unable to maintain the value of military banknotes. As to the maintenance of the value of military banknotes, it was clearly stipulated in Treaty signed by Wang Jingwei and Japan on December 17, 1940 that ―to maintain the value of military banknotes, China should deposit a certain sum of money at designated Japanese banks‖. This, in essence, was to help Japan substitute military banknotes with central reserve banknotes and fund its military expenses. On August 8, 1942, the Central Reserve Bank went further to sign Contract on Mutual Deposits of Military Banknotes and Central Reserve Banknotes with Yokohama Specie Bank, Ltd. According to the Contract, in case Yokohama Specie Bank, Ltd. should need central reserve banknotes, it could collect a certain amount of Military banknotes and deposit them at the Central Reserve Bank should convert these deposits into central reserve banknotes at the exchange rate of 18:100 and deposit them at the bank account of Yokohama Specie Bank, Ltd. The conclusion of this Contract helped the Japanese occupation force to fulfill its goal of turning the Central Reserve Bank into an intermediary bank of military funds and other capital. As the Central Reserve Bank admitted, this was the simplest way for Japan to raise funds since Yokohama Specie Bank, Ltd which held Central Reserve Bank Notes deposits, could withdraw capital whenever it wanted. With this Contract, Japan would no longer have any difficulty with capital supply, even if it stopped issuing military banknotes. Thus, from April 1, 1943, the

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Japanese government decided to stop issuing Military banknotes in the occupied areas of central China and south China; military banknotes were no longer used for the payment of military expenses of the Japanese army in China as well as deposits, loans and foreign exchange at the Central Reserve Bank; military banknotes were no longer used for transactions in Shanghai‘s banking industry; to stop opening military banknote accounts and all military banknote accounts that had been opened must be exchanged with central reserve banknotes at the exchange rate of 18:100. On this issue, the Japanese Ministry of Finance delivered a speech stating that ―although military banknotes are no longer issued, we will not recall those that have been issued, nor will we change the claims and liabilities in military banknotes into those of central reserve banknotes. In addition, we still recognize the circulation of military banknotes and the existence of claims and liabilities in military banknotes. This decision of the Japanese was an open act of obtaining important resources from the areas under their control and ensuring its military supply through underhand means. In other words, through this decision, Japan shifted all its military expenditures onto the people in the occupied areas. When the Central Reserve Bank started business, it claimed to have a capital of 100 million dollars, but in fact, except the two million dollars operation capital, all its funds were internal bank transfers from Yokohama Specie Bank, Ltd. So, whether for the puppet regime or Japan, the issuing of central reserve banknotes was driven by financial needs without any material assurance. At first, the Central Reserve Bank issued currency relatively slowly, but suffering repeated military setbacks, Japan accelerated the process of extracting more funds and practiced the so called ―Using Chinese people to check China and using war to support war‖ policy, which resulted in hyperinflation and the constant need to increase the volume of currency. By June 1944, various kinds of banknotes in the denomination of 500 dollars were issued; in April 1945, another two kinds of banknotes in the denomination of 1000 dollars were issued; in June 1945, banknotes in the denomination of 5000 dollars were issued and in July, banknotes in the denomination of 10,000 dollars were issued. Later, the Central Reserve Bank also issued 100,000banknotes in the denomination of 100,000 dollars and 1,000,000 dollars. After Japan surrendered, Mao Renyu(毛仁 堉), Director of the Board of Issuing Currency, said that the total volume of currency issued reached some 4 trillion dollars, but the exact figure is unknown. Due to the hyperinflation of currency, prices kept rising, the market was in disorder, public resentment was heated, and the finance and economy of the Japanese-backed regime were on the verge of collapse. Nevertheless, the Japanese army still hoped to take action to reverse the tide. From May 7, 1945, the Central Reserve Bank issued three kinds of Gold Certificates with face values of 1 liang, 5 liang and 10 liang and transported a batch of gold (with no Chinese characters in gold bar, called light bar on the market) from Tokyo to meet market demands and maintain the

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currency value. There were four issues of Gold Certificates altogether. In terms of central reserve banknotes, the first issue was worth 780,000 dollars per liang and 13,957 liang of gold was redeemed; the second issue was worth 830, 000 per liang and 30,602 liang of gold was redeemed; the third issue rose to be worth 1.2 million dollars per liang and 30,027 liang of gold was redeemed; the fourth issue soared to be worth 2.04 million dollars per liang and 27,444 liang of gold was redeemed. In total, 100,530liang of gold was converted. Within only two months, gold price rose by 1.6 times and as gold price surged, prices of water and electricity rose by over five fold. The rice price, in particular, rocketed from over 100,000 dollars per dan (a unit of weight) to 1.5 million dollars per dan. Prices of other goods also soared as currency value ran rampant and the Chinese people suffered great losses.

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4 The National Government and Inflation ①

Inflation during the period of the National Government was much severer than that during the late Qing Dynasty and Beiyang government ruling era (from 1912 to 1928). During the Japanese War, areas controlled by the National Government shrunk gradually and legal tender depreciated rapidly due to the invasion by the Japanese imperialists. After China achieved victory over the Japanese invasion, Chiang Kai-shek stepped up the raising of funds to pay for the cost of the Civil War (here, referred to the Third Civil War or the Liberation War of the Chinese People) which further pushed the Chinese people into the abyss of hyperinflation.

4.1 The Mild Inflationary Period After the implementation of legal tender reform ② in November 1935, the National Government increased the issuing of legal tender enormously. According to statistics, the volume of banknotes issued by major banks in China including the Central Bank, the Bank of China, the Bank of Communications and other major commercial banks totaled 560 million dollars by the end of 1934. In January 1936, the National Government announced that the total volume of legal tender issued during the two months after the legal tender reform reached 780 million dollars, with the increment mainly from the Central Bank, the Bank of China and the Bank of Communications. By early 1937, the volume of legal tender issued reached 1.3 billion dollars, which rose to some 1.5 billion dollars before the outbreak of the war with Japan, more than double the volume since the legal tender reform. During these two years, from 1935 to 1937, legal tender circulated normally, foreign exchange could still be bought and sold freely at the fixed exchange rate, and prices of general goods experienced rare fluctuations. The reason for this was that after the legal tender reform, large quantities of silver dollars were recalled from circulation and there was a need for new legal tender to take their place. Therefore, the increase of legal tender in circulation did not lead to an oversupply of them. After the outbreak of the Japanese War, with large numbers of people in north China and central China moving to southwest China, legal tender gradually converged into several large and medium-sized cities, as a result of which, prices began to rise, but moderately. ①

National Government (July 1, 1925-May 20, 1948) was the central government and the supreme executive organ during the Period of the Republic of China. ② Legal tender reform referred to the monetary reform of 1935 introduced by the National Government which abolished the use of silver as currency. -78-

Since 1939, the National Government had failed to balance the budget every year and the fiscal deficit became increasingly wide. Moreover, military setbacks in the coastal areas, central China, and Hunan-Guangxi battlefields, and the exhaustion of funds combined to invalidate its method of issuing government bonds. Under such circumstances, the National Government set in motion printing machines and began printing legal tender in large quantities. The unchecked issuance of banknotes led to infinite price hikes, which in turn stimulated the issuing of further banknotes and the situation was soon critical and beyond control. From the outbreak of the war with Japan in 1937 to the end of 1938, the annual increase of legal tender reached 40.6% and from 1939, legal tender was issued more quickly, with an average annual increase of 87.2% and from 1942, an average annual increase of 132.5%. By and large, the inflation of legal tender during the Japanese War experienced two phases: the first phase lasted from July 1937 to 1938, when the volume of legal tender issued was on the rise but price rises lagged behind or were just abreast of the increase of legal tender. For example, in December 1937, the issuance index of legal tender was 117% while the price index in Chongqing was 98% and in December 1938, the issuance index of legal tender rose 164% while the price index was 164%. This was during the mild inflationary period of legal tender. During the early stages of the war with Japan, inflation developed slowly mainly because the masses strongly supported the resistance against the Japanese aggressors. They trusted banknotes issued by the National Government and purchased government bonds to support the government. Before the War broke out, legal tender mainly circulated in central China, north China and south China. By June 1937, the volume of legal tender issued totaled 1.4 billion dollars, with 400 million dollars circulating in North China, 800 million dollars in central China and some 100 million dollars in south China. Only a small amount of legal tender circulated in southwest China and northwest China. In east China and north China, though legal tender was forbidden by the government, it was a common practice among the people in enemy-occupied areas to store legal tender. However, the volume of legal tender in circulation in southwest China and northwest China increased. Of the government bonds issued during wartime, 600 million dollars was raised from the public directly and the rest was mainly borrowed from national banks with reserves coupons in return. When the War had just broken out, the National Government could still raise money from the public by taking advantage of their patriotism and their common hatred towards the Japanese imperialists. In the past, the National Government issued bonds to banks only but it was in the early stages of the Japanese War that the masses purchased government bonds for the first time, which played a certain role in making up for fiscal deficit and cutting the volume of legal tender. Meanwhile, 1937, 1938 and 1939 saw bumper harvests in agriculture. Take Chongqing as an example. The price indexes of grain in 1937, 1938 and 1939 (except the last three months of 1939

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when the price indexes were slightly higher) were all below the average of the first half of 1937. This was because agriculture in Sichuan Province turned for the better in 1937 after the famine of 1936and enjoyed bumper harvests in 1938 and 1939, with rice output growing by 1.9 times and 1.5 times respectively compared with previous years. Thus, an oversupply of grain occurred and the grain price was lower compared with pre-wartime. At the time, grain output in all fifteen KMT-controlled areas, excluding a few provinces and regions, peaked in 1938 and 1939. In this environment, prices of farm produce and processed industrial products rose slowly. At the early stage of the Japanese War, the National Government dumped foreign exchanges in Shanghai and America and Britain continued to dump industrial raw materials and products into the Chinese market, which impacted on market prices. Meanwhile, the War caused massive migrations of the population, and they took more cash with them, so currency circulated slowly. After the War expanded, people had to travel a longer distance from the inland to ports, which considerably reduced the velocity of commercial capital. For instance, before the war, for a merchant in Sichuan who went to Shanghai to purchase goods, the velocity of his capital would be on average four or five times per year. The War meant he had to make a detour around Vietnam to transport his goods back and forth, which usually took half a year to seven months, so the velocity of capital would fall to less than twice per year. The slow-down of currency circulation inevitably resulted in an increase in costs. Afraid that banks might fail to cash checks, merchants preferred to take cash and refused to have it exchanged, which also increased the demand for the currency in circulation. Owing to these political and economic factors, prices of goods rose more slowly than the volume of currency did. For example, by the end of 1939, the volume of legal tender issued increased by 3.04 times from June 1937 while the price index in Chongqing and Shanghai during the same period was 1.77 times and 3.08 times respectively.

4.2 The Hyperinflationary Period At the start of the Japanese War, the Chinese army failed to resist the attack of the Japanese army and lost most agricultural and industrial zones. The Japanese troops occupied the North China Plain, the Yangtze River Plain, the Jianghan Plain and the Pearl River Plain together with some major industrial cities including Tianjin, Shanghai, Guangzhou and Wuhan. One third of the Chinese lands were occupied and the agricultural and industrial productivity of China was reduced by 40% and 92% respectively as the major trade routes between China and other countries were cut off. In June 1939, Kong Xiangxi revealed in his secret letter to Chiang Kai-shek that fiscal deficit -80-

was widening. By 1936, prior to the Japanese War, the fiscal deficit had already reached over 200 million dollars. After the War broke out, with expenses increasing sharply, fiscal expenditure rose to 3.29 billion dollars in only one and half years from the latter half of 1937 to the end of 1938 while revenue totaled only 760 million dollars, thus representing a deficit of over 2.52 billion dollars. Apart from government bonds, the government mainly relied on bank loans and ultimately resorted to issuing banknotes. By June 1937, the volume of legal tender issued reached over 1.4 billion dollars and kept increasing on a monthly basis. By April 1939, the figure doubled and reached 2.8 billion dollars. Before August 1938, the volume of legal tender issue increased by 20 or 30 million dollars per month and after September, by about 100 million dollars per month. With fiscal deficit widening with each passing day, the volume of legal tender issue grew month by month. As regards fiscal policy, the government bonds issued after the outbreak of the War fell into five categories: short-term treasury bills, salvation bonds, national defense bonds (500 million dollars for each) construction bonds and war bonds (600 million dollars for each). By the end of April 1939, the volume of government bonds reached 2.4 billion dollars, with only 210 million cash raised from industrialists and residents and the rest borrowed from the Four Major Banks (namely, the Bank of China, the Central Bank, the Bank of Communications and the Farmers‘ Bank of China) who raised money mainly through issuing currency. Apart from bonds, the government also allocated a large quantity of township public savings notes among the people and levied more taxes and donations. Even the so-called wartime excess profits tax was only beneficial to large bureaucratic capitalist enterprises while harmful to small national capitalist enterprises. Excise was imposed on handicrafts and industrial raw materials, and transit duty was arbitrarily levied from people passing counties and towns. Small industrialists and merchants were more susceptible to various kinds of exploitation and grain levies and procurement were the two heaviest forms of exploitation suffered by farmers as procurement prices were far below market prices. Worse still, instead of using cash, the government sometimes purchased goods with treasury bonds or procurement certificates that would soon become worthless. From 1941, the National Government implemented the Land Tax Collect in Kind policy and forced people to accept the depreciating legal tender while paying tax with physical farm produce. Such kinds of predatory fiscal policy seriously destroyed the productivity of agriculture, industry and commerce and accelerated inflation. As a result, agricultural and industrial production in the National Government-controlled areas kept declining. In 1940, grain output of the 15 National Government-controlled provinces saw a widespread drop, so did winter crop output in 1941. The output of indica rice in Sichuan fell by 6.9% in 1943 compared with the average of the previous five years (from 1938 to 1942); output of cotton and sugarcane in 1942 fell by 41.4% and

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33.5% respectively compared with the average of the previous four years (from 1938 to 1941); output of vegetable seeds in 1943 fell by 27.6% compared with the average of the previous five years (from 1938 to 1942). In 1940, grain output in Sichuan fell to 68% that of the previous years, leading to price hikes in grain. From August to December 1940, prices rose by three times and by July 1941, they rose by 7.5 times. The reduction of farm produce inevitably led to the decrease in the output of processed industrial products. From 1940, cotton output began to fall and in 1942 it fell by20% compared with 1941. As a result, the price of cotton silk began to rise in 1940 and more than doubled within one month‘s time from February to March. Before the Japanese War, the National Government had always relied on British and American imperialists for industrial products and a portion of industrial raw materials, including even farm produce. Between the fall of Wuhan①and the eruption of the Pacific War, foreign imports decreased and all kinds of equipment was in short supply, which reduced the overall productivity. In fact, the year 1941 witnessed the peak of industrial development in rear areas and from then on industry was on a constant decline. The decline in agriculture and industry in the National Government-controlled areas led to a considerable decrease of goods in circulation and currency for the circulation of commodities decreased accordingly. Conversely, military and political spending of the National Government increased rapidly and fiscal deficit widened correspondingly. The National Government attempted to borrow more money from the people, but due to depreciation and price hikes during the protracted war, publicizing government bonds no longer worked and the masses refused to support them. This was not because the war-beaten masses had lost enthusiasm for the resistance against the Japanese aggressors, but because they had lost faith in the National Government. Consequently, funds raised through government bonds were only slightly over one sixth of the funds raised through all loans. Later, the National Government adopted the ―allocating‖ policy, namely, to promote government bonds by allocating them proportionally to the public, a policy no different from pronouncing the absolute failure of government bond. Meanwhile, legal tender in the enemy-occupied areas began to flow back. After the Japanese army and the puppet regime banned the circulation of legal tender in central China in June 1942, more legal tender flowed in than out, but it was unpopular both in the enemy-occupied areas and in the National Government-controlled areas. To prevent the losses caused by the depreciation of legal tender, authorities in the liberated areas decided to issue their own currencies, which also narrowed down the areas for the National Government to carry out inflationary policies. These factors combined to narrow down the ①

The fall of Wuhan: In early August 1938, the Japanese troops began to attack Wuhan and fully occupied Wuhan in October 26 after the fall of the three towns, namely, Hanyang, Hankou and Wuchang. -82-

circulation area of legal tender. Besides, in order to reduce the losses caused by depreciation, the people quickly put their legal tender to use, thus substantially accelerating the circulation of currency. Due to the decrease of commodities in circulation, the immense backflow of legal tender into the National Government-controlled southwest and northwest China and the acceleration of currency circulation, price growth began to outpace currency growth from 1939, marking the arrival of the hyperinflationary period of legal tender. With the deepening of the war with Japan, the National Government faced increasingly large military expenditure, which accounted for 87.61% of the total expenditure in 1937, 81.47% in 1938, 73.02% in 1939, 90.13% in 1940, 69.02% in 1941, 60.65% in 1942, 67.90% in 1943 and 73.49% in 1944. In 1945, military and special expenditure alone accounted for 71.33% of the total expenditure. At the same time, the National Government allocated massive funds to develop national monopoly capital. The so-called construction expenses in the eight years from 1937 to 1945 averaged 21.92% of the total budget expenditure. Kong Xiangxi claimed: ―ever since the anti-Japanese War, the government has endeavored to build up national capital and has allocated massive funds every year to build up national capital‖. Excluding those allocated to the military industry, funds allocated to the Resource Committee from 1937 to 1947 alone amounted to 1.26 billion dollars, 1% of the annual budget expenditure on average and in the highest year 2.8%. At the Fifth Plenary Session of the Fifth Central Committee of KMT①, KMT admitted that legal tender increased for the following two reasons: to offer advances to state treasury and to increase construction capital. Owing to the constant increase of military and administrative expenditure and the investments in national monopoly capital, the National Government was confronted with a huge fiscal deficit. According to the archives and documents in the Office of Statistics of the National Treasury of the Ministry of Finance, military and administrative expenditure accounted for 70%~80% of the total expenditure, so did fiscal deficit, which suggested a close correlation between fiscal deficit and military and administrative expenditure: huge military and administrative expenditure brought about huge financial deficit which relied on the Central Bank loans to be made up for. The approach the National Government adopted to make up for fiscal deficit was the implementation of the Unrestricted Inflationary and Unchecked Price Hike policy. To carry out the inflationary policy, the National Government modified the Legal Tender Reserve System. Before the Japanese War broke out, the Central Bank had flouted the rule of ―60% of cash reserves and 40% of pledge‖ and after 1939, it went further in tampering with this rule. According to the ①

The Fifth Plenary Session of the Fifth Central Committee of KMT was held in Chongqing and lasted from January 21 to January 30, 1939. The major topic at the meeting was ―anti-Japanese and anti-CCP‖. -83-

financial report from 1937 to 1941of the Ministry of Finance, ―the government approved the Central Bank, the Bank of China and the Bank of Communications to decide the volume of currency to be issued with full pledge from the latter period of 1939.‖Since then, legal tender was issued more flexibly and in greater volume. On September 8, 1939, the National Government published Outlines for Strengthening Finance, which laid down a new rule regarding cash reserves, which used to refer to gold, silver and foreign exchanges only: ―besides gold and silver and foreign exchanges, short-term business bills, goods receipt and productive investments (stocks)‖ can also act as legal tender reserves. But make sure that ―this new rule should not impair the flexibility of the issuing of currency.‖ By this time, the National Government had virtually broken its promise of ―full legal tender reserves‖ with ―at least 60% of cash reserves and 40% of pledge‖, made when it began issuing legal tender. Since ―pledge reserves‖ served as a portion of legal tender reserves, a receipt for a loan of the Ministry of Finance could simply act as legal tender reserve. It was true that there still required to be a portion of cash reserves, but these they referred to bills, stocks and goods receipts rather than gold, silver and foreign exchanges. So they were no longer cash reserves in nature. Getting rid of the restriction on legal tender reserves, then, allowed the National Government more liberty in implementing inflationary policies. The inflationary policy introduced by the National Government was fervently opposed by people from all social strata. In the autumn of 1940, Ma Yinchu(马寅初), Chairman of the Financial and Economic Committee of the Legislature of the National Government, legislator, professor at the Business School of Chongqing University and Director of Chinese Economic Society, submitted a bill to the legislature, proposing to levy temporary property tax on those having made large fortunes amidst the national calamity. He also wrote in a newspaper against Kong Xiangxi（孔祥熙）and Song Ziwen（宋子文）: ―Taking advantage of the national calamity and their political influences, several officials colluded with a couple of big banks to conduct business or purchase massive foreign exchanges by unfair means. In the process, they made large fortunes under the cover of Control Trade① which, however, is still unknown to most Chinese people and foreigners. Some embezzlers in our country are more to be condemned than wicked merchants and Chinese collaborators if the harm they‘ve done to our country is taken into consideration. We Chinese people sacrificed hundreds of lives and millions of wealth for the victory in the anti-Japanese War and the revitalization of the nation. By no means are we willing to see a couple of profiteers, one controlling the finance and the other seizing the economy. Given this, we demand that the government should levy temporary property tax on these people. We can ①

Control Trade refers to the kind of trade with the state setting up some special agencies to organize and manage all trade. -84-

start from the corrupted officials by ordering them to hand over all their unfair fortunes made through political influences to the state and set an example for other profiteers to follow.‖ In October 1940, Ma Yinchu published an article entitled The Only Outlet for China‟s Fiscal and Finance: Levy Temporary Property Tax on Whoever Made Fortunes amidst National Calamity in Current Affairs, in which he pointed out that from ―1997 to 1940, war expense was entirely borne by people without money. Before the anti-Japanese War, the volume of legal tender issued reached 1.4 billion dollars and by 1940, 6 billion dollars and increases in the volume of legal tender were exploiting the people. A wage-earner now can only possess 30 dollars out of the 300 dollars monthly salary, with 270 dollars levied. The low class offered labor, the middle class offered money, while the upper class made fortunes amidst the national calamity. In the first three years of the anti-Japanese War, poor people were the mainstay and it was not until the fourth year that the upper class was asked to hand out their fortunes and foreign exchanges to fund war expenses.‖ In December 1940, Chiang Kai-shek arrested Ma Yinchu and imprisoned him first in Xifeng Concentration Camp①, Guizhouand then in Shangrao Concentration Camp②, Jiangxi. This move by Chiang Kai-shek implied that the National Government would go on its own way and continue implementing the inflationary policy. The hyperinflationary period of legal tender arrived in 1939 when with price growth began to outpace the growth of the volume of legal tender issued. In December 1939, the issuance index of legal tender was 305 times while the price index reached 355 times. The gap kept widening thereafter and in June 1945, the issuance index of legal tender was 282 fold while the price index reached 2,133 fold. Thus, the year 1939 was a crucial year that witnessed the transition from mild inflation to the hyperinflation. Basically, the internal depreciation of the legal tender was at the same pace as the external depreciation of legal tender, but from 1942, the latter outpaced the former. According to the internal value of legal tender, one dollar‘s worth of legal tender in December 1942 equaled 1.28cents worth of legal tender in 1937, but according to the external value of currency, only 0.24cents. Here, we can see the internal value of legal tender was five times higher than the external value of legal tender and this continued to be so ever since. By the time China won the victory in the Japanese War, the volume of legal tender issue amounted to 556.9 billion dollars, up by some 400 times from 1937, while prices in Chongqing during the same period rose by about 1,800 times.

①

Xifeng Concentration Camp is six kilometers away from Xifeng County, Guizhou Province. It was one of the four major concentration camp of KMT to imprison the captured CCP members and progressive personages during the anti-Japanese War, the other three being Chongqing Mansion, Zhazidong Concentration Camp and Shangrao Concentration Camp, Xifeng Concentration Camp. ② Shangrao Concentration Camp was one of the four major concentrations of KMT during the Japanese War. -85-

The depreciation of legal tender was inevitably reflected in prices. Take prices in Linxiang County, Hunan Province as one example. When the Japanese War broke out, Iondanthren cloth and blue cloth for student uniforms were sold around 20 dollars per piece, Double Happiness Cloth was sold at no more than 10 dollars per piece, Baoqing Cloth was sold 14 or 15 dollars a tube (one tube contained 25pieces), cotton silk (40 batches) was sold 110 or 120 dollars a box. In 1939, the prices of Iondanthren cloth and blue cloth for student uniforms rose to about 200 dollars per piece and cotton silk, over 1,000 dollars a box. In 1940, the market prices of Iondanthren cloth and blue cloth for student uniforms exceeded 100,000 dollars per piece. By the time the Japanese aggressors invaded Dushan Mountain of Hunan in 1944, Iondanthren cloth and blue cloth for student uniforms were sold around 170,000 dollars per piece, Double Happiness white cloth was sold110,000 or 120,000 dollars per piece, and cotton silk was sold over 3 million dollars a box. In November 1937, goods in Lishui County, Zhejiang Province were very cheap. An egg cost only 2 cents and pork meat cost 20 cents per 500 grams. However, from 1943 to 1944, face values of banknotes issued by the National Government grew constantly, from 50 dollars to 100 dollars. Afterwards, the government repeatedly varied its gimmicks and finally issued CGU certificate notes①.Twenty dollars of CGU certificate notes could be exchanged for 100 dollars legal tender. At first, people trusted CGU certificate notes and they circulated steadily for a time, but with an increasingly greater amount of CGU certificate notes issued, people began to realize that they had been taken in and lost confidence in them, as they had done with legal tender. In this economic environment, there followed an extreme shortage of goods in the market. People could not buy what they needed even though they had money and prices kept soaring ever higher -the price of a packet of 20 cigarettes made in Wenzhou rose above 1000dollars per packet. In response the government had to issue larger-denominated banknotes and banknotes in the denominations of 1000dollars, 5000dollars and 10,000 dollars came out in large quantities. At this time in Lishui, Zhejiang, people used to paste their water-patterned doors and windows with peach flower paper to protect them from the cold during winter, but since peach flower paper was so expensive and cost more than 1000dollars, some people pasted their doors and windows with banknotes in the denomination of1000 dollars instead.

①

CGU Certificate Notes: also known as CGU, is a kind of security issued by the Central Bank of KMT in May,

1931 to collect tax. -86-

4.3 The Intensification of Hyperinflation and Collapse of the .

Legal Tender System Due to the civil war waged between the National Government and communist forces after the Japanese War, the inflation of legal tender was intensified and it began to collapse. When the war with Japan ended, prices of goods, gold and foreign exchanges throughout the country plunged drastically. In August 1945, shortly before China‘s victory over the Japanese, the average price in Chongqing grew by 1,585 times, but the figure fell to 1,226 times in September and 1,184 times in October compared with 1937. In July 1945, gold price in black markets once hit 199,075 dollars per liang, but it fell to 111,424 dollars per liang in August and further fell to 66,728 dollars in September. In July 1945 in Chongqing, one USD (US dollar) was worth 2,889 dollars legal tender, but it soon depreciated to be worth 1,745 dollars in August and 968 dollars in September. From these figures, we can see that at this point in time the severe inflation experienced some temporary relief. In addition, the National Government still held 4million liang of gold and US$900 million foreign exchanges and had taken over a large number of Japanese-backed industries in the occupied areas from the Japanese-backed puppet regime. These provided favorable conditions for the National Government to rectify the country‘s finances and stabilize legal tender. Despite all these favorable conditions, the National Government, however, stepped up implementing the hyperinflationary policies to fund the huge military expense of the Civil War against the communist forces. In 1946, budget expenditure was 2.5 trillion dollars while actual expenditure more than doubled and reached 5.5 trillion dollars, two thirds of which being military expenses. The huge fiscal deficit was made up for by the increased production of legal tender. Large-denominated banknotes with face values of 5,000dollars and 10,000 dollars as well as CGU certificate notes with face values of 200dollars, 500 dollars and 1,000dollars were printed and issued. With the expansion of the Civil War, the volume of legal tender issued got increasingly bigger while the internal and external values of legal tender fell drastically. In 1948, the National Government was forced to admit in its memorandum to the American government that hyperinflation was a result of the Civil War. It said that due to the ―anti-communism warfare, actual expenditure exceeded budget expenditure. In 1945, budget expenditure was 263.8 billion dollars while actual expenditure reached 1.586 trillion dollars; in 1946, budget expenditure was 2.525 trillion dollars while actual expenditure reached 8.719 trillion dollars; in1947, budget expenditure was 9.37 trillion dollars while actual expenditure reached 42 trillion dollars. Of the total expenditure, military expense accounted for 52.3% in 1945, 41.4% in -87-

1946 and 50.1% in 1947.‖ According to the Bureau of Economic Research of the Central Bank, of the total expenditure, military expenses and special expenses accounted for 71.33% in 1945, 54.4% in 1946 and 59.8% in 1947. The National Government admitted that ―instead of alleviating the financial burden over the state, the end of the anti-Japanese War increased it.‖ with expenditure in 1946 exceeding that in1945 by 5.5 times. The National Government also admitted that since the people opposed the anti-Revolutionary War, ―tax revenue decreased sharply from accounting for 53.2% of the total national revenue in 1936 and an average of 14.7% during the eight years of the anti-Japanese War to 7.7% in 1945, 7.7% in 1946 and 21.5% in 1947‖. Tax revenue in real terms in 1945 and in 1946 ―was 7% and 28% respectively that of 1936. Revenue from selling property, goods and state-run enterprises also declined, 22% in 1945, 29.9% in 1946 and 6.7% in 1947. Loan revenue fell from 34.2% in 1936 to 0.4% in 1945, 0.1% in 1946 and 3% in 1947.‖ By this time, the credit of the National Government had been ruined completely and it could no longer borrow any money domestically. In April 1947, the National Government issued government bonds and national treasury bonds twice, totaling US$400million. But within nine months, only $56 million treasury bonds, that is,3% of the overall fiscal expenditure was purchased. Therefore, the National Government had to borrow more money from the Central Bank and of the total expenditure, bank loans accounted for 66.8% in 1945, 57% in 1946, and 67.2 % in 1947 and an average of 71.1% during the eight years of the anti-Japanese War. Bank loans offered by the Central Bank to the Ministry of Finance were 6.6769 trillion dollars in December 1945, 12.6565 trillion dollars in June 1947 and 236.416 trillion dollars in July 1948 and ―the consequence of the heavy reliance on bank loans is inflation.‖ The National Government admitted that ―since 1945, currency was issued at a speed greater than during the anti-Japanese War.‖ ―The increments in June 1947 alone exceeded the total increments from June 1937 to December 1945.‖ The National Government also admitted: ―printing machines failed to produce enough banknotes‖ and ―banknotes were insufficient.‖ The president of the Central Bank said when making a report on May 31, 1947 that ―our expenses have been huge for months, but banknotes are far from enough. The production of banknotes has lagged behind expenses and the materials for making banknotes have been used up.‖ Therefore, even the printing of legal tender relied on America. In 1947, only 58 trillion dollars legal tender was printed in China while137 trillion dollars were printed in foreign countries. ―Airplane is the major means of transportation. But when we managed to transport goods to the destination, we often felt disappointed to find that our goods were already unwanted due to rising prices.‖ On November 27, 1947, the Board of Supervisors of the Central Bank decided that the newly printed banknotes with face values of 50 dollars and 100dollars ―are to be destroyed by melting for being of little use.‖

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The National Government had to admit this as the ―threat of galloping inflation‖ and the ―vicious cycle‖ of legal tender inflation, which was more dangerous than ―communist defection‖ as the ―price surge has already demolished social order and ruined political confidence.‖ During the eight years of the Japanese War (roughly from June, 1937 to August 1945 when Japan surrendered), the volume of legal tender increased by 394 times and prices rose by 1,585 times. However, during the three years of the Civil War (from 1945 to 1948), the volume of legal tender increased by 450,000 times and prices in Chongqing and Shanghai rose by over 1.5 million times and over 4.9 million times respectively compared with June 1937. Shortly after the Japanese War, prices in Shanghai were lower than in Chongqing. But after the National Government moved to Nanjing and Shanghai resumed its status as the center of national finance, tourism capital flooded into Shanghai and speculative activities ran rampant, as a result of which, prices in Shanghai gradually surpassed Chongqing. Hyperinflation and soaring prices led to the appearance of legal tender with face values of 100,000 dollars and 500,000dollars. In 1948, CGU certificate notes with a face value of 50,000 dollars (equivalent to one million dollars‘ worth of legal tender) were issued and the volume of banknotes issue reached an astronomical figure. Nevertheless, prices skyrocketed much more quickly and therefore led to a figurative saying that went like this: ―the amount of legal tender that could buy a head of cattle before the War can barely buy a match now,‖ and this was no exaggeration. Indeed, if we calculate carefully, we will see that the amount of legal tender that could buy a head of cattle before the War might only buy one third of a match as a result of inflation. Prices rose so violently and changed so constantly that the National Government was unable to work out its gross budget of the fiscal year 1948. According to the statistics of the Joint Office of the Four Major Banks, the Wholesale Price Indexes (WPI)in Shanghai, Nanjing and Hankou rose by over 600 times, in Tianjin by 7.5million times, in Guangzhou by 4.5million times and in Chongqing by over 2.8 million times compared with the first half of 1936. According to the prices in Shanghai, the overall purchasing power of all legal tender in circulation was equivalent to that of some 100 million dollars legal tender in the first half of 1936. Prices of hardware saw an astonishing rise of 11 million times. In times of industrial and commercial depression, speculation alone experienced illusory prosperity, with the common belief at wartime that ―working is inferior to doing business while doing business is inferior to hoarding goods‖ replaced by ―hording goods is inferior to hoarding gold while hoarding gold is inferior to storing foreign exchanges.‖ The mass of working people had to endure hunger and coldness, often breathing their last breath. It was estimated that, with 100 dollars‘ worth of legal tender, you could buy two heads of cattle in 1937, but only two eggs in 1945, one sixth of a piece of soap in 1946, one coal ball in 1947, one fifth liang of rice in 1948 and one 500,000th liang

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of rice in 1949. Amidst the galloping inflation, the people, even capitalists included, suffered a great deal. Take a depositor of Kincheng Banking Corporation as one example. The depositor had been teaching in a primary school for 30 years and had a meager sum of bank savings for his child‘s education. Before the outbreak of the Civil War, this amount of money could buy 1,250 kilo of rice, but in 1948, only one fried bread stick (Chinese doughnut). Kincheng Banking Corporation lent a large sum of money to the National Government, but the National Government only repaid back the principal and paid the interest according to the original interest rate. Amidst an inflation of over 10,000 times, in so doing, the National Government was actually playing with figures without presenting itself as a defaulter. In face of super-high inflation, the people could no longer stay put and the National Government also had difficulty in making ends meet. An expenditure budget worked on one day now might instantly become rubbish due to inflation. As the saying goes, the maintenance of inflation depends on inflation. That is to say, after developing to a certain stage, inflation would accelerate automatically and beyond government control. In fact, inflation developed so fast that even its initiators felt financial hardship. Under such circumstances, Chiang Kai-shek and his followers decided to abolish legal tender and issued gold coin banknotes.

4.4 Gold Coin Banknotes Gold coin banknotes were issued on August 20, 1948, shortly before the outbreak of the Liaoxi-Shenyang Campaign①, the Huaihai Campaign② and the Beiping-Tianjin Campaign③. By this time, the National Government had already been at a disadvantage militarily, politically and economically and from July 1946 to June 1948, the number of KMT soldiers shrunk from 4.3 million to 3.65 million. During the same period, the number of People‘s Liberation Army (PLA) began a fight back as PLA soldiers jumped from over 1.2 million to 2.8 million. In the National Government-controlled areas, campaigns against hunger, the Civil War and oppression launched by large numbers of workers, students, teachers, intellectuals, citizens and Chinese bourgeoisie spread like a wildfire. The National Government was in isolation and doomed to failure. Worse still, the National Government was running out of financial and economic ① The Liaoxi-Shenyang Campaign (Sept.12-Nov.2.1948) the first of the three decisive Campaigns of the Liberation War ② The Huai-Hai Campaign (Nov. 6, 1948-Jan.10, 1949) is the second of the three decisive Campaigns in the

Chinese People's War of Liberation. ③ The Beiping-Tianjin Campaign (Nov.29, 1948-Jan.31, 1949) is the third of the three decisive Campaigns in the Chinese People‘s War of Liberation. -90-

resources and had used up foreign exchanges, with only some 200million liang of gold reserves left. According to the White Paper released by the American State Department in 1949, the National Government had only US$130 million foreign exchanges, which would be used up by the end of 1948 or early1949 and this presented another tremendous difficulty to the National Government. For instance, China Airline relied exclusively on American and British petroleum companies in Shanghai for its petroleum supply, so it needed USD to buy petroleum. But the National Government only gave China Airline US$500,000, which was insufficient to pay auditors of the Airline and purchase aircraft components. ―We have great difficulty in maintaining oil supplies, which may lead to a suspension of China Airline Company unless this can be overcome in a few days‘ time‖. Due to the exhaustion of foreign exchange, economic and military institutions supported by the National Government with materials and goods from America risked being paralyzed. In a desperate measure in order to appropriate gold, silver and foreign exchange, the National Government decided to issue gold coin banknotes. According to Measures for the Issuing of Gold Coin Banknotes, legal tender already issued would be converted into gold coin banknotes at an exchange rate of 3,000,000:1. In essence, this had the effect of abolishing legal tender, and a one-dollar gold coin banknote became equivalent to 300 million dollars legal tender. In this way, the maximum face value of gold coin banknotes soared from 5 million dollars to 300 million dollars. A more important aim of issuing gold coin banknotes was obtaining gold, silver and foreign exchange for the government by force. According to the decree released by the National Government, ―whoever fails to convert or deposit his or her ‗gold, silver, silver dollars and foreign loans‖ within a given period of time will have them confiscated and whoever does not have his or her foreign assets registered will be sentenced to up to seven years.‖ It was exactly through imposing such political pressure that from August 23 to the end of October 1948the National Government managed to gain1.65497019million liang of gold, 9.038535166million liang of silver, 23.54686029

million

liang

of

silver

dollars

and

hundreds

of

millions

of

USD,

totalingapproximatelyUS$200 million. When the National Government announced the gold coin banknotes reform, the Liberation War of the Chinese People had entered into the strategically decisive period. With the Liaoxi-Shenyang Campaign and the Huaihai Campaign proceeding successfully, the precarious National Government stepped up issuing gold coin banknotes and in less than three months‘ time, the volume of gold coin banknotes increased from 200 million dollars on August 20 to 190 million dollars on November 9. Influenced by the Checked Price Policy of the National Government, Shanghai saw the outbreak of the first wave of panic buying on October 2, 1948, when citizens

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bought whatever they saw lest that they might suffer great losses overnight due to the sharp depreciation. In the first 40 days of the panic buying commodities like grain, oil, sugar, paper, and rubber were out of stock and 100,000 pieces of cotton cloth were sold. On September 30, the National Government decided to prolong the acquisition term of gold and silver till the end of October, which destabilized the reputation of gold coin banknotes. People now realized that gold coin notes were short of reserves and prices could no longer be maintained at the level of August 19. From October 2, throngs of people crowded into famous silk stores on Nanjing Road and wool fabric stores on Henan Road the moment they opened and goods sold out instantly with sales revenues three to ten times higher than usual. Commodities were in very limited kinds, fresh meat could no longer be found on the market, vegetables were expensive and scarce, cooking oil was quickly snapped up, and shelves in many stores were empty. The wave of panic buying soon spread to many places including Tianjin, Beiping, Hankou, Nanchang, Kunming, Suzhou, Hangzhou, Zhenjiang, Wuhu, Wuxi, Tunxi, Yangzhou, Hefei, Fuzhou, Xiamen, Taibei and Lanzhou. Contemporary reports stated that ―99% of the shelves in Tianjin are empty‖ and ―rice stores and wheat stores in Beiping have long been empty.‖ Later, this wave of panic buying developed into a nationwide panic of rice buying and as a result, ―Shanghai saw the panic buying of rice 27 times in a day‖ and as well as rice, ―anything edible became the target of panic buying.‖ Soon ―the extreme shortage of rice led to the paralysis of all institutions in Shanghai.‖ Black markets in gold and USD revived and saw a rapid rise in prices, with USD price rising to 11 dollars (the official price was 4dollars) and gold price rising to 390 dollars (the official price was 200dollars) on October 13. Stores that had sold out their commodities could no longer replenish themselves due to the closure of many factories due to the lack of raw materials. This resulted in not only a collapse of gold coin banknotes, but also a collapse of the entire economy. Facing the collapse of the economy and monetary system, the National Government hastened to replace the Checked Price Policy with the Bargaining Policy① on November 1. On November 12, it announced an amendment to the Measures for Issuing Gold Coin Banknotes and Measures for Handling Gold, Silver and Foreign Currency, reducing the gold content of each gold coin note to 4.4434 cg, permitting the people to hold gold, silver, foreign exchange and openly announcing the depreciation of gold coin banknotes by 80%. Accordingly, gold price rose from 200dollars per liang to 1000dollars per liang; one liang of silver be could be exchanged for 15dollars‘ worth of gold coin banknotes, one silver dollar could be exchanged for 10 dollars‘ worth of gold coin banknotes, and one USD could be exchanged for 20 dollars‘ worth of gold coin banknotes. ①

Bargaining Policy was introduced by the National Government under which the prices of goods could be discussed and set freely by buyers and sellers in the market rather than fixed by the government. -92-

Meanwhile, the National Government announced it would revoke the quota on the issuing of gold coin banknotes. Once set free after being curbed for over 70 days, prices of goods skyrocketed instantly. For instance, the price of rice in Shanghai, which was 23 dollars per dan during the price control period, soared to 80dollars per dan on November 1and 1800 dollars per dan in December. After the quota of 2 billion dollars on the issuing of gold coin banknotes was officially revoked, the volume of gold coin banknotes increased to 3.394billion in November and 8.32 billion dollars in December. After 1949, the volume of gold coin banknotes saw a more frantic increase. In March, large-denominated gold coin banknotes with face values of 5000 dollarsand 10000 dollars were issued; in April, large-denominated gold coin banknotes with face values of 50,000 dollars and 100,000 dollars were issued and in May, gold coin banknotes with face values of 500,000dollars and 100 million dollars (equivalent to 3trillion dollars-legal tender) were issued. The Central Bank also printed gold coin banknotes with a face value of 500million dollars which, however, failed to be issued because of the liberation of Shanghai. At the same time, prices at this time soared not once in several days but several times in a day. For instance, there was a store in Shanghai that changed the list prices 16 times in a day. Goods in urban markets were all priced in gold, USD or silver dollars while barter trade was still prevalent in rural markets. The black market prices of gold, silver and foreign exchange surpassed the official prices. On August 23, the third day after the issuance of gold coin banknotes, one USD in black markets of Tianjin was worth 41.8jiao(a Chinese monetary unit)gold coin banknotes, which on August 24 jumped to be worth 43.5 jiao gold coin banknotes. Likewise, the black market price of USD in Guangzhou also began to exceed the official price from 24 August. The black market price of gold per liang in Chongqing exceeded the official price by 30 dollars on September 2 and the black market price of gold per liang in Hankou exceeded the official price by 25 dollars on September 6. The black market price of silver dollars in Guangzhou and Hankou also exceeded the official price on September 2. On November 11, the black market prices of gold, silver and foreign currency throughout the country all exceeded the official prices by over five times. That same day, the Executive Council could not but promulgate Measures for Revising the Handling of All Gold, Silver and Foreign Exchange, permitting people to hold gold, silver, foreign currency and raising the prices of the notes of gold coins and foreign exchanges by five times. Soon, the black market prices of gold, silver and foreign currency skyrocketed in the same manner as the prices of goods had. On June 25, 1949, the Executive Council ruled that one silver dollar was equivalent to 500 million dollars‘ worth of gold coin banknotes. But the government of Sichuan Province had already announced that one silver dollar was equivalent to 750 million

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dollars‘ worth of gold coin banknotes and on June 21, in the black market in Chongqing, one silver dollar was worth 2.5 billion dollars‘ worth of gold coin banknotes. As prices of goods soared violently and changed many times in a day, the meager salary earned by the underprivileged masses depreciated seriously. According to some who lived at the time in Linxiang County, Hunan Province, prices soared several times in a day during the depreciation of gold coin banknotes and the money required to buy a dan of rice on one day would only be enough to buy a handful of rice the next day. Since the face values of gold coin banknotes were so small while prices were so high, people chose to weigh rather than count gold coin banknotes when making purchases. Sometimes, one dan of banknotes was not enough for one dan of millet. At that time, vendors refused gold coin banknotes and accepted silver dollars only and would dump them immediately once they had received them. When the Southwestern Tea Room in Huguangguan Street of Chengdu started business one an April day, tea was priced at 7,000dollars per bowl, but the price soon soared and reached over 10,000dollars per bowl within two hours. Therefore, disputes arose among customers, who eventually resorted to force. Tables and chairs were broken and attendants got injured. Many stores closed after hearing this news. Afraid that they might never be able to replenish themselves once they had sold out their goods, some businessmen even refused to sell goods and closed their stores, leading to a shopkeepers‘ strike. We can see from these events how chaotic the economy was and how turbulent the society was at that time. Prices in terms of gold coin banknotes during the circulation of gold coin banknotes were as follows: On August 19, 1948 Gold: 200 dollars per liang One silver dollar: 2 dollars Rice: 10.3dollars per dan On June 22, 1949 Gold: 90 billion dollars One silver dollar: 1 billion dollars Rice: 9.7 billion dollars per dan These figures show that during the short period of ten months after gold coin banknotes replaced legal tender, gold price rose by 480million times, silver dollar price by 500 million times and rice price by 900 million times. Price increases of other goods were roughly the same as those of gold, silver and rice. Gold coin banknotes were refused by most distant counties of Sichuan Province, where businessmen used self-made notes and certificates, including letterpress printing notes, stone printing notes, wood carving notes, oil printing notes and holograph notes. Some also

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used discarded legal tender as cash by denominating and stamping them. Besides, there were various kinds of tea notes and wine notes, to name just a few. In addition, barter trade still existed. For instance, public servants, teachers and workers in Chengdu and Chongqing were still paid with physical goods like rice, firewood and oil and in the suburbs of Chongqing, tea and meals were paid for with rice and silver dollars were secretly used in business transactions and banking. Gold coin banknotes had lost their exchange value and became nothing but waste paper. As gold coin banknotes could no longer be sustained, on June 22, the National Government in Guangzhou had to forbid the circulation of gold coin banknotes and the ―gold tiger‖ was thus doomed as a viable currency. During this period a popular poem read: With gold coin banknotes depreciating, prices kept rocketing. The commoners feared price hikes, day and night. Legal tender reform is too bitter to recall. Gold coin standard remains, but prices have changed. Could you feel the anxieties torturing my heart like flying arrows?

4.5 Short-lived Silver Dollar Banknotes On April 21, 1949, the PLA of China was ordered to launch a nationwide march. The remaining forces of KMT fled frantically to the southwest and northwest of China, where they attempted to stage a comeback. As gold coin banknotes had already collapsed, the remaining forces of KMT planned to issue silver dollar banknotes, trying to deceive the people for the last time. When the remaining forces of the National Government fled to Guangzhou, they were forced to spend the gold, silver dollars and HK dollars seized during the issuing of gold coin banknotes to fund their expenditure. According to Finance Minister Xu Kan‘s report made on July 16, 1949, the total volume of gold, silver and foreign exchanges spent in April, May and June, 1949 were as follows: Silver dollar: 34,435,970 dollars Silver: 700,000liang Gold: 195,610 liang Taiwan Dollar: 443.5 billion dollars Foreign currencies in USD: $24,605,396 Bank loans in silver dollar: over 50 million dollars According to Xu Kan‘s report, monthly expenditure reached 45million dollars, including 28million dollars military expenses, 12 million dollars administrative expenses and 5 million -95-

emergency reserves while monthly revenue, as Yan Xishan admitted, was only 9 million dollars, representing a monthly deficit of nearly 40 million dollars, about 80% of monthly expenditure. To make up for the deficit, the remains of KMT attempted to play the same old trick of issuing a new kind of banknote. In a desperate struggle, the National Government planned to print and issue silver dollar banknotes from March 1949. In July 1949, acting President Li Zongren(李宗仁) and Prime Minister YanXishan（阎锡山） issued Measures for Issuing Silver dollar banknotes. In his report to Yan Xishan, Xu Kan wrote: ―Over the past months, revenue and expense were imbalanced, finance was in disorder and people distrusted banknotes. Not only did the National Government fail to make ends meet, but commercial and industrial transactions were in paralysis and stagnation for lack of a medium of exchange‖. Xu argued that: ―The Chinese people have long been used to silver dollars and have trusted coins. Such preference is especially obvious since the depreciation of legal tender and gold coin banknotes. In order to restore the credit of coins, I thus suggest that we resume the silver standard, take the boat-edition silver dollar① as a yardstick, cast boat-edition silver dollars in large quantities and allow them to circulate and be used.‖ Again, this was still aimed at issuing banknotes: ―Made of coins, silver dollars are heavy and inconvenient to carry to and fro in large quantities. Thus, in modern the economy, the silver dollar system is not desirable to begin with. Besides, the government had a fairly sufficient stock of gold, silver and foreign exchanges, so it is able to issue several kinds of banknotes to circulate concurrently with silver dollars. We should designate certain cities to use these notes and order the Central Bank to redeem them.‖Meanwhile, the National Government was also planning to loot all foreign exchanges from the masses. ―Holders of foreign exchange should have them deposited at bank as foreign exchange bank deposits.‖ For convenience of dividing the spoils, the government allowed provincial warlords ―to issue one silver dollar banknotes and banknotes of fractional silver dollar banknotes.‖ In other words, Dayang notes (Dayang Piao in pinyin) issued by Xue Yue Bank of Guangdong were also legal to circulate. Finance Minister Xu Kan boasted this move as ―the most risky and courageous measure for monetary reform‖, which was, in fact, nothing but the most despicable and shameless act of deception and plunder. On July 4, 1949, the Executive Council that had fled to Guangzhou issued the Measures for Issuing Silver Dollar and Silver Dollar Banknotes, ruling: ―Silver dollar should be taken as standard,‖ and ―each silver dollar should contain 23.493448 centimeter pure silver.‖ What lay behind this move was the attempt to issue silver dollar banknotes: ―In terms of face value, silver dollar banknotes fall into five categories: 1dollar, 5dollars, 10dollars, 50 dollars and 100dollars. Fractional silver dollar banknotes fall into four categories: 5 cents, 1 Jiao, 2 Jiao and 5 Jiao. In 7. Boat-edition silver dollar refers to the coin that has an image of boat inscribed on it. -96-

case of a shortage of cast silver dollar, silver dollar banknotes can only be redeemed with gold at the listed exchange rate published by the Central Bank.‖ By this time, the National Government was already on the brink of collapse. To make it easier to raise revenue, the irresponsible government decided to issue different banknotes for Guangzhou and Chongqing so that it could terminate the redemption of certain exchange notes at will. Guangzhou and Chongqing began to issue silver dollar banknotes on July 4 and July 8 respectively. The so-called silver dollar banknotes were not guaranteed to be redeemed and had to be redeemed in ―designated cities like Guangzhou, Chongqing, Fuzhou, Hengyang, Guilin, Kunming, Guiyang, Chengdu and Lanzhou‖, which meant that they could not be redeemed elsewhere. Moreover, they were not necessarily to be redeemed with silver dollars, ―you can convert them with gold‖. However, given the relatively greater value of gold, silver dollar banknotes worth below certain level could not be redeemed at all. Therefore, silver dollar banknotes were, in essence, inconvertible banknotes. With the deception of the National Government fully disclosed and its foundation shaken, the issuing of silver dollar banknotes was resisted by the people from the very first beginning. The statement of the PLA announcing it would not to accept and redeem puppet exchange notes in south China and southwest China further propelled the people across the country to reject silver dollar banknotes. The issuing of silver dollar banknotes suffered a severe setback in Guangzhou, which was then under the control of the National Government. The masses reckoned that the bold National Government might cast silver dollars wantonly and reduce the content of silver in each coin, so the market price of silver dollar fell, from 8 HK dollars per dollar to only 6 HK dollars per dollar and further to 4 HK dollars per dollar. By the middle of July, it fell to 3.3 HK dollars per dollar. After the PLA launched a mighty frontal attack at the frontline of Central China, the masses rushed to redeem silver dollar banknotes into silver dollars, triggering the first run on bank. Unable to redeem all silver dollar banknotes into silver dollars, the National Government was forced to dump a portion of gold and foreign exchanges, causing the decoupling of silver dollar banknotes and silver dollars. On July 25, shortly before the liberation of Zhuzhou, the authorities stamped silver dollar banknotes with place names so that it could nullify banknotes in certain places at will. This triggered a second run on bank in Guangzhou. Under such circumstances, the Central Bank had to terminate the ―unrestricted redemption‖ and set a maximum of redemption of 100 silver dollars‘ worth of banknotes for each person. Thus, just in a day, the price of silver dollar banknotes slumped from 3.4 HK dollars per dollar to merely 2.4 HK dollars per dollar. The authority had to give out wages in HKD and silver dollar banknotes that had been in circulation for only one month

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basically collapsed. The issuing of silver dollar banknotes was also objected by the masses throughout southwest and northwest China. On August 26, 1949, Zhang Qun, director of the Administrative Office of Southwest Chongqing, telegraphed Finance Minister Xu Kan: ―Silver dollar banknotes were generally refused by people in all the counties and towns (except Chengdu and Chongqing) of Sichuan and Xikang①because they were difficult to convert. And in Chongqing, since silver dollar supply is limited, silver dollar banknotes worth above 100 dollars are also redeemed with gold bullion. Besides, since troops in Sichuan are mainly funded by Chongqing where silver dollar banknotes are widely refused, the troops unanimously demand silver dollars, but the Central Bank still gave them gold bullion.‖ Consequently, ―silver dollar price fell‖, ―the exchange rate of silver dollar banknotes against silver dollar rose‖, ―credit of the silver dollar was weakened and people became skeptical of silver dollar banknotes‖ ―banks and money shops made measures for the acceptance and payment of silver dollars and silver dollar banknotes.‖ The areas in Xikang were outside the designated areas for the redemption of silver dollar banknotes. On July 18, 1949Lie Wenhui telegraphed Xukan: ―Since the government did not designate places for redeeming silver dollar banknotes into silver dollars after the issuing of silver dollar banknotes, people in Xikang highly doubted silver dollar banknotes in light of the repeated heavy losses caused by the depreciation of silver dollar, which inevitably led to a refusal of silver dollar banknotes. So, silver dollar banknotes from the Central Bank have not been issued yet.‖ On July 6, 1949, Lu Han from Yunnan Province also telegraphed Xukan(徐堪): ―People have lost confidence in the currency system‖ and ―panic among the people has already been felt even before the release of measures for currency reform, which implies that we are bound to fail in implementing these measure whatever forcible means we try.‖ The Central Bank Kunming Branch also telegraphed Xu Kan: ―Gold coin banknotes had already left an extremely bad impression on the people in Yunnan.‖ During the issuing of gold coin banknotes, Yunnan Branch transferred some 4 million USD to the Central Bank, for which ―Yunnan Branch felt regret, in that it will surely meet with opposition from both the Central Bank and the people now if it tries to issue silver dollar banknotes that can‘t be converted in Kunming.‖ On August 2, 1949, Ma Bufang(马步芳) from northwest China reported an emergency in his telegraph to Xukan: ―Gold market in Lanzhou is too small and silver dollars have been exhausted. We can‘t dump silver dollar banknotes and they have practically become rubbish. ‖ Due to the fiscal deficit in KMT-controlled areas, the volume of silver dollar banknotes ①

Xikang, founded in 1928, referred to today‘s western Sichuan Province and Tibetan Autonomous Region. After the founding of the PRC, the two regions were classified into Sichuan Province and Tibetan Autonomous Region and the name Xikang was no longer used. -98-

exceeded their supply of silver dollars. As a result, people converted silver dollar banknotes wherever they went and silver dollars were reported to be out of stock everywhere. On November7, 1949, Gu Zhenglun(谷正伦), Mayor of Guizhou Province, telegraphed Finance Minister Guan Jiyu（关吉玉）: ―Conversion at the Central Bank is now in a state of stagnation. One hundred thousand dollars of silver dollars have been transported here, but they were of no help. I am afraid this might trigger a run on bank and lead to grave consequences. The situation is really urgent and the future is truly worrisome.‖ On November 22, 1949, Bai Chongxi（白崇禧） from Guangxi wrote to Guan Jiyu, pointing out that the Central Bank of Guangxi had only some 70,000 dollars‘ worth of gold and silver available. During the last month, only 300,000 silver dollars were delivered here while the expenses of Guangxi government reached about 3 million silver dollars. Thus, Bai Chongxi asked for 2 million silver dollars per month to meet the demand for conversion. He also pointed out that since silver dollar banknotes were only convertible in Guilin, they could not be used in Liuzhou, Nanning and elsewhere. The resistance against silver dollar banknotes eventually gave rise to the absolute collapse of silver dollar banknotes. People across the country, including the KMT army, refused silver dollar banknotes. Lu Chongyi（鲁崇义）, Commander of the 30th Army said in a telegraph: ―In our stations (namely, Mianzhu, Deyang and Luo River areas of Sichuan), silver dollar banknotes are absolutely refused; bigger stores tear silver dollar banknotes on spot immediately after the transaction.‖ On November 23, 1949, the Ministry of Finance reported to the Executive Council: ―We hear from time to time that silver dollar banknotes were refused in some places and by troops.‖ Gu Zhenglun admitted in his telegraph to the Executive Council: ―The collapse of the credit of silver dollar banknotes‖ has led to ―the stagnation of market‖ and ―the people are panicky and anxious from day to night.‖―The ruin of the credit of silver dollar banknotes was also one cause of our severe military setbacks.‖ On October 29, 1949, the Ministry of Finance admitted: ―In Guangdong and its neighboring areas, HKD is still the medium of exchange and goods are priced in terms of HKD.‖ The absolute collapse of silver dollar banknotes in only a few months‘ time made it the shortest-lived currency ever issued by the National Government. The issuance of silver dollar banknotes showed that as long as the masses saw through the inflationary scheme of the national monopoly capitalism and took resolute action, they could timely stop inflation, protect themselves from the subsequent exploitation and reduce the banknotes issued by the national monopoly capitalism into worthless paper. The collapse of silver dollar banknotes pronounced the demise of the inflationary policy implemented by the National Government on the mainland.

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4.6 Credit Inflation and Currency Inflation While carrying out currency inflation, the National Government also implemented credit inflation to develop national monopoly capitalism. During the Japanese War, national monopoly capitalism developed rapidly. By the end of 1925, the national industrial capital reached 250,844,098 dollars, with 30,197,729 dollars or over 12% of the total from state-run enterprises. In 1941, in KMT-ruled areas, ―industrial capital amounted to 1.6 billion dollars, accounting for 50% of the total, with 800 million dollars from state-run enterprises, 600 million dollars from sectors affiliated to the Resource Committee and the other 200 million dollars from state-run enterprises in provinces outside KMT-controlled areas.‖ Munitions industrial capital was not yet included. Capital from national monopoly capitalism came from financial allocations and bank investments and loans, with the latter accounting for a larger proportion. This was because in times of inflation when currency depreciated rapidly, low-interest bank loans were as good as subsidies. Therefore, except founding funds which came from the government, all the operational funds of the sectors affiliated to the Resource Committee had been provided by national banks and offices every year. However, the goal of the national banks and offices, namely, the Central Bank, the Bank of China, the Bank of Communications and the Farmers‘ Bank of China (known as the Four Major Banks) as well as the Central Trust of China (CTOC) and the Postal Remittance and Savings Office, was to support the Chinese monopoly capitalist industries. For instance, in 1943, the Four Major Banks offered a loan of 500 million dollars to the iron and steel industry, with 270 million dollars going to the Resource Committee, 180 million dollars to Kong Xiangxi‘s China Investments Holdings Limited and only 50 million dollars to private industries. This breakdown demonstrates that 90% of the loans from national banks were used to develop national monopoly capitalism. To develop the national monopoly capitalism, the Four Major Banks, the CTOC and the Postal Remittance and Savings Office (hereinafter, referred to as the Four Major Banks and Two Offices) introduced credit inflation and offered far more bank loans than their total deposits. According to Outlines of Measures for Reinforcing Finance issued by the National Government in September 1939, ―short-term commercial bills, commodity warehouse receipts and industrial investments (namely, stocks) can also act as cash reserves of legal tender.‖ Therefore, national banks‘ investments and loans to the national monopoly capitalist industry could also act as cash reserves to expand the issuing of legal tender. By the end of 1945, the Four Major Banks and Two Offices made a loan of 1.4131 trillion dollars, exceeding the deposit of 618.8 billion dollars by 794.3 billion dollars, which also led to the acceleration of legal tender inflation. -100-

The hyperinflation of legal tender and its subsequent collapse was a result of the National Government further developing national monopoly capitalism with the help of the American imperialists. The accelerated growth of national monopoly capitalism required a greater input of financial investments and bank loans, which fostered the development of legal tender inflation. After the war with Japan, the National Government took over all the industries in the enemy-occupied areas. First, the Resource Committee took over major factories and ran them separately in a Trust style. Northern Hebei Electric Power Company monopolized the electricity of Tianjin, Tangshan and Zhangjiakou and took over a total of seven electric power plants including plants in Qingdao, South Hubei, Guangzhou and Hainan. Coal mines like Jingxing Coal Mine（井陉煤矿）, Zibo Coal Mine（淄博煤矿）, Datong Coal Mine (大同煤矿)were also taken over. China National Petroleum Corporation (CNPC) monopolized the petroleum industry in north east China, Taiwan and Shanghai. As for iron and steel, Daye Iron and Steel Company（大冶钢铁厂） and Hanyeping Company（汉冶萍公司） and factories in Tianjin, Tangshan, Qingdao and Shijingshan were taken over. The Central Bureau of Mines took over the iron mine and copper mine in Jiangsu, Zhejiang and Anhui. Central Machinery Company was set up to take over machinery industries in Shanghai and Tianjin and Central Electrical Equipment Factory took over the electrical utility industry. In addition, Tianjin Chemical Industrial Company, North China Cement Company, Tianjin Paper-making Company and Yaohua Glass Company of Tianjin were established. The Resource Committee also took over electric power companies, sugar companies, machinery and shipbuilding companies, paper companies, soda companies, fertilizer companies, cement companies, gold and copper plants, aluminum companies and oil refinery companies in Taiwan. In so doing, the Resource Committee which only had 78 factories in 1941 had 128 in 1945 and 291 in 1947. Apart from the major industries monopolized by the Resource Committee, the National Government also seized major monopolized companies like China Textile Construction Company, China Textile Machinery Company, China Sericulture Industry Company, China Plant Oil Factory, Chinese Aquatic Products Company and China Tobacco Company. National monopoly capitalism not only monopolized major industries which were state-run, but also enormously expanded its private-run industries such as Song Ziwen‘s Nanyang Brothers Tobacco Company, Yangtze Electric Company, Huainan Mine Road Company and Fu Chung Corp., Kong Xiangxi‘s Huafu Company and C-C‘s① Yangtzi Company and Qilu Company. These industries required a large sum of working capital which mainly came from budget allocating or bank lending. For instance, China National Petroleum Corporation (CNPC) increased its capital by 5 billion dollars; Nanyang ①

C-C referred to Chen Guofu and Chen Lifu, head of the C-C Clique. -101-

Brothers Tobacco Company borrowed 3 billion dollars from banks by the end of 1946; China Textile Construction Company with 2 million spindles concluded an overdraft contract worth 20 billion dollars with the Central Bank shortly after its establishment; Qilu Company run by C-C Clique borrowed a total of 36 billion dollars from the Joint Office of Four Major Banks and paid back 20 billion dollars, with 16 billion to follow. In other words, most of the working capital of Qilu Company was raised through currency inflation. During this period, ordinary loan balances of the Four Major Banks and Two Offices also grew rapidly: 1.4131 trillion dollars in 1945, 7.9921 trillion dollars in 1946, 51.1950 trillion dollars in 1947 and 373.877 trillion dollars in June 1948. The statistics on the loans of the Four Major Banks and Two Offices in 1946 showed that the development of credit inflation had already been a major cause of legal tender inflation. In December 1946, the volume of legal tender issued reached 3.7261 trillion dollars and the ordinary loan balances of the Four Banks and Two Offices was more than double this figure and reached 7.96 trillion dollars. According to the rule that short-term business bills and industrial investments, namely, stocks, can serve as cash reserves of legal tender, lending money and making investments in this way fostered legal tender inflation. The Four Major Banks and Two Offices and the Central Cooperative Gold Treasury were the center of national monopoly capitalism. Under the control of Chiang Kai-shek,the Central Bank was the preserve of Kong Xiangxi‘s Clique, the Bank of China of Song Ziwen‘s Clique, the Bank of Communications of Chen Lifu（陈 立夫）and Chen Guofu(陈果夫), the Farmers‘ Bank of China of the Central Trust Office of China and the Central Cooperative Gold Treasury. It was through these banks that the National Government invested in industry and developed Chinese monopoly capitalism and these banks all enjoyed the privilege of practice currency inflation and credit inflation. Apart from the Central Bank which had the direct right of issuing banknotes and keeping government deposits, the other three major banks and two offices also had the indirect right of conducting currency inflation and credit inflation by ―appropriating cash from the Central Bank‖ and accepting government deposits. The Four Major Banks and Two Offices, then, had the power to influence credit inflation to develop national monopoly capitalism. It was pointed out at that time that the volume of loans offered by the Central Bank reached 3.7261 trillion dollars and the total volume of loans offered by the Four Major Banks and Two Offices reached 7.96 trillion dollars. This led them to be known as two bloodsuckers. Chinese monopoly capitalist industries in Old China were decayed and lifeless. They had to rely on fiscal investment and bank loans to survive and could not add to the national fiscal revenue. Therefore, the development of national monopoly capitalism inevitably resulted in the expansion of fiscal deficit and intensification of currency inflation. During the Japanese War, the

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development of national monopoly capitalism had already fostered currency inflation and credit inflation. After the National Government waged the Civil War, the national monopoly capitalism frantically conducted expansive campaigns, adding oil to the fuel in the development of currency inflation and credit inflation. For instance, to purchase gold notes in large quantities, the C-C Clique, unwilling to use its own cash (for this could only preserve the value of currency rather than create profits), left no stone unturned to borrow money from the Central Bank. They incited Song Ziwen to offer massive loans, reputed as ―industrial loans‖ that took factories and machinery as collateral. They also ordered the headquarters of the Four Major Banks in Shanghai and other 12 cities outside Shanghai to offer such loans simultaneously. This move was, in fact, aimed at purchasing gold and USD. Some factories that had received the so-called large denominated industrial loan checks in the morning rushed to the market to buy gold dumped by the Central Bank before the checks had been exchanged in the Exchange House. It was reported that industrial loan checks were found among the property of the Central Bank the day it dumped its gold. Only a few days away the end of the year, Joint Office of the Four Major Banks offered industrial loans of 65 billion dollars, a practically self-ruining move that would surely lead to its own collapse.

4.7 Polices on Foreign Exchange and Gold and Inflation The legal tender system was designed and established with the support of imperialists before the Japanese War. After the outbreak of the War, it again attempted to maintain the value of legal tender by relying on the loans offered by the imperialists. From the outbreak of the War to February 1942, America made a loan of US$625 million and the Britain offered a loan of 88 million pounds to China as ―Foreign Exchange Funds in Support of China‖, and ―Legal Tender Stabilization Fund‖. On this, Financial Review run by Kong Xiangxi commented: ―These loans contributed to the stability of legal tender either directly or indirectly. With the support of the imperialists and under the cover of selling foreign exchange and gold, the National Government carried out inflationary policies.‖ The National Government believed that the key to the maintenance of the value of legal tender lied in the ―unrestricted buying and selling of foreign exchange.‖ Therefore, it began to transport silver dollars, silver bullion and gold accumulated by the Chinese people over hundreds of years to America in exchange of foreign exchange even before the outbreak of the Japanese War. After the Japanese War broke out, Xi Demao(席德愗) said in his secret letter to Kong Xiangxi on August 2, 1937: ―From July 13 to July 31, 3,885,000 UKP and 3,884,000 USD were dumped because of the War.‖ ―Shanghai Times, Business and Financial Newspaper favored the National -103-

Government‘s measures that pegged the exchange rate at a low level and met the demands of all sides infinitely so as to champion the policy you announced on November 3, 1935.‖ It was recorded by Zou Zongyi(邹宗伊) that ―from the outbreak of Lugou Bridge Incident to the eruption of Songhu Battle① on August 13, the volume of foreign exchange sold by the government grew by 200,000 pounds every day and during this short period of 36 days alone, over 7.5 million pounds, or 124 million dollars legal tender were sold.‖ On March 10, 1938, the Joint Reserve Bank of Central China was established in an attempt to exchange legal tender with new legal tender and arbitrage foreign exchange. To this end, the National Government issued Measures for the Application for Foreign Exchange Purchase and its Examination and black markets of foreign exchange subsequently emerged. Within six months, the price of legal tender in terms of GBP (British pound) dropped from 1shilling 2.5 pence per dollar to about 8 pence per dollar. Therefore, the National Government ordered the Bank of China to intervene and maintain the value of legal tender. In March 1939, relying on bank loans, the National Government set up the Exchange Stabilization Funds of 10 million GBP to buy and sell foreign exchange in black markets so as to maintain the black market price level of legal tender at 8.25 pence per dollar. In addition, the Japanese imperialists went further to establish Huaxing Bank in Central China, which issued banknotes, forcibly collected and exchanged legal tender and arbitraged foreign exchange on a larger scale. But shortly after the suspension of foreign exchange sales in early June1939, when the price of legal tender in black markets dropped to 6.5 pence per dollar, the National Government intervened in to maintain the value of legal tender. In December 1940, the black market price of legal tender fell to around 3pence per dollar. In April 1941, with money borrowed from Britain and America, the National Government established a stabilization fund worth 110 million dollars between China, America and Britain and continued dumping foreign exchange. Nevertheless, this measure could neither prevent the Japanese-backed regime from arbitraging foreign exchange of China nor restrict KMT dignitaries to transfer their capital abroad. Instead, it impaired the legitimate demands for foreign exchange from industrialists and businessmen who therefore resorted to black markets. The Japanese-backed regime also tried every means possible to extort massive amounts of legal tender in the occupied areas and arbitrage foreign exchange in black markets. These factors combined to drive up the price of foreign exchange in black markets. In April 1938, the black market price of one USD in terms of legal tender was3.75 dollars, exceeding the official price by over 0.42dollars. By this time, foreign currency exchanged with Songhu Battle (Aug.13, 1937), also known as ―8.13 Battle‖ was a battled launched by the Chinese people to resist the Japanese troops at the early stage of the anti-Japanese War. ①

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rice before the War was used up. In October 1938, the Bank of China allocated one million GBP to secretly maintain the price of legal tender in terms of foreign currency, but with inflation having already emerged and an increasing number of people purchasing foreign exchange, black market prices of foreign exchange kept rising. In March 1939, with 5 million GBP offered by the Bank of China and the Bank of Communications and 5 million GBP lent by HSBC and Standard Chartered Bank, the National Government and Britain co-founded the Committee of Foreign Exchange Stabilization Funds between China and Britain to go on maintaining the price of legal tender in terms of foreign currency. At that time, the price of legal tender in terms of GBP had dropped from 14.5 pence per dollar to 8.5pence per dollar. So, the goal was to maintain the price of legal tender in terms of foreign currency at 8.5pence per dollar rather than the fixed price of 14.5 pence per dollar, which it had been in 1935. In April 1940, with US$20 million from the Bank of China, 5 million GBP from Britain and 50 million USD from America, the National Government established the Committee of Foreign Exchange Stabilization Fund between China, Britain and America to continue supplying foreign exchange ―at the natural price level‖ rather than 8.5pence per dollar. During this period, Hong Kong was the center of foreign exchange in China. After the outbreak of the Japanese War, the General Office of the Bureaucratic Capital Bank was moved from Shanghai to Hong Kong and some major private banks also reinforced their presence in Hong Kong. Moreover, British and American members of the Committee of Foreign Exchange Stabilization Fund also lived in Hong Kong at this time. Therefore, the volume of imports and exports to and from Hong Kong grew at an astonishing speed and the foreign exchange market was very prosperous, making Hong Kong the center of China‘s foreign exchange transactions. As the financial capital, Hong Kong controlled branch and subsidiary banks in the occupied areas and coordinated with branch and subsidiary banks in the National Government-controlled areas thus forming a financial triangle with Shanghai and Chongqing during the wartime with Hong Kong acting as the hub for the inflow and outflow of foreign exchange. This financial triangle lasted until the outbreak of the Pacific War on December 8, 1941, when the Japanese troops occupied Hong Kong and Shanghai concessions. In 1942, the center of the foreign exchange market began to move to the Chinese mainland. In July that year, the National Government borrowed US$500 million from America, decoupled legal tender from GBP and pegged legal tender to USD only, with the exchange rate of legal tender against USD being 20:1. Since the Bank of China had already conducted transactions at the legal tender/USD exchange rate of 20:1, fixing the exchange rate this time was only recognizing the existing fact. From then on, the exchange rate of legal tender against USD at 20:1 remained unchanged until China‘s victory in the war with-Japan.

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However, the black market price of foreign exchange kept rising, never showing a sign of dropping. In Chongqing, the black market price of one USD in terms of legal tender rose to 58 dollars in June 1943, 192 dollars in June 1944, 542 dollars in December, 1,000 dollars in June 1945, and the price continued to rise. The wide gap between the black market price and the official price of foreign exchange created an opportunity for KMT dignitaries as well as financial capitalists to transfer their capital abroad and make large fortunes from the price difference. Through buying foreign exchange at the official price and selling it at the black market price, they could reap huge profits. The price of foreign exchange experienced one fall after the Japanese War, but it began to rise with more momentum in early 1946. Thus, in February of that year, the National Government announced the abolishment of the original official fixed price of one USD to 20 dollars of legal tender 20 dollars and replaced it with 2,020 dollars, due to take effect from March 4. At the same time, the National Government established a foreign exchange fund of 500 million dollars and permitted free and open trade of foreign exchange in an attempt to stabilize the price of legal tender. However, the foreign exchange fund soon got exhausted and the black markets of foreign exchange reemerged. In February 1947, the National Government raised the price of one USD in terms of legal tender from 2,020 dollars to 12,000dollars, but black markets of foreign exchange still existed. During the less than one year since the free trade of foreign exchange, over 400 million USD, 17 million GBP and 27 million HKD were put to use. From August 19, 1947, the exchange rate of USD against legal tender fell into two categories: official exchange rate and market exchange rate officially set by the Central Bank. While the former stood at 1:120,000, the latter was three times higher, 1:39,000. Despite the rise in the official USD/legal tender exchange rate, transactions of foreign exchange in black markets remained active. In Shanghai, the black market price of one USD in terms of legal tender was over 50,000dollars in September that year, which rose to over 400,000 dollars in March 1948 and 1000,000 dollars in August 1948. Since the value of legal tender by this time was too small to be measured, USD and HKD replaced it to become the medium of exchange in most business transactions. At that time, the National Government attempted to stabilize the value of legal tender with the above-mentioned loans of US$500 million, with 100 million designated as funds for the issuing of USD Economical and National Savings Certificates and 100 million as funds for the issuing of Allied Victory USD Government Loans. Both savings certificates and government bonds were exchanged and purchased at the USD/legal tender exchange rate 1:20. A bulk of USD saving certificates was purchased by billionaires, banks and money shops and some were purchased by medium- and high-ranked clerks of the Four Major Banks and Two Offices. Buyers

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of savings certificates could exchange them for USD when the certificates were at maturity and made huge profits. As for USD government bonds, again, dignitaries and financiers had the first access to them when they were issued, with a portion distributed by Kong Xiangxi among his circle. The uneven distribution of the bonds highlighted corruption at high levels, which stirred public clamor against corruption. Later, when government bonds were at maturity, the authority had to cash them according to the listed USD/legal tender exchange rate. From March 1946 to July 1946, the prices of gold and USD in terms of legal tender rose relatively slowly: the price of one USD rose from 2,022dollars to 2,519dollars, a rise of some 25%; the price of gold rose from 1.59million dollars per liang to 1.93million dollars per liang, a rise of about 21%. However, due to the rapid growth of the volume of legal tender issued, the prices of goods during the same time were still on the rise. The price of rice, in particular, soared from 27,000 dollars per dan to 57,000 dollars per dan, up by some 111%. Gold and foreign exchange of the National Government were consumed so quickly that by November 1946, US$455 million were used. In such a situation, the National Government no longer dared to dump gold and foreign exchange, which accelerated the rise in the black market price of gold and foreign exchange. In August 1946, the price of one USD was 2,909 dollars and in February 1947, 12,657 dollars, up by over three times. Similar to the price of goods, the gold price during this period doubled and rose from 2.03 million dollars per liang to 6.11 million dollars per liang. Opening the foreign exchange market was, in essence, opening the Chinese market to American imperialism in the hope of supporting legal tender and the Civil War with cheap and redundant American goods. The consequence was America gained unprecedentedly huge profits. In Shanghai, the prices of American imports in the Chinese market were only 1/3 of or even tens of times cheaper than those of their Chinese counterparts. For instance, an American bulb which cost one USD was sold for only 200 dollars in Shanghai while a homemade Chinese bulb cost over 400 dollars; an American turning lathe cost 200,000 dollars while a homemade Chinese turning lathe cost 1.2 million dollars; American coal cost 70,000 dollars per ton while Chinese coal cost 130,000 dollars per ton. Even the farm produce market was swamped with American products like Citigroup orange and KLIM milk powder. The opening of the foreign exchange market and the dumping of American goods into the Chinese market dealt a deadly blow to the Chinese bourgeoisie. At the time it was said, ―Foreign goods flood into the Chinese market and are paid according to the legal tender/USD exchange rate. Since domestic industry is inferior to foreign industry, the exchange rate is to the advantage of foreign product and some foreign goods are smuggled products that are much cheaper, it is no surprise to see foreign goods swarm to China. As a result, domestic products surrounded by foreign products are reduced to an unfavorable position and we hear stores shut down from time to time.‖

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The massive dumping of American goods into China helped America to ease its economic crisis which had resulted from overproduction on one hand, while brought unprecedentedly severe economic crisis to China on the other. After the Japanese War, due to the monopoly of bureaucratic capitalists, the national capitalist commerce and industry did not receive compensation for machines and equipment destroyed by the Japanese-back puppet regime nor did it receive any working capital as support. On top of these problems, the national capitalist commerce and industry at this time lost their domestic market. These factors combined to lead to a severe decline in agricultural and industrial production, high unemployment and a sharp reduction in the quantity of commodities in the market, which accelerated the price surge. Since the gold trade policy① of the National Government did not regulate the conversion of gold at a fixed price but ruled the selling of gold at a high price, it fermented currency depreciation rather than inhibit inflation. The National Government took concrete measures to sell gold based on market demands: ―It was originally up to the Farmers‘ Bank of China and the National Commodity Bank of China to conduct gold transaction under the commission of the Central Bank. But now it is secretly conducted by Gu Yiqun from the Farmers‘ Bank of China and Song Ziliang from the National Commodity Bank of China at the command of Kong Xiangxi. No relevant official document was released and the selling price was randomly set by the Central Bank.‖ Gold transactions were conducted by the Farmers‘ Bank of China and the National Commodity Bank of China with the Central Bank manipulating behind the scenes and only a few major cities were allowed to sell gold deposits. This showed that according to the policy on gold sales introduced by the National Government, gold was neither sold at a fixed price nor without limits. In other words, the National Government had no intention to inhibit inflation. In order to establish an open gold speculation market and a commodity Exchange House, the National Government took the first step to lift the ban on gold trade. Before the Japanese War, the National Government forbade gold from being transported abroad and after the War broke out, it went further to outlaw the gold trade. On June 4, 1943, the National Government announced to provisionally lift the ban on the gold trade and permit its free trade. Afterwards, although there was no formal speculative gold market, a gold speculation market across southwest China and northwest China came into being automatically with the approval and encouragement of the National Government. Chongqing gold market, center of the national gold speculation market, was established by the Chongqing Association of Banks. Xi‘an Clique, Kunming Clique, Qianlai Bank of Shanghai, Sichuan Bank, silverware shops and commodity cliques were its major clients. Xi‘an Clique was a ①

Gold trade policy here referred to the free trade of gold policy introduced by the National Government after the gold market was opened. -108-

big client, who usually bought gold by the brick and then transported it to Xi‘an Clique headed by Kong Xiangxi‘s Yuhua Bank. Kunming Clique was also a big client with relatively smaller capital, who would put its gold on public sale. Qianchuan Bank and Sichuan Bank also purchased gold by the brick (a brick weighed 10 liang). Silverware stores also bought gold in bricks. They made accessories with the gold and sold them to the public. Merchants of dyestuff and general commodities as well as commercial groups purchased gold too. Businessmen from Wanxian, Fengjie, Fuling, Xufu and Luzhou came to Chongqing not to purchase goods, but to sell gold. Together, the National Government which profited from the gold trade, farmers that sold gold, the National Commodity Bank of China and the Four Major Banks and Two Offices that opened gold deposits, the above-mentioned cliques and silverware stores constituted a diversified and prosperous gold market. This speculative gold market was, in essence, the commodity exchange house for gold transaction and speculation in futures, long-anticipated by Kong Xiangxi. Not only the silverware industry, but also the finance industry took an active part in it, which was in accordance with the intention of Kong Xiangxi ―to allow public and private banks to sell gold.‖ The existence of such a grandiose semi-open gold market across the country was helpful for the bureaucratic capitalists to constantly drive up gold prices and absorb more legal tender. Generalissimo Chiang Kai-shek was a devotee of gold price rises. On November 16, 1944, he gave an order to adjust the gold price and raised it from 17,500 dollars per liang to 20,000dollars per liang. In March 1945, the President of the Executive Council Song Ziwen announced: ―with the approval of Generalissimo Chiang Kai-shek, from March 29, gold price will be changed to 35,000 dollars per liang.‖ According to the decree issued by Chiang Kai-shek on June 8, 1945: ―From June 8, 1945, the gold price will be changed to 50,000dollars per liang.‖ There existed a mutually-reinforcing correlation between the official gold price and the black market price of gold as pointed out by the Business Bureau of the Central Bank in its telegram to Xi Demao on April 10, 1945: ―After the gold price was raised on March 28, acute and notable changes took place in the black market: the gold price was 63,000 dollars per liang on April 7, 73,000 dollars per liang yesterday and 78,600dollars per liang today, the highest price being 82,000dollars per liang. And now, gold price keeps rising.‖ What the National Government intended to do was to shift or ease the pressure of commodity speculation through gold speculation. However, as gold became a financial commodity, speculation led to a rise in prices. ―Once the official gold price was raised, prices of goods would fluctuate accordingly, leaving a situation where the gold price and the price of goods rivaled against each other. Moreover, since deposits in legal tender were allowed to be converted into gold deposits from September 15, 1944, once gold price was raised, the financial market would be

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contained and customers would rush to withdraw money. As a result, bank deposits shrank and black interest rates rose.‖ Chinese bureaucratic capitalists were the only beneficiary of the gold trade policy. Gold was sold in cast bullion at that time. And one gold bullion usually weighed over 10 liang, with the largest gold brick weighing over 400 ounces. The high price of gold kept it out of reach for the ordinary people; those who bought from dozens to hundreds of gold bricks were mostly bureaucratic bourgeoisie. Kong Xiangxi, for instance, was very active in gold trade and professed himself as a champion of the gold trade policy. Instead of hoarding gold as wealth, the bourgeoisie used gold as a tool to conduct speculation and make profits. Through purchasing gold at a lower price and selling it at a higher price, they reaped huge profits. Since the official price of gold was frequently raised, the market price of gold rose many times, making gold speculation fairly profitable. Once the official price of gold was raised, the market price of gold would soar, so buyers of gold before the price surge would profit a great deal from selling their gold after the price increase. As both the price setters of gold and speculators in the gold market, the bureaucratic bourgeoisie could drive up the black market price of gold through raising the official price of gold and ensure their profits from gold speculation. In one prominent case, the gold price soared from 20,000dollars per liang on March 28 to 35,000dollars per liang on March 29, 1945. Since a particularly large quantity of gold was sold on March 28, buyers would make a 75% profit if they sold their gold on March 29. Sales of gold that day reached 34,000 liang, an increase of 10,000 liang compared with other days, including 21,447 liang from Chongqing and 10,000 liang from other cities. Among them, 10,000 liang of gold was purchased after bank office hour by individuals who submitted a transfer application form or by people in groups who anonymously drew a promissory note or bill. In face of the accusation from the masses, Procurators of the National Government were forced to single out a few officials and people including the General Director of the Ministry of Finance and friends of the Director of the Business Bureau of the Central Bank were investigated. From this event, we can see that the National Government was incredibly decadent at that time. Nevertheless, this did not in the least impair the enthusiasm of the Chinese bureaucratic bourgeoisie for speculation in gold. Since they had the final say in the price of gold, they could take their time to purchase massive amounts of gold several days before approving a price rise. They became furtive ―legal‖ embezzlers of gold whose power was so strong that their underlings at the Procurators office dared not investigate them, and the progressive media had difficulty in obtaining any proof of their involvement in manipulating the market. In the notorious gold case mentioned above, only a few lackeys of bureaucratic bourgeoisie who purchased gold a few hours prior to the price rise were sent for trial, and they were low-level clerks of the Four Major Banks

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and Two Offices who purchased only one or two liang of gold. The petty bourgeoisie suffered losses repeatedly during the implementation of gold trade policy. Deceived by the National Government, they purchased gold futures or gold deposits when they were unable to buy gold products. In this way, they attempted to store gold and preserve its value and protect themselves from the exploitation of currency depreciation. However, the National Government delayed the payment of these gold futures or deposits and on July 31, 1945, the Supreme National Defense Council passed a Decision based on the proposal of Song Ziwen, announcing that ―In order to fund the offensive military attacks, we will take 40% of the gold deposits as donations‖, depriving people of a fortune worth 150 billion dollars in legal tender. According to Finance Yearbook, 40% of gold was donated to the National Government and by the end of 1946 ―donations totaled 820,468 liang and 8 qian (a monetary unit)‖and 80% of the gold depositors were small savers with savings of less than 5 liang of gold. In April 1945, the gold price was 35,000dollars and at maturity, the official price ought to have been 170,000dollars which, however, dropped to 80,000 dollars. With 40% of their gold deposits taken by the government, savers had only 48,000 dollars left and, if the daily interest rate was taken into consideration, they suffered a great loss. This fully revealed the fact that the gold trade policy was not aimed at preserving the value of currency for the public and easing domestic class conflicts under inflation, on the contrary, it was aimed at cheating and deceiving the masses amidst the financial turmoil. Chinese citizens purchased gold at a price twice that of the world gold price, namely, 60 or 70 dollars per liang. Therefore, while the Chinese bourgeoisie made huge profits in the gold trade, the Chinese people suffered tremendous losses. The result of the implementation of the gold trade policy demonstrated that Chiang Kai-shek‘s insistence that ―inflation is nothing to be worried about‖ was nothing but a lie. For both the governance of the National Government and its legal tender system, dumping gold was only a desperate measure which could barely prolong the life of the dying National Government. According to the report sent to the Executive Council by the Ministry of Finance on June 29, 1945, ―Ever since the implementation of the gold trade policy, we have up until now recalled over 80 billion dollars of legal tender, which turned out to be very effective in curbing inflation and regulating currency supply.‖But, as the KMT ruling class continued implementing an anti-communism and anti-people policy, developing the national monopoly capitalism and collaborating with American imperialism to send massive military forces to China, its military and administrative spending kept rising and the hyperinflation of legal tender kept developing. This showed that the assistance and large quantities of gold offered by the American imperialists to the National Government was of no use in saving it from the hyperinflation of legal tender.

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During the first year of the People‘s Liberation War, from July 1946 to June 1947, the PLA foiled several offensive attacks by Chiang Kai-shek and forced him to adopt a defensive military strategy. During the first three months of the second year of the Liberation War, from July 1947 to September 1947, the PLA began to launch national frontal attacks against Chiang Kai-shek and frustrated his scheme to shift the battlefield to the liberation zones with a view to completely sabotaging liberation zones. By this time, the Kuomintang-ruled areas had replaced the liberation zones as major battlefields and Chiang Kai-shek‘s political lie had been laid bare, which shook the credit of legal tender to its foundations. Chiang Kai-shek‘s failure in military matters and politics also resulted in an insurmountable financial and economic crisis. His intention to hide the inflation of legal tender by relying on the assistance from America and by recalling legal tender with gold and foreign exchange did not work due to the quick exhaustion of gold and foreign exchange reserves resulting from the huge military expense and rapid increase in the volume of banknotes issued. By February 1947, gold reserves decreased from 6 million liang to 2 million liang; by June 30, 1947, foreign exchange assets in the Central Bank shrunk to US$327 million and industries owned by the Japanese-back puppet regime were sold. By this time, Chiang Kai-shek had already been unable to recall legal tender and the financial and economic crisis was aggravating. It was in such a situation where military and political crises were intertwined with financial and economic crises that the Gold Rush Case① of February 1947erupted. In early 1947, against the backdrop of the Xuzhou crisis on KMT‘s part and the issuing of 10,000dollars legal tender, massive amounts of hot money flew into Shanghai from northeast China, Beiping and Tianjin and Tianjin-Pukou to buy gold and foreign exchange, triggering a wild rise in the price of gold and foreign exchange. During the short period of one month from January 6, 1947 to February 10, 1947, the gold price rose by nearly two fold and price of USD also rose by two fold. Confronted with such a price hike, the Central Bank only dumped 79,382 gold bullion from January 4 to February 10 and gold bullion dumped between early February and February 10 was much lower. On February 4, only 1,550 gold bullion reserves were dumped under Fixed Quota Dumping ② and Arbitrary Dumping③ had been stopped. Consequently, the gold price experienced a general rise from February 5 to February 8.On February 7, the Central Bank dumped only 1,344 gold bullion ① The Gold Rush Case was a notorious case in China‘s history. It was caused by the frantic dumping of gold after the gold market opened. In February 1947, due to the severe shortage of gold, gold and silver shops stopped selling gold, so people rushed to purchase gold, thus triggering the Gold Rush, which was known as ―Gold Rush Case‖. ② Fixed Quota Dumping is way introduced by Song Ziwen to dump gold. The Central Bank sets gold price to the market price of gold and after members of gold and silver Shops in Shanghai submitted the figure of gold purchase applicants to the Central Bank, the Central Bank designate certain institutions to allocate a certain sum of gold for sale. ③ Arbitrary Dumping was another way to dump gold, also introduced by Song Ziwen. The Central Bank designated certain gold or silver shops to secretly dump gold anytime to meet market demands for gold.

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and on February 8, only 570. On February 9, it openly announced the end of Fixed Quota Dumping, triggering the Gold Rush Case of February 10. The gold price rose to 9.6 million dollars per liang, a rise of several million in a day, leading to a frantic rise in price in Shanghai. For instance, price of rice soared from 100,000 dollars per dan to 160,000 dollars per dan. Therefore, Chief of the Executive Council Song Ziwen asked for emergency help from America on February 6, 1947, admitting the beginning of the collapse of legal tender and the economy. In face of the military and political crisis intertwined with financial and economic crisis, the National Government took more desperate measures and released the Act of Emergent Economic Measures on February 16, 1947, which ruled to: ―forbid the gold trade and crack down on gold speculation‖, ―forbid the circulation of foreign currency in China‖ and ―freeze wages‖ and adopted the Checked Price and Bargaining Policy. In an attempt to curb market prices, the Central Bank pegged the list price of gold and one USD in terms of legal tender at a low level of 4.8 million dollars per liang and 11,640 dollars respectively. But these measures taken by the National Government soon fell through; less than one month after the release of the Act of Emergent Economic Measures, black markets of gold and foreign exchange revived and saw a vibrant price rise. The practice of freezing wages was forced to be abandoned due to the resistance of the working class and the Checked Price and Bargaining Policy also became unenforceable. Military and political failure together with fiscal and financial bankruptcy accelerated the collapse of legal tender. On June 23, 1947, Financial Daily admitted that ―For safety reasons, capital holders in northeast China and Central China transferred all their capital from northeast China to North China and then to Shanghai.‖ The circulation area of legal tender increasingly shrunk, with legal tender flowing into Shanghai from northeast China, North China and Central China. Each military failure of the National Government was followed by a plunge in the price of legal tender. Zhang Jia‘ao(张家傲), Governor of the Central Bank, admitted his helplessness when making a report on May 31, 1947. ―When the Act of Emergent Economic Measures took effect from 2 February 17, the volume of legal tender issued was 4.5628 trillion dollars, which rose to 8.1586 trillion dollars by May 28‖, an increase of 78%. The volume of currency notes issued in northeast China was 39.5 billion on February27, which rose to 63.4 billion dollars by May 28, an increase of 60%. By the end of 1947, the volume of legal tender issued rose from 3.7261 trillion dollars to 33.1885 trillion dollars, up by approximately eight times or 29.4624 trillion dollars compared with the prior-year end, and the volume of currency notes issued in northeast China rose from 27.5 billion dollars to 277.3 billion dollars, an increase of over 9 times compared with the previous ear-end, causing the unprecedented and constant price hike of gold, USD and goods between 1947 and 1948.From February 1947 to December 1947, gold prices rose by over 13 times,

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USD by over 11 times and prices of goods rose by over 7 times. During the first eight months of 1948, the gold price rose by over 62 times, USD by 78 times and price of goods by 58 times. Price hikes at such a great speed had never been seen before. Legal tender had begun to collapse since the Gold Rush of February 1947. Financial Daily of March 20, 1948 gave details about the collapse of legal tender in the rural areas along West River and North River. It said after the outbreak of the Gold Rush of February 1947, ―people hastened to put all their banknotes into the market. Seeing that they could not purchase the same amount of goods as they had sold, stores could not but refuse legal tender, as a result of which, people lost faith in legal tender and began to take hard currency like gold, silver as the standard means of exchange.‖ The collapse of legal tender was reflected in the following ways: prices of goods skyrocketed and market prices changed several times a day; people vied to dump legal tender as they no longer trusted it; gold, silver and foreign currency prevailed as a medium of exchange and a unit of price. Despite resorting to violence, the National Government still failed to combat black markets in gold and foreign currency and it was forced to issue government bonds and treasury bills in the name of USD. Meanwhile, the official price of foreign exchange began to follow the black market price of foreign exchange more closely. The National Government also considered issuing treasury bills with grain as the price benchmark and even schemed to issue new currency. All these indicated that the National Government could no longer ignore the fact that legal tender had already gone completely bankrupt and entered a period of collapse.

4.8 Capital Flight and Inflation The inflation of legal tender and Gold coin banknotes manifested themselves in the price rise of goods (internal depreciation of legal tender) and price rise of foreign currency in terms of legal tender (external depreciation of legal tender). Generally, they were at the same pace, but when the international balance of payment was uneven, external depreciation outpaced internal depreciation. During the Japanese War, legal tender experienced a more rapid external depreciation than internal depreciation. Although the National Government once raised the external value of legal tender after waging the anti-revolutionary Civil War, the speed of external depreciation re-overtook that of internal depreciation after a certain period. The policy of the National Government of enhancing the purchasing power of legal tender in foreign trade maintained a ―low USD/legal tender exchange rate‖ against the backdrop of domestic inflation inevitably led to a decline in both the internal and external purchasing power of legal tender. In March 1946, the National Government published the price of one USD in terms of legal tender: 2,020dollars, thus lowering the price of USD to only 600 fold higher than pre-wartime -114-

while prices were over 2,500 fold higher than pre-wartime. The aim was to deliberately curb the rising prices by maintaining the ―low exchange rate of USD/legal tender‖. The National Government believed that as long as it purchased large quantities of American goods with US$900 million reserves, it could curb the rising prices. The aim of America in inciting the National Government to adopt a ―low USD/legal tender exchange rate‖ was to facilitate the dumping and selling of redundant American goods to China so as to alleviate the domestic economic crisis. But, with the rapid expansion of inflation and more legal tender issued, even the massive dumping of American goods into the Chinese market failed to fundamentally curb the rising prices in China and the price index, which was 2,500 fold in March 1946 rose to 4,200 fold in August 1946. Yet, the low USD/legal tender exchange rate of 1:2,020or1:3,035 helped America to realize its dream of monopolizing the Chinese market. Fu Chung Company，Yangtze Company and Jinshan Company purchased USD at a price 600 times higher than pre-wartime, imported American goods and sold them at a price 2,500 times higher than pre-wartime. In so doing, they not only pocketed huge profits and but also facilitated the dumping of American goods into the Chinese market. In this way, they dealt a heavy blow to both domestic and overseas sales of China‘s agricultural and industrial products. Since products were sold to foreign countries at a price 2,500 times higher than pre-wartime and foreign exchanges were sold to the Central Bank at a price only 600 times higher than pre-wartime, over 50% of the capital was lost. In such case, planters or processors of exports like raw silk, bristles, tea leaves, tung oil and casing either narrowed their scale of production or engaged themselves in other business lines, causing great losses to domestic production. Depressing domestic agricultural and industrial production on one hand while expanding imports and reducing exports on the other, the practice of ―low USD/legal tender exchange rate‖ fostered price growth, widened China‘s deficit in international trade, accelerated the consumption of foreign exchanges and led to the exhaustion of gold and foreign exchange in February 1947 and legal tender entered the period of collapse. With domestic prices skyrocketing and the black market price of USD rising at an even greater speed, the external depreciation and internal depreciation of legal tender were brought to be abreast of each other once again. However, in 1947 alone, ―the black market price of foreign exchange rose by over 25 times, which implied that the external depreciation of legal tender actually outpaced the internal depreciation of legal tender.‖ Regarding the depreciation of legal tender and Gold coin banknotes, it should be pointed out that except during the short period of 1946 when the internal depreciation outpaced the internal depreciation of legal tender because of the National Government‘s purposeful appreciation of legal tender in terms of USD, the external depreciation had always outpaced the internal depreciation. The root cause lay in the constant widening of the trade deficit of China with foreign countries

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during the rule of KMT, and the widening of trade deficit was the result of the following factors: first, the imperialists monopoly on some products meant they could dump their redundant products into the Chinese market which hurt Chinese industry; second, imperialist countries imposed unfair exchanges upon China which further expanded the deficit; third, the huge return of imperialists‘ investment and war retributions demanded by the imperialists further increased China‘s foreign exchange spending, caused trade deficit and fostered fiscal deficit; fourth, after the outbreak of the Japanese War, the Chinese bourgeoisie transferred massive foreign exchange abroad, which also expanded the trade deficit and accelerated the external depreciation of legal tender. The Chinese bourgeoisie were backed up by the imperialists. Yan Xishan(阎锡山) had deposits at Japanese banks, Chen Jitang（陈济棠） had deposits at HK banks, warlords in Sichuan had deposits at French banks and national monopoly bourgeoisie had deposits at American banks. While determined to carry out inflationary policies, they were also worried that their domestic deposits might suffer depreciation due to inflation. Therefore, they kept transferring capital abroad after the Japanese War broke out. In the early period of the War, the transfer of China‘s capital abroad was one cause of the depreciation of legal tender.US Weekly in Shanghai remarked on August6, 1939 that ―before the Exchange Stabilization Fund stopped assisting legal tender last week, the wife of a major minister of Chongqing telegraphed a foreign broker in Shanghai, asking him to purchase massive foreign exchange of 40,000 GBP for her.‖Here, the major finance minister referred to is Kong Xiangxi. Wei Temai(魏特迈), an ardent supporter of the National Government was also forced to recognized the severity of capital evasion in his memorandum to Harry S Truman(杜鲁门)by pointing out that ―by July 30, 1947, the volume of personal foreign exchange reached at least 600 million dollars or even as much as 1.5 billion dollars‖. Far Eastern Survey of the Institute of the Pacific Relations pointed out in April 1948 that ―Bureaucratic corruption and undisciplined governance are quite common in China‖ and ―those who have deposits at foreign banks are mainly government officials‖. An official of the US State Department remarked that ―the Chinese people have a deposit of 2 billion dollars in America, with 1 billion dollars belonging to ten major clients.‖ Freedom Biweekly reported that ―Song Ziwen has deposits of US$100 million in American and Swiss banks.‖ Therefore, the external depreciation of legal tender and Gold coin banknotes outpacing the internal depreciation was the inevitable result of American imperialism, bureaucratic capitalism and feudalism in China, the result of the National Government‘s reliance on American imperialists and the result of the Chinese bureaucratic bourgeoisie‘s longstanding practice of capital flight from China.

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4.9 The Redistribution of National Income in the Process of Inflation Although the nominal income of the working class was on the rise, during inflation when the rise in wage lagged behind that the rise in prices, the real-terms wage of the working class shrank. According to statistics provided by the Department of Agricultural Economy at the University of Nanking and the Institute of Economics at Nankai University, around the year 1943, the real wage of workers and non-factory workers in Chongqing fell to 69% and 74%that of the pre-wartime respectively, urban workers in Chengdu‘s wage fell to 87% and agricultural workers in Sichuan to 58%. By and large, during the Japanese War, the real wage of workers decreased to 20% that of pre-wartime and during the War of Liberation, further decreased to 15% or so. Take workers of Yong‘an Cotton Mill of Shanghai one as example. In 1936, their per capita monthly monetary income could buy 1.48 dan of rice, but it could only buy 1.05dan in 1939 and 0.32dan in 1949. This meant that workers could only afford porridge or soup and were unable to raise their family. When Gold coin banknotes were on the verge of collapse, prices rose several times a day. For instance, a cigarette factory worker in Shanghai might think that his wage could buy 5 dou (a unit of weight) of rice, but actually it could only buy 2 or 3 dou of rice, and only if he used the wage right after he received it. If rice stores happened to have closed before he went there, he would have to buy rice the next day and his wage would only be enough for 1 dou of rice. Worse still was the high unemployment. In the latter half of 1946, the number of laid-offs in Shanghai, Nanjing and Beiping alone totaled 2.6 million and during the first 23 days of April after legal tender entered into the period of collapse, Shanghai witnessed 2,500 dead bodies lying on the roads. Thanks to the political and economic struggles of the working class under the leadership of the Chinese Communist Party (CCP), worker began to be paid with grain or according to the living cost index in some areas. For instance, after the war with Japan, workers in Shanghai were paid according to the living cost index. However, since the ruling class still held the right of compiling and releasing the living cost index, it tried every means possible to alter and lower the index to exploit workers. Therefore, real wage of workers was still on the decline. In July 1948, the Wholesale Price Index (WPI) in Shanghai compiled by China Institute of Economic Research rose to 4.06 million times while the living cost index of Shanghai workers rose to only 1.62 million times, with the former exceeding the latter by 150.6%. The living cost index, then, was little more than a tool for deceiving people. The effects of inflation hit the working class hard because when their wage was paid to them, -117-

its real value had greatly shrunken and when they tried to purchase goods, they had to pay more because of currency depreciation. For instance, when calculating the living cost index of workers in the first half of August, 1947, the price of rice was 40 million dollars or so, but on wage day, it jumped above 60 million dollars. Before the Japanese War, one dollar could buy a dou of rice, while during the War it could only buy 5 sheng (a unit of dry measure for grain) of rice and one or two sheng afterwards. The actual living standard of the working class fell to below 30% that of the pre-wartime and this unsurprisingly led to the working class living in abject poverty. Such an adverse political and economic status strongly enhanced the political awareness of the working class and prompted them to integrate economic struggle with political. Since the spring of 1948, in particular, the anti-hunger campaigns of the working class spread to Shanghai, Nanjing, Beijing, Tianjin, Qingdao, Hankou, Guangzhou and Nanchang and other cities, involving over 40 industries including textile, woolen, silk, knitting, clothing, beddings, general commodities, pottery, chemistry, western medicine, match, cigarette, finance, printing, water and electricity, traffic, coal mine, machinery, shipbuilding, steamer, customs and sailing. The courageous struggles of the Chinese working class motivated the youth, students and people from other walks of life to strongly promote the development of the People‘s Democratic Revolution in Kuomintang ruled-areas. Farmers suffered tremendous losses. Farmers were also a victims of inflation. Firstly, in the price hike, the price difference between agricultural products and farm produce widened rapidly, causing tremendous losses to farmers. According to statistics of the Central Bank, during the inflationary period prices of farm produce climbed slowly while prices of manufactured goods or industrial products rose quickly. Shortly before China‘s victory in the Japanese War, prices of industrial products were 4.76 times higher than those of farm produce, and after the war the price of industrial products stood at roughly three times higher those of farm produce. According to the WPI of general goods, by August 1945 the price of food rose by 1,585 times, fiber by 3,151 times, fuel by 4,864 times, metal by 2,744 times, timber by 2,275 times and sundry items by 975 times. These figures also showed that prices of industrial products like fiber, fuel and metal rose more quickly than those of food and other farm produce. Since prices of farm produce grew slowly while prices of industrial products rose rapidly, farmers‘ real income fell. According to the Central Agricultural Research Institute, if the purchasing power index of Sichuan farmers in 1937 was seen as 100, in September 1939, it would be 64. In 1941, prices of farm produce saw a slight rise because of the reduction of agricultural output, but farmers‘ real income decreased despite the price rise. From 1942, farmers‘ income kept declining with agricultural workers‘ income decreasing faster than others. In 1943, the wage of Sichuan agricultural workers in real terms decreased to 58% that of

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1937. The decline in the prices of farm produce and the reduction of agricultural investments and the farm labor force had huge impacts on the reduction of the agricultural output. Worse still, the National Government also exploited farmers by monopolizing the purchase of goods and by purchasing farm produce at low prices. For instance, in 1942, although the market price of autumn tea per dan was 8,500 dollars higher than the official price, the National Government purchased tea at its official price. Anhua, Hunan province produced 1 dan of raw tea at a cost of 150.5dollars, which was sold to the government for 100dollars. In 1944, the cost of cotton was 15,000 dollars while the procurement price was 6,000 dollars, only 40% of the cost. As a result, commodity production in agriculture gradually shrunk. In the KMT controlled-areas, cotton output fell from 7.5million dan in 1936 to 1.55million dan in 1944. In the areas along Tuojiang River, Sichuan Province, sugarcane output in 1943 fell by 30% compared with 1941 and tobacco output in 1945 fell to only 84.6% that of 1937. A more remarkable drop was seen in the output of tea leaves, tung oil and eggs. According to an estimate by the Central Agricultural Research Institute, tea leave output in 1946 fell by 82% compared with the average output between 1933 and 1937; egg output in 1946 fell by 6.7% from 1936, and tung oil output halved compared with pre-wartime. In addition, ill-informed farmers also suffered great losses from storing currency. Seizing the opportunity created by inflation, the National Government looted farm produce and plundered farmers brutally though a series of forcible means, directly or indirectly, including land tax, procurement, levies, cotton field tax, procurement of cotton, exclusive sales or controlled procurement and distribution of sugarcane, tealeave, paulownia and silkworm. Further, goods were not fairly purchased; they were forcibly exchanged with depreciating legal tender which was gradually becoming worthless. The severity of the disaster brought to the people by the inflationary policy of the National Government cannot be underestimated. Brutal exploitation drove farmers to the brink of hunger and death. In 1947, the number of famine refugees throughout the country reached over 100 million and the working people were struggling on the verge of starvation; bodies of famine refugees were seen everywhere. Such a tragic scene was common in KMT-controlled areas during the hyperinflation and the national economic collapse. Soldiers of Chiang Kai-shek lived in abject poverty. After the Japanese War broke out, the National Government implemented a conscription system. According to Real Cash Income of Soldiers compiled by the Department of Agricultural Economy at the University of Nanking, if the real income in 1937 was 100, it fell to 93 in 1938, 64 in 1939, 29 in 1940, 21 in 1941 and 10 in 1942. By February 1944, soldiers‘ purchasing power was only 5% that of the pre-wartime. Soldiers‘ living standards were also reduced by the corrupt National Government. In October 1944, after the ―treatment of officers and soldiers was improved‖, soldiers‘ income was less than 1dollar that of the pre-wartime. Including physical goods, the minimum income was only 1/50 of the

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pre-wartime while the income of officials, excluding the value of their embezzlements, was 300 times that of soldiers. For the army in China, whether soldiers could be fully paid and fed had always been a matter of life and death. During the Northern Warlords Period (1912-1927), constant mutinies were mainly caused by default on payment of wages. From the Northern Expedition① to the late period of the Liberation War, the reason why the troops under direct leadership of Chiang Kai-shek rarely mutinied or revolted was that Chiang Kai-shek could basically ensure soldiers‘ salary and food. From the autumn of 1948, Chiang Kai-shek began to carry out the policy of forcibly exchanging gold coin banknotes with legal tender, thus many troops under his direct leadership could not get fed or paid, leading to the rapid collapse of KMT‘s military machine. Take Aurora, the largest warship of KMT as one example. No sooner had the officers of this 5,270 ton-cruiser returned from the Britain than they were forced to convert their foreign exchange into Gold coin banknotes. By the time they came back from the northeast battlefield, their Gold coin banknotes had practically become worthless due to rising prices, and this antagonized the officers. Economic depression and the extreme discontent with KMT‘s rule among officers combined to trigger the uprising of Aurora. The living standard of public servants, intellectuals and youth students declined rapidly. The lives of public servants and intellectuals experienced the greatest changes because of inflation. Before the Japanese War, their living standard was relatively high, but declined rapidly after the National Government implemented the inflationary policy. During the inflation, public servants fell into two parts: a minority was senior KMT and government officials, whose income mainly came from robbery and blackmail and from the dividends of bureaucratic capital; a vast majority was lower public servants and intellectuals, whose living standard declined remarkably in that they had no income besides their salary. Professors in Kunming, including such famous scholar as Wen Yiduo(闻一多), were forced to carve seals for extra income. Du Su（杜肃）, professor of Guangxi University of Guilin had taught for 20 years and used to be director of the Economic Faculty; Suffering poverty and disease, he committed suicide in 1948, leaving his wife and three daughters in despair. The intellectuals grew more discontented with the National Government which stepped up squeezing public servants and intellectuals. At the same time, some public servants began to liberate themselves from the National Government, presenting a good opportunity for them to participate in the People‘s Democratic Revolution led by the proletariats. The destitution of intellectuals was especially notable among students: on one hand, the ① The Northern Expedition: 1926-1928, the battle launched by the national revolutionary army against the Northern Warlord Government. -120-

so-called public education system and scholarship system implemented by the National Government during the Civil War could no longer maintain the minimum living standard of students; on the other hand, the decline in the family income inevitably led to the constant fall in their living standard, as the majority of them came from working or intellectual family. These factors combined to enormously enhance the political awareness of students and encouraged them to play an active role in the anti-hunger and anti-Civil War campaigns. Petty bourgeois were subject to exploitation. The National Government also exploited petty bourgeois by purposefully undervaluing currency. Before the Japanese War, the National Government promoted government bonds by promising decent interests and huge discounts, and after the outbreak of the War, it promoted government bonds by taking advantage of the public patriotism. By 1946, outstanding government bonds amounted to 9.558 billion dollars (excluding government bonds in GBP, USD and CGU certificate notes). After the Japanese War, creditors of government bonds demanded to be paid back 1,000 times that of the principal. However, the National Government issued measures ruling that ―from July 1946, government bonds will be paid back according to the figure of the principal.‖ Moreover, the National Government also plundered the people by devaluating pre-war saving deposits. After the outbreak of the war with Japan, the National Government restricted the withdrawal of deposits and more than one million household saving deposits worth billions could not be withdrawn. Since the bureaucratic bourgeoisie withdrew their money in advance, the deposits which failed to be withdrawn mainly belonged to small depositors, including a few unsupported families. In spite of this, the National Government still refused to pay the deposits with a reasonable interest rate after the Japanese War. In 1947, although prices in the National Government-controlled areas rose by over 100,000 times, the National Government was only willing to pay the deposits according to a price rise of 700-1700 times and it was not until 1953, when the capital of the national banks and offices had already been ransacked, that the government of the People‘s Republic of China set aside funds to pay these deposits with a reasonable interest so as to help these small depositors. On the payment of saving deposits during pre-wartime, a striking contrast could be found between the government of the People‘s Republic of China and the National Government with the former earnestly caring for the people whereas the latter cruelly plundered the people Business and finance on the verge of bankruptcy. The Chinese national business was established on a very weak foundation. Bullied and discouraged by imperialism and bureaucratic capitalism, and suffering from inflation for as long as 12 years, it was in a constantly precarious situation. At that time, the law of supply and demand had been too simplistic to explain the complex price fluctuations. Due to speculation, hoarding, transportation, the war situation,

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population mobility and changes in consumer psychology and other factors, price growths during different periods and in different places were different, and prices were highly unpredictable. For instance, comparing the price index of major goods in Chongqing in December 1942 with that in 1937, we will see food prices rose by 50 times, fiber by 76 times, fuel by 139 times, metal by 282 times and construction materials by 103 times while the price index of goods in Shanghai during the same period rose relatively slowly, with food prices rising by 51 times, fiber by 21 times, fuel by 71 times, metal by 93 times and construction materials by 47 times. By December 1947, the price index of goods in Chongqing showed food prices climbing by 35,100 times, fiber by 101,200 times, fuel by 73,500 times, metal by 196,900 times and construction materials by 261,000times while food prices in Shanghai during the same period rose by 78,400 times, fiber by 29,700 times, fuel by 186,500 times, metal by 224,700 times and construction materials by 108,400 times. Thus, we can see that price growth was vastly different during different time periods, and also varied from area to area. The reason why we singled out the prices growth in Chongqing and Shanghai as examples was that Chongqing was the center of national economy during the Japanese War and Shanghai was the center of national economy after the War. Vast differences could also be found in price growth of other areas during other periods. On the whole, prices grew on a monthly basis, but prices of some goods occasionally experienced a temporary fall after a rise. In face of the intricate and constantly changing market prices, industrial and commercial enterprises had great difficulty in shaping their own destiny. Admittedly, there were some successful businessmen, but most suffered great losses. Generally speaking, handicraftsmen were confronted with greater risks as more time and money was needed from the purchasing of materials to the production of goods and often the sales revenue would not even cover the cost of raw materials. Many manufacturers therefore took business as a sideline, as business operation was more flexible and responsive to market changes. However, due to the uneven price increases of different goods amidst inflation, it was common to see businessmen lose money. This was because, when making the annual financial statement, many industrial enterprises were confronted with the so-called ―virtual profit and real loss‖, referring to a monetary surplus on the book but shrinking materials in stock. In such situation, many industrial enterprises resorted to speculation, leading to the prevalence of the following maxim at that time: ―Working is inferior to doing business, doing business is inferior to hoarding, hoarding is inferior to purchasing gold while gold is inferior to foreign exchange.‖ While issuing Gold coin banknotes, the National Government also confronted the Chinese bourgeoisie business and compelled them to dump products according to the Checked Price Policy① so as to support gold coin banknotes. Rong Hongyuan(荣鸿元) ①

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from Shengxin Silk Factory and Guo Lihuo（郭隶活）from Yongan Silk Factory, for example, were arrested and told to sell goods at face value. During the time period between the issuing of Gold coin banknotes to the abolishment of the Checked Price Policy in early November 1948, Shanghai Silk Factory sold 50,000 pieces of cotton silk and tens of thousands of cotton cloth pieces at the ―checked price‖, suffering a loss of US$12.5 million. The cotton inventory of Shenxinjiu Factory fell from 160,000dan to 2,000dan and the factory also owed 5,000 pieces of cotton silk to the government, and its operational capital had been used up. The losses of this factory alone reached US$1.25 million. Woolen textile factories sold 1 million yards of wool fabric, and 150,000 pounds of knitting wool, suffering a total loss of US$5 million. Yongli Company sold 60,000 bags of pure soda ash and lost US$1million. The Chinese rubber plant lost US$2.5 million. The National Government also held Zhan Peilin, Director-general of Paper Industry Association, cotton cloth businessman Wu Xilin, Zhang Chao, Director-general of the Cake Association, and Tang Zhiliang, Director-general of Sugar Industry Association, hostage and forced them to sell their goods at face value. Three fourths of the stock in the general merchandise industry was sold according to their checked prices and all the stock in the four major companies, except Yong‘an Company were sold out. Before the issuing of the Gold coin banknotes, silk merchants had 1.5 million pieces of silks and satins, which were sold out within one month and only two tenths of cotton cloth were left. This meant that seven tenths of the retailers could no longer continue to do business. In order to seize overseas sales revenue, the National Government also tackled companies and firms that did not manage overseas sales at official prices. Wang Chunzhe, manager of Lin &Wang Company, was arrested and sentenced to death by the special criminal court on 25 September. In Guangdong and Fujian, a large number of employers of Private Mail Offices were arrested and overseas remittance firms from Philippines and Malaysia were forced to shut down, making it easier for the National Government to purchase overseas remittance at a low price. The national industry was under enormous pressure. The hope of the national capitalists to revitalize business and restore prosperity was absolutely dashed with the Civil War and the inflationary policies causing factories to close, and leaving business in desolation. The hyperinflation of legal tender and Gold coin banknotes made it more difficult to conduct financial transactions. On one hand, sources of bank deposits shrank because although bank deposits multiplied by hundreds of millions of times, their real value fell drastically. On the other hand, besides the above-mentioned various exploitations, the private financial industry was also looted by the Four Major Banks and Two Offices and the percentage of private bank deposits in total bank deposits also fell remarkably. In 1936, bank deposits in private banks throughout the country reached about 1.5 billion dollars, accounting for over 30% of total bank deposits of the country. By 1946, bank deposits fell to below one tenth of the bank deposits at the Four Banks and

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Two Offices. That is to say, more than 90% of the bank deposits went to bureaucratic capital banks. Among private banks, Jincheng Bank and Shanghai Bank had more bank deposits than others, but like other banks, they suffered severe setbacks too. For instance, total bank deposits at Jincheng Bank in 1936 accounted for about 6.5% that of the Four Major Banks and Two Offices during the same time, but by the first half of 1948, they only accounted for 0.6%. Although bank deposits reached 1.1768 trillion dollars, they were worth only over 10,000 liang of gold, less than 1% of the bank deposits at pre-wartime. The percentage of Shanghai Bank‘s deposits at Four Major Banks and Two Offices also fell from 7% in 1936 to 0.8% in 1946. During inflation, the composition of bank deposits also changed. Before the Japanese War, time deposits at banks usually accounted for about 70% of the total deposits. After the outbreak of the War, with the intensification of inflation, the percentage of time deposits in terms of total deposits gradually fell and that of demand deposits grew. Take Jincheng Bank as example. In 1946, the percentage of demand deposits in total bank deposits had already been 71.2%, but 1948 this figure further rose to 93.1%. Similar changes took place in the make-up of bank deposits at other banks. At that time, demand deposits were, in essence, overnight money preserved for industry and commerce and due to their tremendous liquidity they were very difficult for banks to utilize. The decrease in bank deposits, reduction in available time deposits and the devaluation of currency in real terms inevitably impaired the lending capability of banks which, therefore, gradually cut loans to industry and commerce. Due to soaring prices, the lending rate was too high for industry and commerce to bear (in 1948, the highest monthly private lending interest reached 50%), but high interests on bank loans still failed to offset the losses caused by the depreciation of currency. Therefore, many banks preferred to lend capital to self-run enterprises, but most banks engaged themselves in commercial speculation and gold trade. Therefore, instead of promoting the development of industry and commerce, these banks destroyed the national economy. With legitimate business breathing its last breath, the financial industry was bound to decline. Even those few banks that had once benefited from speculation ended up in misery just like other banks, as the saying goes ―nothing can exist without a basis‖. Seeing private banks as root cause of financial disturbance and rising prices, the KMT authority tried every means possible to restrict them. But, it was well known to the public that hyperinflation, price increases, industrial depression and destitution of the people stemmed from KMT‘s political, economic and military policies. Private banks did make profits during this period which made matters worse, but compared with the KMT policies which had done tremendous harm to the country, they caused minimal damage. The National Government also looted the Chinese bourgeoisie of their gold, silver and foreign exchange through issuing Gold coin banknotes. According to the archives in Shanghai

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Money Trade Guild, the Chinese bourgeoisie were twice forced, once on September 10,1948 and once on September 20, 1948, to hand out 21,348.545liang of gold, 8,087.558liang of silver， 13,302 silver dollars， 214,077two-jiao fractional silver dollar banknotes,10,693one-jiao fractional silver dollar banknotes, 323,264.6 USD, 743 GBP and 249,419.9 HKD. By the end of October 1948, the National Government had taken1, 146, 000 liang of gold, 34.42million USD, 11 million HKD, 3.69 million dollars silver dollars, and 960,000 liang of silver in Shanghai alone. It was reported that foreign exchange declared by commercial banks were as follows: Jincheng Bank, US$6 million, Shanghai Bank US$5.2 million, Zhejiang First Bank, US$4.3 million, Zhongnan Bank, above US$2 million, Joint Commercial Bank US$6 million, Zhejiang Industrial Bank, above US$500,000, and Fuyuan Private Bank, above US$300,000. The bureaucratic bourgeoisie pocketed all profits of inflation. Inflation was not only a means of the National Government to fund the Civil War, but also a major tool of bureaucratic bourgeoisie for extracting and amassing national wealth through redistributing the national income. Bureaucratic capital industrial enterprises were both political and commercial in nature. Taking advantage of their political, economic and military privileges, they practiced the Controlled Economy System during the Japanese War and enjoyed an overall development. They fished in the troubled waters of inflation and reaped huge profits by conducting various kinds of speculation activities, monopolizing commerce with the government as back-up, hoarding goods in large quantities and driving up prices. They set up many exclusive companies which were state-run in name but private-run in reality and feathered their own nests. Business of these exclusive companies covered a wide scope, ranging from grain, cotton, gauze, fuel, cigarettes, matches, sugar and salt to dozens of kinds of manufacturing equipment. They purchased all kinds of products at their official price or even forcibly acquired them at prices below their cost, but sold them for higher prices. Since the prices of exclusive commodities were free from the Checked Price Policy, they rose more quickly than those of non-exclusive commodities, thus initiating the price rise of goods. Through purchasing commodities at lower prices and selling them at higher prices, these exclusive companies made several-fold of profits. The mining industry in the charge of the Resource Committee affiliated with the Economic Sector of the National Government experienced great development during the Japanese War. After the War, by taking over heavy industries including coal mines, iron and steel, electronic machinery, cement and rare metals from the puppet regime, the mining industry became the mainstay of the bureaucratic capitalist industrial enterprises and created a monopolist position in the national mining industry. During this period, the National Government also established Fuxing Company, China Textile Company and China tea Company and gained considerable profits. Taking advantage of

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the preferential loans offered by the Four Major Banks and Two Offices, these bureaucratic capitalist companies exploited producers by exchanging the increasingly volatile legal tender for major exports like tungsten, antimony, tin, tung oil and tea leaf with, and exported these goods themselves in return for foreign exchange. During the Japanese War, with loans from Britain, the National Government set up the Foreign Exchange Parity Funds with 10 million GBP in March 1939 and with loans from America and Britain, it further set up the Chinese, British and American Parity Funds of US$110 million in April 1941. Then, by controlling foreign exchanges and unrestrictedly selling foreign exchanges in black markets, the bureaucratic bourgeoisie rushed to purchase foreign exchanges, speculated on foreign exchanges, converted their fortunes into USD and GBP and then transferred them to New York and London. After the outbreak of the Pacific War, the National Government obtained massive loans from America, including 500 million in February 1942 alone and the price of price of legal tender in the foreign exchange market was listed in terms of USD. Therefore, the bureaucratic capitalist enterprises obtained foreign exchange at the low official USD/legal tender exchange rate of 1:20 for a long time. In March 1946, the National Government reopened the foreign exchange market and lowered the price of USD in terms of legal tender at 2,020dollars per dollar, far below the then price level of goods. Thus, bureaucratic capitalists rushed to purchase cheap foreign exchange and figures disclosed by insiders of KMT showed that within the short one year‘s time since the opening of the foreign exchange market, Song Ziwen‘s Fu Chung Company and Kong Xiangxi‘s Yangtze Company alone managed to ―apply for‖ foreign exchanges amounting to US$15.53 million and US$1.8 million respectively from the Central Bank. In the process of inflation, gold was both a financial commodity leading price rises and what the bureaucratic bourgeoisie speculated in. In the late period of the Japanese War, the National Government introduced the inflationary policy under the cover of the so-called ―gold trade policy‖, triggering repeated ―gold cases‖. It was in this way that the bureaucratic bourgeoisie engaged themselves in the speculation of foreign exchange and gold and reaped huge profits within a few hours. It was estimated that during KMT‘s rule, the bureaucratic bourgeoisie, by means of robbery and embezzlement, and through doing politics and business at the same time, plundered at least 500 million liang of gold, including the value of their fortunes at home and deposits and properties abroad. Proceeding in its own interest, the National Government implemented the inflationary policy and robbed people of their wealth, bringing great agony to them. However, though hyperinflation brought massive monetary wealth to the ruling class, it weakened the economic and political foundation of the government. First, it disturbed finance and revenue, leading to the government‘s overspending; secondly, it resulted in social turbulence and aroused strong resistance from the

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people, leading to the rapid fall of the reactionary government. The Qing government stepped down due to the depreciation of copper coin, the Beiyang government began to decline after the Bank of China and the Bank of Communications stopped their redemption business and the National Government fled to Taiwan partly because of its implementation of the inflationary policy. History provides lessons that can be applied to contemporary society. Today, we look at history with the aim of learning useful lessons to help us control inflation, maintain social stability, ensure the smooth development of reform and opening up, promote a sound development of the socialist commodity economy, and build China into a modern powerful socialist country.

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References 1. Arthur Yong, China‟s Financial and Economic Situation, 1927~1937, Beijing: China Social Sciences Press, 1981. 2. Financial Historical Data Group of the Head Office of People‘s Bank of China, Data on the Modern History of Chinese Currency[M](1stedition.). Beijing: Publishing House of China， 1964. 3. Peng Xinwei, A History of Chinese Currency[M].Shanghai: Shanghai People‘s Publishing House, 1958. 4. Shou Chongyi, Shou Leying, A History of the Central Bank[M].Beijing: China Literary and History Press. 1987 5. Tang Xianglong, Selected Papers on the Modern History of Chinese Finance and Economy[C].Chengdu: Southwestern University of Finance and Economics Press, 1987. 6. Wei Jianyou, A Modern History of Chinese Currency[M].Anhui: Huangshan Press, 1986. 7. Wu Wang, Historical Data on the Inflation in Old China [M].Shanghai: Shanghai People‘s Publishing House, 1958. 8. Yang Peixin, Inflation in Old China[M].Beijing: SDX Joint Publishing Company, 1963. 9. Yang Yinpu, A History of the Finance during the Republic of China[M].Beijing: China Financial &Economic Publishing House, 1987. 10. Zhang Bofeng, The Northern Warlords[M],volume(5).Wuhan: Wuhan Publishing House, 1990.

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