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By Root 320 0

and inflation came sooner, not later. Chiang's position was directly weakened by the loss of the silver reserves that could have financed at least the initial expansion of government spending, thereby postponing the need to engage in inflationary monetary creation. He was weakened indirectly by the severely disturbed economic conditions to which the U.S. action contributed and which undermined popular support for the Nationalist regime.* If the United States had not driven up the U.S. dollar price of silver, China would have left the silver standard later—perhaps several years later—than it actually did and under better economic and political conditions. The future course of events would have been altered. The ultimate hyperinflation might not have been prevented, but at least it would have been postponed, giving the Nationalist government more time to recover from wartime disasters and to repel the communist threat.

From 1937 on, U.S. silver policy had no further effects on China (though other U.S. policies undoubtedly did). The damage caused by the U.S. government's myopic concentration on the narrow short-time self-interest of a small but politically potent group had been done. However, the aftershock was still to come.

The Chinese Hyperinflation

The Japanese invasion of China launched the Nationalist government on a frantic arms program, financed primarily by the printing of money. The issue of notes multiplied nearly 300-fold from 1937 to 1945, or on the average by 100 percent a year, starting at 27 percent from 1937 to 1938 and ending at 224 percent in the final year of the war. Prices rose even faster, to nearly 1,600 times their initial level, or an average of more than 150 percent a year.* Clearly that was a major inflation. Yet the price rise "had been kept from reaching hyperinflationary levels by the flow of U.S. aid to the KMT government, by the entry of America in the Pacific War, and the sharp decline in the flow of refugees from Japanese occupied territory. In the weeks preceding victory over Japan commodity prices had actually slumped in anticipation of allied victory over Japan and the resumption of foreign supplies" (Greenwood and Wood 1977b, p. 32).

The initial prospects after the Japanese surrender looked favorable. A truce was reached between the Nationalists and the communists. However, "neither side was really interested in a united front when the main struggle was for domestic control.... [A]rmed clashes became more serious and civil war was renewed ... by the end of 1947.... A mammoth war spread over thousands of miles and involving millions of men on both sides.... By the end of 1947 the communists occupied Hopei and Shansi, and by the end of 1948 they had scored a decisive victory on the plains of the Hwai River near Suchow. In January 1949, the Nationalist commander, General Tu Yu-ming, surrendered with the best part of the surviving Nationalist army ... Chiang Kai-shek resigned in February, and fled with the last of the gold reserves (about three million ounces) to Taiwan" (Greenwood and Wood 1977b, [>], [>]).

There is little doubt that bureaucracy, corruption, and bad financial management, which led to the collapse of the money market and a true hyperinflation, were major factors contributing to the defeat of the Nationalists. In a final desperate measure, "on the 22nd of August, 1948, Chiang Kai-shek announced an official reform of the currency....Under the terms of the reform a 'Gold Yuan' was created.... Prices were frozen, and all private holdings of gold, silver, and foreign exchange were to be surrendered within three months" at terms that amounted to outright confiscation. Only force might produce results. But in the process "the authorities forfeited the respect of the lingering few who had not already abandoned their wider sense of social responsibility" (Greenwood and Wood 1977b, [>]). By November, with the black market raging, the government admitted defeat. All in all, linking together the "gold yuan" and the earlier currency, prices in Nationalist territory in April 1949