Download How the Chinese inflation developed during the Second World War

How the Chinese inflation developed during the Second World War and
how it is affected by the progress of war? A regional comparison
-Work in progressEH590 Thesis Workshop, LSE
Xun YAN
I. Introduction
From 1937 to 1949, China experienced the most severe inflation in its modern history.
The inflation persisted eight years during the Second World War (1937-45), and in some
places it developed into a hyperinflation.
Most of the works on Chinese inflation considered the inflationary process of the Chinese
legal tender, fapi. This brings two problems. First, the concentration on fapi would miss
out the other half of China under occupation, which also experienced high inflations. And
it is arguably in Shanghai where the highest inflation of wartime China was recorded.
Second, given the political and economic fragmentation of China, a discussion of
inflation on nationwide level might be less meaningful. This paper therefore provides a
regional analysis based on recently compiled data series price level, note issue and
production. The paper looks at not only price level and money supply, but also the
velocity of money transaction, to see whether other factors such as news from the battle
front and production affects people’s expectation on future inflation.
The rest of the paper is divided into four sections: the second section provides an
overview of the timeline of the war, the wartime economy and the currency situation; the
third section discusses inflation progress in Chongqing; the fourth section discusses
inflation in Shanghai; the last section concludes.
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II. The Second Sino-Japanese War and the currency issue
2.1 War and the loss of territory
As early as during 1931-32, Japan seized China’s north-eastern provinces, commonly
known as Manchuria, and set up the puppet regime ‘Manchukuo’. In July 7, 1937, the
full-scaled Sino-Japanese hostilities broke out. The war lasted eight years, starting from
the Marco Polo Bridge Incident on July 7 to the Japanese surrender in August 1945.
Within the first month of the war, Beijing (then Peiping) and Tianjin (then Tientsin) fell
into the hands of the Japanese. After three months’ confrontation, Shanghai and the
surrounding area (the Lower Yangtze Delta) were occupied too. In December, the capital
Nanjing was captured by the Japanese troops. The National Government first retreated to
Hankou (then Hankow) and later settled in Chongqing (then Chungking) in the southwest interior (the Free China) in 1938. (See Map 1.)
The Japanese-occupied territories (North China, and the Coast) were the most
economically developed and most productive area in China. Most ports, industrial and
banking sectors located along the coast and in the North. By the end of 1938 the Japanese
occupied regions producing 40% of China’s agricultural output and 92% of her pre-war
industrial capacity.
The immediate consequence is the loss of tax base from Customs and industries. Prices of
industrial products rose rapidly. As most chemicals, metals, electric goods were either
produced in coastal area or imported from the coastal ports.
The government did manage some hasty movement of essential industries and skilled
labours into the interior before the war. However, the interior was economically
underdeveloped and the government was forced to spend a lot on developing the
industrial capacity and correcting the economic dislocation. The government deficit rose
drastically.
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2.2 Disruption in communication and trade
The Japanese seizure of Shanghai cut off the major line of communication of China with
the outside. It also exerted an effective control over all the other major trade port cities
along the Coast. The interruption of the already poor transport impaired the movement of
goods and increased the risk of inflation.
In October 1938 the Japanese occupied Guangzhou (Canton) and then Hankou (Hankow).
Canton was directly connected to Hong Kong and Hankow was the strategic city in the
middle of the Yangtze River. With the seizure of Hankow-Canton railway, the
international trade route via Hong Kong was cut off. The fall of Hankou also
strengthened the Japanese control of waterway from Shanghai to inner China via the
Yangtze River. The interruption in international trade caused an abrupt rise in price level
of imports.
In late 1939, the Japanese troops invaded French Indo-China and severed the trade route
between Free China and Indo-China. Since then the only remaining connection between
China and the outside world was the Burma Road, which was also blocked in 1942. The
price increase was much more severe after 1942.
2.3 Political and monetary segmentation: puppet regime and puppet money
Since 1935, the sole legal tender of China is called the Nationalist Yuan (or fapi), which
is a foreign-exchange based currency. However, fapi is not the only currency circulating
in China.
Before 1937, Taiwan and Manchukuo (Northern China occupied by Japan since 1931)
already issued their own currencies as well. The two economies belonged to the ‘yen
bloc’ and were remote with the Chinese economy. Their currencies were at par with
Japanese yen and were relatively quite stable.
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During the war, the Japanese first invaded North China and set up a puppet government
in Beijing (then Peiping). The troop advanced southward and seized the Chinese capital
Nanjing (then Nanking), while the Nationalist government fled to Chongqing in the
interior. The Japanese set up another puppet government in Nanjing in 1940.
The Japanese set up several banks on the occupied land in the course of war, among
which the most prominent two were the Federal Reserve Bank (1938-45) in north China
and the Central Reserve Bank (1941-45) in central and south China. There are in addition
the Japanese military yen (gunpyo) and a separate paper money circulating in Communist
area.
These currencies had experienced inflations of different magnitudes, except for those of
Manchukuo and Taiwan. Both Federal Reserve Bank (FRB) and Central Reserve Bank
(CRB) were inconvertible paper money. The CRB notes, in particular, competed with
fapi in the area of circulation.
2.4 A regional perspective
Most of the works on Chinese inflation considered the inflationary process of Fapi. This
brings two problems. First, the concentration on fapi would miss out the other half of
China, which also experienced high inflations. And it is arguably Shanghai that has
recorded the highest wartime inflation in China. Second, given the political and economic
fragmentation of China, a discussion of inflation on nationwide level might be less
meaningful.
This paper therefore provides a comparative analysis of the wartime inflation process,
based on a compilation of various published data sources on price level, note issue,
industrial and agricultural output in Chongqing and Shanghai.
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III. Chongqing
After the outbreak of war in July, Beijing, Tianjin and Shanghai were quickly occupied
by the Imperial Japanese Army. The Chinese Capital Nanjing was also captured in
December. The government, together with factories, workers and refugees retreated the
interior in Southwest China. This area remained as the base of the Chinese government
controlled area and is often referred to as the ‘Free China’. Chongqing became China’s
wartime capital since 20 November 1937.
Among cities with detailed price record, Chongqing is the only one that has never been
occupied, and therefore provides the most consistent series for researches on wartime
economic activities of ‘Free China’ such as the monetary policies and industrial
development.
3.1 Movements in Money, Prices, Output and Velocity
As the Japanese troops quickly occupied major ports and productive areas which
constituted a large part of tax revenue, the government had a genuine need for funds to
finance the war and to assure economic activities. The government faced a dilemma on
whether or not to finance the war by turning on the printing press. Even among the
highest decision makers opinions towards the monetary policy were split. It was
suggested that exchange control should be implemented. This suggestion was put off as
the government was both unwilling and unable to carry out this plan. Fapi was a foreignexchange based currency and every time there was a rumour of exchange control, the
market confidence was disturbed. Also exchange control was difficult to enforce due to
the Japanese seizure of coastal Maritime Customs and the existence of extra-territorial
jurisdiction.1 There was also suggestion that another inconvertible currency should be
issued for internal use and war financing only, while leaving fapi an intact, convertible
currency. The scheme of ‘dual currency’ system was also rejected. The final agreement is
1
Young, Arthur N., China’s wartime finance and inflation, 1937-1945. Cambridge: Harvard University
Press, 1965. p. 196.
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a secret note issue of 500 to 1000 million without backing, and at the same time
government would seek new taxation to meet this deficit. 2 Based on the data, this
additional note issue should have been launched to the market gradually, and on a rather
contingent basis.
There are doubts on why the government resorted to debt monetization instead of other
methods such as borrowing domestically or abroad. The government did issue several
loans at the beginning of the war and subscriptions were high. But limited information on
this subject seems to suggest that except for the success of the Liberty Loan in the fall of
1937, government bonds were never very appealing to the public.3 Foreign loans, on the
other hand, came ‘too late and too little’. Large quantities of foreign loans from the US
occurred only in 1942. The foreign aid consisted mainly of credits for purchasing goods
(especially military supplies) in foreign markets.4 It could be seen from figure 2 that the
growth rate of money supply increased steadily throughout the war period.
On the economic front, the Chinese government presumed that Japanese troops would
overran North China and the coast provinces, and stop at a line east of the CantonHankow railway, and hoped that fourteen provinces (Shaanxi, Gansu, Ningxia, Qinghai,
Sichuan, Yunnan, Guizhou, Hunan, Hubei, Henan, Jiangxi, Xikang and Xinjiang) with a
population of 170 million would remain free. The agricultural products in Free China
should be able to accommodate the influx of army and refugee, as it was originally an
important area of agriculture produces. Arsenals and factories were removed from
Shanghai and Wuhan to the interior. Despite of many difficulties, considerable
achievements in industrial development were made in Free China (fig. 3). However,
difficulties were more apparent during the later part of the war, since 1943, when Burma
Road was sealed and the encirclement completed.5
2
People’s Bank of China ed., Material on the currency history of Republican China Vol. II (Zhong hua min
guo huo bi shi zi liao), Shanghai: People’s Press of Shanghai, 1986. pp. 284-85.
3
Young, op. cit., pp. 75-80.
4
Ibid., pp. 97-117.
5
Chang, Kia-ngau. The inflationary spiral: the experience in China, 1939-1950. Cambridge: Technology
Press of Massachusetts Institute of Technology, 1958, pp. 213-15.
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The money supply and the price level keeps similar upward trend through the whole
period (1937-1949), as both are heading up neck and neck (fig 1). But when we look at
the velocity of money circulation, its movement is far from smooth (fig 4). There are
clearly several turning points and therefore four periods of monetary development are
identifiable according to figure 4. From July 1937 to around the end of 1939, the velocity
of money actually declined. The velocity started rising from the beginning of 1940.
Despite some turbulence in mid 1941 to mid 1943, this upward trend continued until May
1945. From May1945 to August 1946, there is a sharp decline in velocity. Starting from
August 1946 however, the velocity rebounded and never dropped till the end of our series.
3.2 July 1937 – August 1939 (25 months)
This is not a period of particularly severe inflation. The average monthly growth rate of
the wholesale price is around 1.05% (see figure 5), and from the start of war until the end
of 1939, the velocity continues to decline. The lowest Price Money ratio (P/M) is 0.56 in
August 1939. The downward trend of velocity could be explained by several possible
factors: a high money growth rate which was not yet detected by the market, an
artificially low price level due to price control, an increase in production, or simply
people’s expectation of low future inflation.
As discussed before, monies without backing were secretly issued. But large quantities of
note issue did not occur in this period. The average monthly growth rate of money supply
(fapi) of this period is around 3.41%. Given that from November 1935 to June 1937, the
average monthly growth rate is 6.1%, the monthly money growth rate is not particularly
high. There is an increase of note issue from August to December 1938 (with a monthly
rate of 6%), which coincided with the Battle of Wuhan, one of the most severe battlement.
From Fig 6 it is quite obvious that on the whole, growth rate of note issues remained
quite stable at the beginning of war, and sped up only from July 1939 (with a monthly
growth rate of 18%). The increase in liquidity might well help stimulate the economy and
increase output.
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Table 1. Prewar monthly growth rate of note issue, by period
Period
Growth rate
(%)
Nov35-Jun37
Dec35-Jun36
Jun36-Dec36
Dec36-Jun37
Jun37-Aug39
6.09
5.88
4.60
2.10
3.41
China’s interior had long been an agriculture producing area and was far from
industrialized in 1937. From 1938 to 1939, the annual industrial output in Free China
increased by 30% or by 60%, according to different estimation, while agricultural output
remained stable (fig 3). The quick industrial development can be explained by the
successful industrial reallocation programme carried out by the government when it
retreated from Nanjing to the interior. However, if the large influx of army and refugee is
taken into account, the per capita output should be presenting a far lower growth rate.
Unfortunately, no regional population data is readily available for this period.
Another reason of low inflation during this period might be the geographic location of
Chongqing. Chongqing is in the south west of China, and is surrounded by mountains.
The strategic location of Chongqing makes it very difficult to be captured. The first wave
of Japanese offensives concentrated in the North China (Beijing and Tianjin) and the East
Coast of China (Shanghai and Nanjing). Therefore people in Chongqing area fared better.
This might explain the reason why at the beginning of the outbreak of the war in 1937,
price level seems only slightly affected.
The only event which seems to have a long lasting effect on the price level is the Battle of
Wuhan. This battle of attrition lasted for nearly five months and is one of the biggest
battle in terms of scale and duration (early June to mid-November, 1938). 6 After the
quick fall of Shanghai and Nanjing in 1937, the Nationalist Government decided to move
the capital to Chungqing. However, due to the hasty decision, a lot of government
organizations, war facilities and troops only managed to be moved to Wuhan, which is in
Hubei Province, and some twelve hundred kilometres east of Chongqing. Wuhan
therefore was the actual political and military centre at the beginning of 1938. Once
Wuhan is captured, Chongqing will face direct danger. The Imperial Japanese Army
6
Hu, Puyu, A brief history of Sino-Japanese War (1937-1945), Taipei: Chung Wu Pub. Co, 1974. pp. 12226.
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believed that the Nationalist Government would surrender once Wuhan was captured.
The Nationalist government therefore pulled in main troops in Wuhan and would defend
the city at any cost. From August to December 1938, the growth rate of money supply
jumped from less than 3% to a rate of 6%. And since September 1938, inflation also
became apparent. Before September, despite the fluctuation of inflation rate, the mean
value was nearly zero, while after September, the mean value is clearly positive.
Eventually Wuhan was lost, but the Japanese Army was greatly depleted. The battle of
Wuhan ended the first phase operations and turned to the phase of stalemate. No more no
major Japanese offensives occurred until Operation Ichi-Go in April to December1944.
3.3 August 1939 – March 1945 (67 months)
In Chongqing, or in Free China by and large, the most difficult time occurred in the
second phase of the war. Sometimes caused by the occasional Japanese offensive and
more often by the real shortage.
The average monthly inflation rate is 10.76%. From September 1939 to May 1941,
average inflation rate is 13.23% per month. The inflation rate then dropped to around
6.9% from June 1941 to March 1943. It jumped again to an average of 12.24% from
April 1943 till March 1945 (see figure 7). Starting from August 1939 the downward trend
of velocity halted and from January 1940, velocity went upward quickly. In July 1940
inflation rate for the first time exceeded the growth rate of money. This upsurge of
velocity persisted till around May 1941. The velocity increase relented from mid-1941 to
mid-1943, and rose up again in June 1944 and March 1945.
Since the later half of 1939, bad news came one after another, both internationally and
domestically. On 1st September, the German invasion of Poland marked the beginning of
the Second World War. People in China began to feel that it was a long-lasting battle for
which China was going to fight alone. The impact of the outbreak of European war is
more than psychological: the ceasefire agreement between Soviet Russia (who used to
provide military and financial support to China) and Japan in September encouraged the
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latter to resume its invasion plan in China. In the end of 1939 Britain closed the Burma
Road (important path for imports into Free China) under the Japanese pressure; the
Imperial Japanese army also took advantage of the French defeat in Europe and overtook
Indochina in September 1940, by which China’s access to the sea was completed cut off.
Domestically, after the fall of Wuhan in 1938, Guangzhou (Free China’s outlet to the sea)
and Nanchang (railway centre and capital city of Jiangxi Province) were also lost. In July
and September 1939 therefore, Chinese troops launched four offensives in order to tie
down the Japanese troops and therefore secure strategic places around Chongqing.7 In
May and June 1940, the Japanese launched the Battle of Zaoyang-Yichang. It was a
Chinese victory but Yichang, strategic city on the Yangzi River (via which troops can
moved directly to Chongqing) was lost.8 To further impair the Nationalist Government
politically, a puppet government was established in Nanjing in March 1940. Different
from other puppet regimes supported by the Japanese army, the Nanjing puppet
government exerted a much greater political and economic influence. The puppet
government was led by Wang Jingwei (a notable Republican figure and regarded as No.2
inside the Nationalist Party) and was recognized by Germany and Italy, and controlled a
vast area with economic and strategic importance, including Nanjing, Shanghai,
Hangzhou, Guangzhou and Wuhan. It also issued its own money called the Central
Reserve Bank (CRB) notes, which competed with fapi for areas of circulation.
From September 1939 to mid-1941 the average inflation rate is 13.23%. The velocity
shot upwards as well reflecting people’s worries on the development of the wars both at
home and overseas. The trend is clear that with the runaway inflation, price increase is
independent of the growth rate of money. The faster the price increases, the more money
must be acquired in order to secure a stable real cash balance. If printing press cannot
keep pace, real shortage of money would appear.9 The released government documents
on 7 September 1940 did report a genuine ‘shortage of money’ in the market: banks did
7
Hu, op. cit., p. 156.
Ibid., pp. 185-89.
9
Lewis and Mizen, Monetary Economics, Oxford: Oxford University Press, 2000. pp. 175-76.
8
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not have enough cash for clients and many shops could not continue their business due to
the cash shortage.10
The sub-period of mid-1941 to mid-1943 experienced relatively lower inflationary
pressure (with a monthly average of 6.9%). Evidences are insufficient to single out any
historical event that account for the turning points of changing velocity. The decrease in
the growth rate of velocity might due to a diversion of Japanese troops to battlefields
outside China. Japan was then engaged in battles in Indochina and also preparing for the
Pacific War. The Nationalist Government’s price-ceiling policy and other antiinflationary policies should also be a check on inflation. Inflation rate surged to 20% in
December 1941 outbreak of Pacific War but went down to -2.26% in the next month. It
seems that the outbreak of Pacific War and US participation of the WWII did not have
much immediate and long lasting impact on money velocity.
In the third sub-period (mid1943-March1945), inflation rate increased again to an
average of 12.24% per month. Again, no single event could be drawn to account for the
resumed upsurge of velocity. What is true is that since the autumn of 1943, the tide of the
Pacific War was overturned and the Allied force took the upper turn. It seems that the
Imperial Japanese Army turned back to defend and consolidate its military base in China
battlefield. In this renewed wave of offensives, two heights identifiable from our data
series are the Operation Ichi-Go and the Battle of West Henan-North Hubei (March –
May 1945). The Operation Ichi-Go (Operation ‘Number One’) consisted of a series of
battles in North China (Henan), Central China (Hunan) and South China (Guangxi),
aiming at unifying three Japanese military bases, and catching US airbases in South
China, in order to secure its route of military supply in Southeast Asia.11 The highest
velocity in this period occurred in June 1944 with a P/M ratio of 6.61. It seems that news
of D-Day from the European theatre did not help raise the morale in China. Instead, there
is fear that the war situation overseas might harden the Japanese determination of
speeding up its warfare in China. After the Japanese victory of Operation Ichi-Go, a
10
11
People’s Bank of China, op. cit., pp. 287-88.
Hu, op. cit., pp. 220-33.
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series of offensives followed to control Chinese railways and airbases. In March 1945 the
Battle of West Henan-North Hubei took place which place Sichuan province (and thus
Chongqing) in direct danger. The Chinese counteroffensives rolled back the Japanese
troops in May.12 In March 1945 the price money ratio reached 7.17, which recorded the
highest velocity during the whole wartime period.
3.4 March 1945 – August 1946 (17 months)
Starting from the spring of 1945, the complexion of the war changed. The Chinese troops
also gained upper hand in battles after April. Internationally, Germany surrendered to the
Allied force in May. In the Pacific theatre, the Allied force also gained considerable
momentum, in liberating the Philippines, North Burma. During the Yalta Conference in
February 1945, Soviet Union agreed to enter the fight against the Empire of Japan within
90 days after the defeat of Germany, and in August the US bombardment of Japanese
cities pushed Japan to surrender on 15 August 1945.
The inflation rate of this period dropped steadily from 30% per month to around 2%. And
the average inflation rate is 1.7%. The biggest drop in price level occurred in September
1945, when the Imperial Japanese Army officially surrendered to China on 9 September.
The velocity also keeps dropping from March 1945 until August 1946, when the peach
talk between the Nationalist Government and the Communists broke up, and the civil war
started (see figure 8).
12
Chang, K.N. op. cit., p. 44.
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IV. Shanghai
The story in Shanghai is more dramatic and complicated. It is more dramatic in terms of
the scale of the inflation. The fluctuation of price level is much more severe in Shanghai
than in Chongqing (or, presumably any other cities in China) and the inflation developed
into a hyperinflation by the end of the Sino-Japanese War. It is also a more complicated
case than that of Chongqing, for Shanghai had been occupied, and there was a switch of
monetary base from the Nationalist Yuan (fapi) to the puppet currency (Central Reserve
Bank notes). To make things more complicated, the change of currency did not take place
immediately with the occupation of Shanghai in 1937, and the currency shift was a
gradual process from the later part of 1941 to 1942.13
At the beginning, the Japanese control of the city is only partial with the existence of the
International Settlement and French concession in Shanghai. The western powers
maintained the foreign concession in Shanghai and they were in support of the
Nationalist Government. Most of the financial activities assembled in the foreign
concession, and the Nationalist Yuan remained the main circulation currency. In this way
Free China maintained a financial link with the occupied China and the outside. The
Nationalist government was able to maintain its financial operations and exchange
markets in Shanghai. This situation lasted till the attack on Pearl Harbour and outbreak of
the Pacific War in December 1941.14
After the outbreak of the Pacific War, the Japanese troops had a much stronger control of
the city. The use of Central Reserve Bank notes (issued by the puppet Central Reserve
Bank in Nanjing since January 1941) was enforced, and fapi was banned from circulation
since 25 June 1942. The foreign exchange market was removed from Shanghai to
Chongqing. In 1943, the International Settlement and the French Concession were
13
14
Young, op. cit., p. 151.
Chou, Shun-hsin. The Chinese inflation, 1937-1949. New York : Columbia University Press, 1963 p. 3.
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returned to the puppet Chinese government in Nanjing. Thus the Japanese army gained
full control of the city.15
The inflation process in Shanghai is divided into two periods: from July 1937 to June
1942, and from July1942 to the end of the war. It is assumed for simplicity that the major
circulating currency is fapi before June 1942 and CRB notes afterwards.
4.1 July1937-June 1942 (59 months)
This period can be divided into 3 sub-periods: July-Dec 1937; January 1938 – July 1939;
August 1939 – June 1942, according to the turning points of velocity of money (see
figure 10).
The first sub-period (July-Dec 1937) actually covers the period from the start of SinoJapanese War to the fall of Shanghai. After outbreak of war on 7 July, the Imperial
Japanese Army quickly overtook Beijing, Tianjin and large parts of North China within a
month.16 In mid-August 1937, the Battle of Shanghai broke out. Shanghai was the largest
port in East Asia, and the most important Chinese city in terms of economy and
transportation. Also, Nanjing will be exposed to direct danger if Shanghai is lost. The
battle of Shanghai is therefore one of the most severe battles after the commencement of
the war. Chiang Kai-shek, head of the Nationalist Government, mobilized the best army
and the battle lasted until mid-December 1937 with a hard-won victory of the Japanese
side.17
During this period, average inflation rate is 3.91% per month. Relatively high inflations
occurred in August, November and December 1937, with inflation rates of 4.88%, 6.67%
and 7.82% respectively. Given the severity of the battle, the inflation rates seem too low.
15
Guo, Ting-Yi, Chronology of the Republic of China (Zhonghua Minguo shi shi ri zhi), Taipei:
Department of Contemporary History, Central Academy (Zhong yang yan jiu yuan jin dai shi yan jiu suo)
1979. p. 999.
16
Hu, op. cit., pp. 99-107.
17
Ibid., pp. 110-16.
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This might be attributed to the banking moratorium in Shanghai which prevented large
capital flight at the beginning of the war.18
In the second sub-period (January 1938 – July 1939), similar to Chongqing, Shanghai
also experienced a drop in velocity of money; price level grows at an average of 1.36%
per month and was lower than the growth rate of money. Reasons of the low velocity
might be twofold. First of all, Shanghai is far away from Free China, people did not base
their expectation of future inflation on the note issue of Nationalist Yuan. Therefore the
steady increase of note issue by the Nationalist Government had little effect on the price
level. Second, with a huge influx of refugees and capitals, the Shanghai industry
experienced a ‘wartime boom’ from 1938 to 1941. The increase in output would also
bring velocity down.
The velocity began to increase in the third sub-period (August 1939 – June 1942). The
first wave of high inflation rates occurred in August and September 1939 (30.86% and
26.2% respectively). The Shanghai market seems responded quickly and negatively to
events of German aggression to Czech (August 1939) and Poland (September 1939). The
market reaction in Shanghai is interesting. Since Shanghai had been occupied for almost
two years, progress of the Axis force in Europe should not be of huge impact in the
market. However, the fact that fapi was the major currency makes the market unwilling to
see any disadvantageous news to a government faraway in Chongqing. The upward trend
of velocity continued throughout the period, and the peak was reached in May 1942. In
June 1942, the use of fapi would be banned. Before that date, fapi can be exchanged to
CRB notes but at a discount. It is possible that people tried to spend as much fapi as
possible before June, and thus bid up the price level. The average inflation rate during
this period is 8.37% per month, and was lower than the Chongqing average of the same
period (10.34% from September 1939 to June 1942).
18
Chang, K. N., op. cit., pp. 287-88.
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It seems that Shanghai had had similar inflationary development as that of Chongqing
during this period, except for some of the events reaction from the Shanghai market is
much stronger.
4.2 July1942-August 1945 (37 months)
In this period, monetary base shifted from fapi to CRB notes. The rate of growth of
money, though big, was quite stable. The growth rate of money supply began to move
upward since July 1944, when Japan became almost entirely defensive in the Pacific
battlefield. In the summer of 1944, the Allies also gained decisive advantage in the
European theatre. The money growth then jumped to an incredible level from May 1945,
when Germany surrendered (see figure 11).
Figure 11 shows that the price level of this period presented a very volatile movement.
The average inflation rate is 24.4% per month. The inflation developed into
hyperinflation (with an inflation rate of over 50% per month) since the end of 1944.
During the last ten months of the war (from October 1944 to August 1945), the average
inflation rate reached 61.58%. The highest monthly inflation occurred in June 1945 with
a rate of 301.96%.
Based on the P/M ratio index (figure 12), many dates with extremely high or low velocity
can be singled out. The rest of this section lists some of the dates which could be easily
identified, and it is by no means exhaustive. Description of the historical events are based
several books, mainly Guo19, Spector20 and Dockrill21.
February 1943: inflation rate rose up to 20%. The Battle of Guadalcanal ended in
February with Allies victory.22 This is the first time that the Allies took the upper hand
during the Pacific War.
19
Guo, Ting-Yi, Chronology of the Republic of China (Zhonghua Minguo shi shi ri zhi), Taipei:
Department of Contemporary History, Central Academy, 1979.
20
Spector, Ronald H., Eagle against the sun: the American war with Japan, New York: Free Press, 1985.
21
Dockrill, Saki., From Pearl Harbor to Hiroshima : the Second World War in Asia and the Pacific, 194145. Basingstoke : Macmillan, 1994.
22
Spector, op. cit., pp. 206-07.
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June 1944: The inflation rate reached 50.46%. On 6 June 1944 (the D-Day), western
Allies landed in France, and soon reached Germany in September. Also in June, the US
army won decisive victory in the Battle of Saipan and Battle of Philippines. Japanese
navy was driven back to the Island of Japan.23
September 1944: this is during the Operation Ichi-Go in which the Japanese Imperial
Army gained decisive victory over China. In August 1944, inflation rate dropped to 2.56%. The news temporarily stabilised market confidence in the CRB notes.
March 1945: Japan defeated by the US in the Battle of Iwo Jima. Iwo Jima served as an
important airbase for the following bombing of Tokyo and Osaka.
June 1945: Germany surrendered on 7 May. In June the Battle of Okinawa ended in
decisive US victory; bombardments to Japanese cities and cutting off Japanese imports.
Inflation rate reached to 301.96%.
August 1945: Atomic bombings of Hiroshima and Nagasaki on 6 and 9 August. Soviet
kept the promise of Yalta and invaded the Japanese-held Manchuria. On15 August (V-J
Day), Japanese surrendered. Price level rose by 106.29% in this month.
23
Ibid., pp. 208-301.
-17/25-
V. Concluding remarks
Before December 1941, the inflationary processes in Shanghai and Chongqing present
similar pattern, only that Shanghai market is more sensitive to international news as
Shanghai is more related to overseas market. After 1941, people’s inflationary
expectation in Chongqing is in general affected by domestic news, especially battles that
directly endangered Chongqing. In Shanghai, however, inflationary expectation is more
related to the global war situation, especially in the Pacific theatre.
Some events have had an impact in both Chongqing and Shanghai, such as the Germany
invasion of Poland in September 1939, the Operation Ichi-Go in June-December 1944,
and the eve of Japanese surrender. The two latter events (Operation Ichi-Go and the
Japanese surrender) had, however, opposite effects in Chongqing and Shanghai,
reflecting opposite interests from the two markets. Take the eve of Japanese surrender for
instance, velocity decreased sharply in Chongqing from March 1945 until the end of the
war. In Shanghai however, people fear that the CRB notes would be of no value with a
definite Japanese defeat and tried to get rid of the money as quickly as possible. Velocity
therefore began to speed up from the beginning of 1945 and reached a historical high in
June 1945.
On the eve of V-J Day, regional fragmentation was huge, and as later proved, the
Nationalist Government faced a huge burden in re-unifying the whole country
economically.
-18/25-
Appendices
Map 1. Map of China – Japanese advances and occupation
-19/25-
Fig 1. Price level and money supply (in log) in Chongqing, Jul1937-Apr1949
Chongqing: price level and money supply (in logarithm), Jul1937-Apr1949
30
25
20
WPI
15
M
10
5
Ju
l-4
8
Ju
l-4
7
Ju
l-4
6
Ju
l-4
5
Ju
l-4
4
Ju
l-4
3
Ju
l-4
2
Ju
l-4
1
Ju
l-4
0
Ju
l-3
9
Ju
l-3
8
Ju
l-3
7
0
Fig 2. Monthly growth rate of money (Nationalist Yuan or Fapi), Jul1937-Aug1946
Monthly growth rate of money, Jul1937-Aug1946
25
20
15
10
5
Ju
l-3
Ja 7
n38
Ju
l-3
Ja 8
n39
Ju
l-3
Ja 9
n40
Ju
l-4
Ja 0
n41
Ju
l-4
Ja 1
n42
Ju
l-4
Ja 2
n43
Ju
l-4
Ja 3
n44
Ju
l-4
Ja 4
n45
Ju
l-4
Ja 5
n46
Ju
l-4
6
0
-5
-20/25-
Fig 3. Output index in Free China
Output index in Free China (1938=100), 1937-45
700.00
600.00
500.00
Industrial prod
Index I
400.00
Index II
Crop production
300.00
livestock
200.00
100.00
0.00
1937 1938 1939 1940 1941 1942 1943 1944 1945
Year
Sources: Chang; China Handbook.
Fig 4. Price/Money ratio (in log), Chongqing Jul1937-Apr1949
LnP-LnM, Chongqing Jul1937-Apr1949
2.5
2
1.5
1
0.5
-1
month
-21/25-
Jan-49
Jul-48
Jul-47
Jan-48
Jul-46
Jan-47
Jul-45
Jan-46
Jul-44
Jan-45
Jan-44
Jul-43
Jul-42
Jan-43
Jan-42
Jul-41
Jul-40
Jan-41
Jul-39
Jan-40
Jan-39
Jul-38
Jul-37
-0.5
Jan-38
0
Fig 5. Chongqing Monthly inflation rate, Feb1937-Aug1939
Inflation rate in Chongqing, Feb1937-Aug1939
10.00
8.00
6.00
4.00
2.00
02
/2
8/
19
04
37
/3
0/
19
06
37
/3
0/
19
08
37
/3
1/
19
10
37
/3
1/
19
12
37
/3
1/
19
02
37
/2
8/
19
04
38
/3
0/
19
06
38
/3
0/
19
08
38
/3
1/
19
10
38
/3
1/
19
12
38
/3
1/
19
02
38
/2
8/
19
04
39
/3
0/
19
06
39
/3
0/
19
08
39
/3
1/
19
39
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
Fig 6. Note issues (Nationalist Yuan), Nov 1935-Dec 1939
Note issues, Nov 1935-Dec 1939
(in millions of Nationalist Yuan)
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Aug-35
Dec-36
Apr-38
-22/25-
Sep-39
Jan-41
Fig 7. Chongqing Monthly inflation rate, Sept1939-Mar1945
Inflation rate in Chongqing, Sept1939-Mar1945
50.00
40.00
30.00
20.00
10.00
Se
p39
Ja
n40
M
ay
-4
Se 0
p40
Ja
n41
M
ay
-4
Se 1
p41
Ja
n42
M
ay
-4
Se 2
p42
Ja
n43
M
ay
-4
Se 3
p43
Ja
n44
M
ay
-4
Se 4
p44
Ja
n45
0.00
-10.00
-20.00
Fig 8. Chongqing Monthly inflation rate, Mar1945 – Aug1946
Monthly inflation rate in Chongqing, Mar1945-Aug1946
40.00
30.00
20.00
10.00
ar
-4
A 5
pr
M 45
ay
-4
Ju 5
n4
Ju 5
l-4
Au 5
gSe 45
p4
O 5
ct
-4
No 5
v4
D 5
ec
-4
Ja 5
n4
Fe 6
b4
M 6
ar
-4
Ap 6
rM 46
ay
-4
Ju 6
n4
Ju 6
l-4
Au 6
g46
0.00
M
-10.00
-20.00
-30.00
-40.00
-23/25-
Fig 9. Shanghai monthly inflation rate, Jun1937-May1945
Inflation rate, Shanghai Jun1937-May1945
70.00
60.00
50.00
40.00
30.00
20.00
10.00
n37
Ju
l-3
7
Ja
n38
Ju
l-3
8
Ja
n39
Ju
l-3
9
Ja
n40
Ju
l-4
0
Ja
n41
Ju
l-4
1
Ja
n42
Ju
l-4
2
Ja
n43
Ju
l-4
3
Ja
n44
Ju
l-4
4
Ja
n45
0.00
Ja
-10.00
-20.00
Fig 10. Price /Money ratio (in log), Shanghai Jun1937-Jun1942 (Money = Fapi)
P/M ratio (in logarithm), Shanghai Jun1937-Jun1942
M = Nationalist Yuan (Fapi )
0.80
0.60
0.40
0.20
Se
Ju
n37
p3
De 7
c3
M 7
ar
-3
Ju 8
n3
S 8
ep
D 38
ec
-3
M 8
ar
-3
Ju 9
nS 39
ep
-3
De 9
c3
M 9
ar
-4
Ju 0
n4
Se 0
p4
De 0
c4
M 0
ar
-4
Ju 1
n4
Se 1
pDe 41
c4
M 1
ar
-4
Ju 2
n42
0.00
-0.20
-0.40
-24/25-
Fig 11. Growth rate of price and money (CRB notes), Shanghai Feb1941-Aug1945
Inflation rate, and monthly growth rate of CRB notes, Shanghai
(Feb1941-Aug1945)
350.00
300.00
250.00
200.00
WPI
150.00
MCRB
100.00
50.00
Aug-45
May-45
Nov-44
Feb-45
Aug-44
May-44
Nov-43
Feb-44
Aug-43
Feb-43
May-43
Nov-42
Aug-42
May-42
Feb-42
Nov-41
Aug-41
May-41
-50.00
Feb-41
0.00
Fig 12. Price /Money ratio (in log), Shanghai Jun1937-Jun1942 (Money = CRB notes)
P/M ratio (in logarithm) Shanghai Jun1942-Aug1945,
M = Central Reserve Bank (CRB) notes
10
0.1
-25/25-
08/31/1945
06/30/1945
04/30/1945
02/28/1945
12/31/1944
10/31/1944
08/31/1944
06/30/1944
04/30/1944
02/29/1944
12/31/1943
10/31/1943
08/31/1943
06/30/1943
04/30/1943
02/28/1943
12/31/1942
10/31/1942
08/31/1942
Series1
06/30/1942
1