Chinese hyperinflation
The Chinese hyperinflation was the extreme inflation that emerged in China during the late 1930s, extended to Taiwan after the Japanese surrender in 1945, and concluded in the early 1950s.
After a significant speculative outflow of China's physical silver to the United States of America due to the Roosevelt administration's Silver Purchase Act of 1934 resulted in insufficient silver reserves relative to notes issued, in the 1935 currency reform, the Nationalist government of China abandoned the traditional silver standard and introduced its own paper currency, the Chinese National Currency. However, this currency was issued without sufficient credit or reserve backing. The Nationalist government's reliance on deficit spending led to unchecked monetary expansion, resulting in rapid currency depreciation. This situation was aggravated by the financial burden of the Second Sino-Japanese War and the subsequent Chinese Civil War. To control the price hike, the government tried to introduce a new currency, namely the Chinese gold yuan in 1948, along with price and wage controls, which proved infeasible due to extensive corruption and administrative failures.
The hyperinflation eroded popular support for Nationalists across China, contributing to the collapse of the Republic of China on Mainland. In contrast, the Communists' ability to control it, aided their rise to power on Mainland China. On Taiwan, the Nationalists eventually restored financial stability using the Chinese gold they took to the island during their retreat from the mainland and American financial support.
Origins
In 1905, the Imperial Chinese government founded the Hubu Bank, granting it the authority to issue banknotes. At the time, Chinese leaders, whether conservative or revolutionary, believed that increasing the issuance of banknotes would allow them to outspend their revenues. Although subsequent republican governments sought to unify the national currency, progress was slow by 1937 due to internal conflicts and concerns about foreign intervention, as the plan potentially required substantial foreign loans. As a result, silver bullion still dominated the market, circulated and exchanged in various forms and weights without fixed ratios.Silver outflow in the 1930s
In 1933, China was the only major country to use a silver standard. The use of silver protected China from the initial impact of the Great Depression in 1929, as it primarily traded with gold-standard countries, which saw a reduced silver price, effectively debasing the Chinese currency. The Roosevelt administration enacted Executive Order 6814 and the Silver Purchase Act of 1934. The resulting US silver purchase program, authorised by the Thomas Amendment in 1933 significantly impacted China's silver-based currency by raising silver prices and increasing the global price of silver. This caused a massive speculative outflow of China's physical silver reserves to the United States, facilitated in large measure by the semi-colonial foreign owned and managed banks and trading houses that constituted a sizeable part of the financial sector. These foreign banks in China had until 1935 also possessed the right to issue currency..Now with insufficient physical silver reserves to back up their note issues, foreign-owned and Chinese banks and financial institutions reduced extension of credit, curtailed their loan programs and called-in existing loans. This reduced economic activity and had a highly deflationary effect on the Chinese currency. This further discouraged Chinese exports and resulted in a continuous trade deficit. Cheap agricultural produces flooded into China while silver flowed out.
1935 currency reform
In 1935, the Nationalist government imposed a reform to replace the silver standard with the foreign exchange standard, in which a new paper currency, namely Chinese National Currency, was created. The government pledged to establish an independent Central Bank to act as the reserve bank and to create a supervisory committee with responsible members from the business community to oversee the money supply. However, none of these promises was fulfilled. Instead it paved ways for the government to expand money supply without constraints.The initial inflation after abandoning the silver standard was moderate. In Shanghai, wholesale prices dropped 23% from 1931 to 1934, then fell another 1% by 1935, but rose 24% over the following two years. However, in 1937, with the outbreak of the Second Sino-Japanese War, government spending surged for war efforts. The paper standard and inflation weakened the Chinese as they had to deplete silver reserves, which could have been used for war financing, for maintaining the currency.
Second Sino-Japanese War
Nationalist China
Starting in July 1937, the Japanese military advanced through northern and eastern China, forcing the Nationalist government to retreat inland and abandon significant manufacturing and agricultural regions, as well as key transport hubs for imports and exports. This retreat, combined with Japanese blockades of Chinese transport routes, led to immediate price surges in Free China. Each successive Japanese victory exacerbated the situation. For instance, the fall of Wuhan and Guangzhou in late 1938 caused import prices to rise by 72%. The Japanese invasion of Guangxi in late 1939 nearly doubled import prices in Chongqing. In contrast, locally produced goods, including food and agricultural raw materials, maintained stable prices until 1938, supported by a robust harvest in Sichuan that year. However, from 1939 onwards, the prices of both imported and local goods began to rise in tandem as around five million refugees moved westward into Free China.Since the start of the war, the Chinese government began funding its efforts through the issuance of war bonds, which initially enjoyed strong public support. By late 1938, government spending expanded not only for the war effort but also for reconstruction and the development of inland industries and transport infrastructure. This expansion aimed to reinforce infrastructure and sustain the war effort within the remaining Chinese-controlled territories. Consequently, government spending increased by 33%, despite the administration now managing only about half of the country. However, public confidence in war bonds waned, leading to a decline in bond sales since 1938. Additionally, the limited new taxes, which were not introduced until late 1939, failed to offset the government's excessive spending. As a result, the budget deficit continued to grow unchecked. With limited tax revenue from occupied regions and no bond market, China relied on banking institutions to fund deficits, leading to monetary expansion.
Inflation, previously moderate, surged after the Pacific War began. After the Japanese attack on Pearl Harbor in 1941, Japan quickly seized the whole of Shanghai and, in 1942, cut off the Burma Road, a crucial supply route for China. This led to a 50% decrease in imports in 1942 compared to the previous year. Despite efforts to compensate with The Hump air transport route over the Himalayas, by 1944, China was only receiving 6% of the total imports it had in 1937. Additionally, rice production in southern China faced unfavourable outcomes, although wheat and barley production in Henan and Hebei saw slight increases. Due to administrative failures, the Nationalist government struggled to enforce price control measures, despite issuing decrees to this effect. None of the government's strategies addressed the need to curb its own budget deficit, which continued to generate inflation.
Although American shipment of gold to China played a critical role in reducing inflation, China's insistence on the official exchange rate of CNC created serious tension with its major ally, the United States. The US Department of the Treasury was also unhappy with the Chinese government's handling of the sale of gold that the United States had supplied to China.
American military operations in China also added to the financial difficulty of China. Besides providing food and lodging for US forces, China was responsible for constructing and maintaining military airfields, including costly B-29 bomber bases, which far exceeded initial budgets, costing C$79.9 billion CNC. In 1943, the US offered to cover some expenses in US dollars at an official 20:1 exchange rate, but as the Chinese currency devalued sharply, the agreement became unsustainable. By 1945, the currency's value dropped to 1/2,500 of its pre-war level, with even more severe inflation at major bases like Kunming. This led to the eventual abandonment of the 20:1 rate for payments to US forces. Payments from the US ceased after a final US$45 million settlement for late 1944, forcing China to cover expenses, which accounted for 15%–22% of its fiscal spending. From 1942 to 1945, China disbursed C$246 billion for US military aid, about 7% of its total military expenditures.
Shanghai
Between 1937 and 1941, Shanghai remained prosperous, due to foreign protection. In Shanghai, international connections helped it recover quickly as a trade hub. By 1938, after initial setbacks due to the Sino-Japanese War, imports had rebounded from 3.76 billion yuan in 1938 to 34.1 billion yuan by 1941. Exports also rose from 2.22 billion yuan in 1938 to 19.29 billion yuan in 1941.However, the city constantly saw a shortage of rice. Traditionally sustained by the surplus from nearby Zhejiang and Jiangsu provinces, Shanghai had to import more rice from Saigon due to conflicts in neighbouring areas. While rice prices stabilised when transport links with inland China were restored in 1938, they surged again in 1939 as the Japanese military began forcibly requisitioning rice from surrounding provinces. By 1940, Shanghai was entirely reliant on rice imports from Southeast Asia.
The economic boom of wartime Shanghai was marked by speculative behaviour and a lack of regulation. People hoarded rice and other materials, which led to daily inflation. By 1940, the price of fine rice had grown to four times the pre-war price. In 1939, stock market activity became uncontrollable, and trading of war-related commodities like cotton drove prices up. Cotton that sold for 1,000 yuan per bale in September 1939 doubled to 2,000 yuan by May 1940. However, the French surrender to Germany in June 1940 led to the collapse of inflated prices. This resulted in the overnight bankruptcy of over 50 import-export firms and steep declines in stock values.
Although factories attempted to provide substitutes for workers, these efforts were insufficient to maintain a decent standard of living due to rampant price hikes of rice and rents. This led to a surge in protests, demonstrations, and violent crimes. Labour movements increased significantly, rising from 21 instances in 1938 to 282 in 1941. Following the Japanese capture of Shanghai in December 1941, inflation in the city further worsened, unemployment rose, and production declined, as a result of inadequate supplies under the Japanese rationing system.