Chinese Inflation

Press, Volume LXXXIV, Issue 25581, 24 August 1948, Page 4

Chinese Inflation

Still another attempt to check China’s runaway inflation, one of the two most important problems facing the country to-day, has been made by the Kuomintang Central Political Council, which has decided on the issue of a new currency. China’s other problem is a military one; and it is the basic cause of her present serious economic position. The civil war has imposed a burden of 70 per cent, or more on the national budget, and the Government, cut off by Communist successes from sources of tax revenue, has been forced to print increasing amounts of paper money to meet its operating deficiency each month. This has added volumes of new paper money to that already in circulation. With the money in circulation rising out of all proportion to the goods available, the value of the Chinese dollar has sunk fantastically low, and prices have risen to astronomical levels. The black market rate for the United States dollar has risen to 11,000,000 Chinese dollars, and the Shanghai wholesale price index has climbed steadily until it is now 110,000 times greater than its 1936 base. Other inflationary factors have been the ability of the banks to extend credits apart from currency, and the velocity at which money has circulated. People have had so little confidence in Chinese dollars that they have refused to hold them at all. The Government has attempted to deal with inflation by a number of superficial means. It has tried

dumping gold bullion, setting secret police on black market traders, holding back the issue of higher denomination banknotes, and juggling with the official foreign exchange rate. But most of these measures have been only mildly effective temporarily, and have had to be abandoned. Repeated failure has weakened public confidence in the Government. While inflation has caused the cost of living to soar beyond the reach of fixed wage and salary earners, its worst effect has not been the rise in prices, but the creation of profound distrust of the currency, which has reduced internal transactions to the level of barter. The Government’s main problem now is likely to be not the protection of the new currency against rising budgets and increasing note issue, but the establishment of public confidence in it. China has no strong tradition of a stable national currency. Instead, there have been the currencies of regional war lords which have risen and fallen with the luck of the various armies supporting them. Traditional distrust of the money of a war lord losing battles has been transferred to the present Government as its armies have met reverses in the civil war. Military successes against the Communists would do much to remove this distrust and establish confidence in the new currency.