China’s Hyperinflation – Chartbook Newsletter #26

CHARTBOOK Adam Tooze – 11 July 2021

One of the remarkable things about China under the rule of the Communist Party is its aversion to inflation. Since 2020 the regime has been making a point of emphasizing its resistance to Western-style monetary experimentation. Fascinating background is provided by Isabella Weber’s timely book about China’s price reform discussion of the 1980s.

Weber argues that the stability of the CCP regime today owes much to the rejection of shock therapy a la Russe, urged on it by Western and East European advisors in the 1980s. Instead China opted for a gradualist program of price liberalization combined with the crackdown of 1989. This more cautious and ultimately far more successful approach was justified in the eyes of CCP experts by concerns about inflation. And that in turn owed much to the lessons learned by the Communists during the period of World War II and the civil war. One of the main forces enabling the CCP’s overthrow of Chiang Kai-shek in 1949 was the economic disaster suffered by the Nationalist regime. The Communists were swept to power on a tidal wave of dissatisfaction over a ruinous hyperinflation.

Given the focus of Western historical memory of World War II on either Europe (D-Day, Italy, Eastern Front) or the Pacific, it is easy to forget how dramatic was the military struggle between China, led by the nationalist regime, and Japan between 1937 and 1945, followed by the Chinese civil war between Nationalist and Communist forces that followed between 1946 and 1949. The work of Rana Mitter and Hans van de Ven is an essential corrective. Accounting for casualties is imprecise, but if we reckon with 25 million Soviet casualties in World War II, the figure for China is likely somewhere between 15 and 20 million. As well as intense combat and scorched earth counterinsurgency perpetrated by the Japanese, a large part of that giant death toll is due to famine, disease and environmental disaster. Large parts of China suffered a comprehensive economic and social crisis. And, as is normally the case in market or semi-market societies, comprehensive societal dislocation goes hand in hand with monetary disorder. Think Europe during the 17th century. Think Hobbes, “No arts; no letters; no society; and which is worst of all, continual fear and danger of violent death; and the life of man, solitary, poor, nastybrutish, and short.”

Between 1937 and the collapse of the nationalist regime in the spring of 1949 China experienced an inflationary surge that is amongst the worst ever recorded.

Source: Chang, The inflationary spiral ; the experience in China, 1939-1950, (1958)

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