How Hyperinflationary Policies Ushered in China’s Communist Rule

Austrian economist and professor at Northwest University Richard M. Ebeling in a recent article articulates how the Chinese government’s hyperinflationary policies, which financed her war with Japan 1937-1945 and the civil war compounded by the “dictatorial” Nationalist government, ushered in the communist tyrannical rule.

Here is a slice. From Epic Times (hat tip Bob Wenzel) (italics original)

Inflations have undermined the cultural and economic fabric of society, bringing about social chaos and revolution. Inflation is the enemy of social order and economic stability. Inflation can destroy accumulated wealth, ruin the entire well being of broad sections of a country’s population, and sometimes bring about radical change in a nation’s political system. When combined with war, inflations tear apart the human community.

One example is the Great Chinese Inflation of the 1930s and 1940s. Indeed, the destruction of the Chinese monetary system during this period helped Mao Zedong’s communist movement come to power on the Chinese mainland in 1949.

In the nineteenth and early twentieth centuries, Imperial and then Republican China had no central bank. The monetary system was based on a diverse network of private banks operating in the various regions of the country. While copper was widely used in coins, the primary medium of exchange was silver, and the entire Chinese economy functioned on an informal silver standard for most of this time. A year after Chiang Kai-shek’s Nationalist (or Kuomintang) Party came to power in Nanking in 1927, the Central Bank of China was established with its headquarters in Shanghai, and the country was formally put on a Chinese silver-dollar standard.

Read the details here

 

The real effects of inflationary policies to the Chinese political economy. Again Professor Ebeling

But it is nonetheless true that whatever basis of popular support Chiang’s government might have had against the communists at the end of the Second World War, especially among the country’s middle class, was undermined by the inflation. It destroyed the wealth and savings of the Chinese middle class, and created chaos in virtually all commercial dealings due to the loss of a reliable and stable medium of exchange for purposes of rational economic calculation and business planning.

In addition, the inflation and its effects drove some segments of the rural population into a more severe poverty than even the war had generated. Thus, whatever support the Nationalist government may have had in the countryside soon withered away, as well.

Also, during and after the war, the Nationalist government imposed unworkable price and wage controls as a supposed tool to “fight” price inflation that only succeeded in creating even more distortions and imbalances throughout the Chinese economy due to shortages, black markets, and mounting corruption.

Its policies produced the social and economic unrest that played right into the hands of the communists, as Mao’s revolutionary government promised to do away with the corruption and abuse of Chiang’s Nationalist government.

The hyperinflationary policy followed by the Nationalist Chinese government, therefore, helped bring about more than half a century of Marxist tyranny on the mainland of China, a communist tyranny under Mao Zedong that historians have estimated cost the lives of at least 80 million innocent men, women and children in the name of building the “bright socialist future.”

I find some relevance with China’s inflationary policies of 1930-40s with current stylized policies and politics. Except that the sequence appears to be backwards.

Then inflationary policies had been designed to finance China’s war economy. However today, both China and Japan have been inflating bubbles with the aim of generating economic growth (really—statistical growth, and really—subsidies to the cronies of the Chinese government and State Owned Enterprises (SOE) as well as Japan’s Wall Street) and the ensuring of the tenures of their respective political leaders. 

[Note I included Japan in the above commentary due to the recent controversy which has historical significance.]

However, slowing growth even from statistical measures from the intensifying embrace of bubble policies have placed increased political pressure on both governments. And instead, the current bubble (inflationist) policies have amplified on the credit risks (and other associated risks) for both economies amidst an environment of slowing growth.

So to divert the public’s attention from the real problems, both governments has resorted to diversionary tactic of brinkmanship politics via territorial disputes aimed at the incitement of nationalist sentiment to generate popular support for their respective governments. 

This has also been impliedly contrived to further justify their current inflationary policies with even bigger defense spending. Both China and Japan, a staunch US ally, will raise their defense budget this year.

The peculiarity is that despite the hullabaloo over Senkaku Islands and so the so-called “China threat’ as portrayed by western media, the Chinese government as well as partly Chinese investors continue to indirectly finance the US war machine via record acquisition of US Treasuries. 

The danger of inflationism has been its relationship with wars. The next question is what happens when all these seeming theatrics risks becoming real even by accident? Will massive inflationism lead to World War III or even a nuclear Armageddon?

Or will communism and its close sibling socialism rear its ugly head again, not just in China but to practitioners of inflationism elsewhere?  

Recently Adolf Hitler’s anti-semitic book 'Mien kampf' has seen a surge in sales.

Signs of things to come?