Chapter 72 Fiat Bankruptcy: The Evil Consequences of Foreign Exchange Liberalization

On August 15, 1945, Emperor Hirohito of Japan issued an edict announcing Japan's unconditional surrender.When the news came, the whole country rejoiced, and at the cost of 35 million lives, the Chinese people finally won the decisive battle that determined the fate of the Chinese nation.At this time, for the national government, the most urgent task is how to take over the enemy-occupied areas and how to restore and develop the national economy. Kong Xiangxi, who was in charge of financial work during the war, has stepped down because of the US dollar public debt scandal, and Song Ziwen will replace him as the Premier and Minister of Finance.Song Ziwen, who once again stood on the core stage of managing the national economy, found that what he was facing was really a mess.

A history of the national government is a history of war.First there was the Northern Expedition, then the "suppression of the communists", fighting with various local powerful warlords, and then the War of Resistance Against Japan, which basically did not stop for a few years. Can't make ends meet.In the early stage, the national government could rely on the support of the chaebols in Jiangsu and Zhejiang to issue public bonds to survive.After 1935, the financial power of the chaebols in Jiangsu and Zhejiang was basically forcibly seized by the four major families of Jiang, Song, Kong, and Chen, and the Jiang government repeatedly reneged on debts and had extremely poor credit, which made public debt increasingly scarce.After the outbreak of the Anti-Japanese War, they had to live on foreign debts.However, for such a large country, to deal with a war of this scale, seeking foreign aid can only be an expedient measure.In desperation, in order to raise military and political expenses and make up for the fiscal deficit, Chiang Kai-shek was more inclined to let the National Bank advance money. Since 1945, the central bank's advances to the government accounted for more than 60% of government expenditures all year round!

The central bank is not Alibaba either, and wealth can be conjured out of thin air by chanting a spell.Faced with the government's insatiable appetite, the central bank has only one move left: start the machine to print money.Today, the tactic has a catchy and half-understood name: "quantitative easing." The central bank chanted its "quantitative easing" mantra, and the result was to wake up a devil called "inflation", and Song Ziwen's plundering policy of exchanging 1 yuan of legal currency for 200 yuan of counterfeit currency in the occupied areas opened the confinement Devil's cork.Soon, this devil will turn the Kuomintang-controlled area into a purgatory on earth.

In order to stabilize the economic order of the occupied areas and to implement the strategy of "supporting war with war", the Japanese invaders announced that every time they captured a place, they would exchange 1 yuan of Japanese military tickets for 1 yuan of legal currency, thereby driving the legal currency out of the occupied areas.After the Wang puppet regime was established, it issued false central reserve certificates, and 1 yuan of false central reserve certificates was exchanged for 2 yuan of Japanese military tickets, which actually devalued the currency by half.After the recovery, Song Ziwen actually announced that he would exchange the fake central reserve certificates with French currency at a ratio of 1:200. Monthly income; after the establishment of the Wang puppet regime, there was only 5,000 yuan left, but life was still manageable; after finally staying up until the recovery, partying all night, when I woke up the next day, I suddenly found that my monthly income was only 25 yuan. money!Where did the remaining 9975 yuan go?It was forcibly deprived by the government and used to fill holes in the budget.

"Think of the central government, look forward to the central government, and suffer even more when the central government comes." Song Ziwen's monetary policy caused the people in the occupied areas to cry and cry.But fortunately, it is finally recovered, no more wars, and life will get better after tightening our belts and working hard for a few years.However, the common people suddenly encountered a greater pain - inflation!Prices in the market are soaring day by day. It turns out that the receptionists of the Kuomintang and the speculators in the rear have found that the legal currency they hold is really valuable in the enemy-occupied areas. When 200 yuan is used, no one will take advantage of this advantage!Flocks of swarms rushed to the enemy-occupied areas to buy supplies. Originally, after the devastation of the war, the supply of supplies was extremely scarce. Coupled with the panic buying trend, prices immediately soared like a rocket.

As a result, the national government collected all the wealth in the enemy-occupied areas, but lost all support. This is the enemy-occupied area, so will the situation in the rear be better? After 1942, the national government issued U.S. dollar bonds and gold bonds. Many people bought bonds. They thought that these two batches of bonds were prepared with dollars and gold, and their credit would not be a problem. They could also support the country’s war of resistance and hedge inflation risks. He Le Why not?I took out the coffin and ate some US dollar bonds and gold bonds, hoping to get my own share of US dollars and gold after the victory of the war.As a result, the Anti-Japanese War was finally won, but what we were looking forward to was a 40% discount on the redemption of gold bonds, and a government notice that the US dollar bonds would not be redeemed in US dollars.The government is blatantly robbing people's wallets!At this time, the hyperinflation in the occupied areas has spread to all parts of the country, and the price in the rear market is also one day.The common people's hatred for the government has been surging.

The aloof Song Ziwen would not consider the lives of ordinary people, and his mind was spent on how to accumulate "hard currency" as soon as possible through various methods of raising money.In addition to the people's fat and people's anointing collected by his predecessor Kong Xiangxi, at this time, Song Ziwen already had about 900 million US dollars in foreign exchange and gold. Under the planning of Ji Chaoding, Song Ziwen believed that he had enough capital to start a financial reform that turned the world around—the liberalization of foreign exchange. Originally, the credit basis of legal currency is the stable exchange rate generated by the free exchange of legal currency and foreign exchange in the foreign exchange market, which is also the essence of the so-called "exchange standard system".However, under the special circumstances of the Anti-Japanese War, in order to prevent the Japanese puppet currency from arbitrage purchase of foreign exchange, and then use foreign exchange to purchase strategic materials, the national government froze the free convertibility of legal currency into foreign exchange.After the war, Ji Chaoding lobbied Song Ziwen to maintain foreign exchange control, which was not conducive to the stability and long-term stability of the national currency system, and did not conform to the liberalization principles stipulated by the Bretton Woods system.Ji Chaoding insisted that if China wants to develop, how can it not be in line with international standards?How can it violate the international practice of the "Breton Consensus"?Therefore, foreign exchange control must be liberalized, and the foreign exchange market must be liberalized!

Therefore, in February 1946, the "Interim Measures for Central Bank Management of Foreign Exchange" was promulgated, stipulating that the central bank will issue legal currency with 500 million US dollars as a preparation, and the exchange rate between the US dollar and legal currency will be depreciated from 1:20 to 1:2020, and gold and foreign exchange will be free again. transactions, and the central bank establishes a stabilization fund to conduct market regulation at any time to maintain the stability of the value of the legal currency. However, under the situation of fierce inflation, the official exchange rate depreciated quickly, and the black market exchange rate depreciated even faster!Foreign exchange black market trading is still a popular target for speculators, and the impact on fiat currency is getting bigger and bigger.On the other hand, the plunge in the value of the legal currency did not bring about the effect of stimulating exports and increasing foreign exchange earnings that Song Ziwen expected.Due to the huge destruction of productivity caused by the world war, China could not produce anything decent for export, and the industrialized countries other than the United States were shattered into ruins, and the demand for Chinese raw materials also dropped sharply, which made it impossible to earn foreign exchange through export. Domestic production capacity cannot meet the needs of some commodities. In the past, foreign exchange controls made it impossible for domestic merchants to import them. Now that foreign exchange has been liberalized, they can justifiably ask the central bank to approve foreign exchange to buy foreign goods. Now they can't accept it.Eight months after the reform of foreign exchange liberalization, the central bank’s net loss of US dollars, British pounds, and gold due to the sale of imported goods and foreign exchange settlements for other government purposes has reached 400 million US dollars after deducting the income earned from exports!The foreign exchange funds available to the central bank have been reduced by 60% at once.Seeing that it was not good, Song Ziwen quickly devalued the French currency to 1 US dollar for 3,350 yuan. As a result, he gained nothing except to stimulate inflation to further heat up.

The economy is depressed, the civil war is defeated, and the whole of China is throwing French currency and snapping up foreign exchange and gold. At this time, Song Ziwen is like a red-eyed gambler. His "powerful general" Ji Chaoding not only helps him "advise" and "find a way", but also has super strong execution ability.Under his lobbying, Song Ziwen concluded that the liberalization of foreign exchange has reached a critical "passing the barrier stage". Minister Song, look at how blue the sky is!Go straight ahead, don't look to the sides, walk through, and you'll melt into that blue sky...

Song Ziwen seemed to be hypnotized and dumped the 6.28 million taels of gold that he bought for 220 million US dollars in the market to get back the fiat currency. He did not believe that such a large-scale gold sale could not hold back the plunging momentum of the fiat currency. It really didn't hold back! By February 1947, Song Ziwen had sold more than 3.3 million taels of gold, while the official exchange rate of legal currency had fallen to 1 US dollar to 12,000 yuan of legal currency!There is no way to see the black market price. As a last resort, Chiang Kai-shek personally stepped in and issued the "Economic Emergency Measures Plan" on February 16, 1947, again prohibiting gold trading and foreign exchange circulation, and the central bank no longer sold but only bought gold.

The reform of foreign exchange liberalization failed completely, Song Ziwen resigned sadly, and the credibility of the national government collapsed. Fifty years later, Chen Lifu, who was in Taiwan, published his memoirs, in which he angrily accused Song Ziwen of ruining the "party state" with his wrong monetary policy: "Our (monetary) policy has made the rich people become poor. Those who have no money have nothing...In other words, we have turned the people into the proletariat...Isn't this paving the way for the Communist Party? What kind of financial expert is Song (Song Ziwen)?...Jiang Gongtai I believe Song, I always think that Song is an expert in finance and economics (I listen to Song on all financial issues), but in fact some things belong to common sense and have nothing to do with experts... (and all these stupid tricks) are bad ideas made by Ji Chaoding In a fit of indignation, Chen Lifu unexpectedly named the section of his memoirs "The Success of the Conspiracy of the Ji Dynasty and Ding Dynasty to Disaster the Country". [20] Ji Chaoding's series of currency "faint tricks" combined punches, didn't they arouse the suspicion of the Kuomintang?Not really.Ji Chaoding's suggestions on the national government's financial policy were implemented precisely because they fit the mentality of those in power.Because these policies themselves are tailor-made for the four major families to collect money based on their immediate interests.As long as the four major families can be enriched, for them, Ji Chao Ding is not only innocent, but also meritorious. In fact, since Song Ziwen's foreign exchange liberalization reform failed in February 1947, which triggered a rush to buy gold and hyperinflation, the Kuomintang had already lost the civil war.