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The currency reform of the Republic of China government

Abstract: Currency modernization is necessary to develop a modern economy Conditions. The monetary system reform promoted by the Nanjing Republic of China government from 1932 to 1935 was the beginning of the modernization of China's monetary system. It provided good external conditions for China's economic development before the Anti-Japanese War. By implementing the policy of "abolition of the dual-use yuan", the Republic of China government unified The internal value of the currency was realized and the standardization of currency issuance was realized; the implementation of the legal currency policy enabled Chinese currency to get rid of the traditional silver standard system and realized the circulation of banknotes as credit currency across the country; in the later period of the Republic of China, the legal currency was forced to Withdrawing from the circulation market means that the method of issuing currency to make up for the fiscal deficit is unworkable.

Keywords: The currency reform of the Republic of China government abolished the dual-use yuan legal currency

The unified currency is the national economy One of the prerequisites for maintaining efficient operation is also the starting point for the government to implement monetary policy. From 1932 to 1935, the Nanjing Republic of China government carried out substantial currency reforms under various difficulties. This reform is the beginning of China's currency modernization. It is divided into two stages. The first stage is the "abolition of dual-purpose yuan", which marks the gradual withdrawal of metals as currency from the circulation field and the beginning of China's currency standardization; the second stage is The implementation of the "fiat currency policy" means a complete change in the way currency is priced. This reform achieved certain results, and it brought the Chinese economy out of the Great Depression of the early 1930s. Later, due to the continuous war, the Republic of China government's issuance of legal currency expanded viciously in the absence of disciplined restrictions on currency issuance, eventually forcing legal currency to withdraw from circulation. At present, there are relatively few research results related to this topic. Only Wu Yuwen① and Liu Fangjian② discussed the monetary and financial policies at that time when commenting on the economic policies of the Nanjing National Government. Obviously, a systematic analysis of the monetary modernization movement during the Nanjing National Government from a monetary and financial perspective has important historical reference significance for improving my country's current monetary system.

1. Construct a unified monetary unit based on the silver standard

Historically, most dynasties in China implemented a metal standard system, and the court stipulated the fineness and weight of monetary metals. During the Ming and Qing Dynasties, with the increase in foreign exchanges, foreign currencies began to enter the circulation field. Due to the wide variety of currencies in circulation, different types of currencies have different qualities and weights, making it difficult to unify the values ??and making the exchange procedures quite complicated. This confusion of the currency system not only increases transaction costs in economic activities, but also affects the entire social credit system to a certain extent, "hindering the modernization of industrial and commercial finance." ③

To develop the economy, we must first improve The monetary system has changed the past situation of indiscriminate issuance of banknotes and banknotes, and the indiscriminate minting of money. Just after the Nanjing Provisional Government was established, Mr. Sun Yat-sen tried to unify the currency in February 1912 by taking over the Jiangnan Mint and turning it into a "special minting institution of the Republic of China". Then the Ministry of Finance prepared to build the China Mint, which was in charge of the national currency casting and the melting of old coins. However, due to the short existence of the Nanjing Provisional Government, this reform was abandoned. On February 7, 1914, Yuan Shikai's government promulgated the "Regulations on National Currency" and its implementation rules, which clearly stipulated that the casting and issuance authority of "national currency" belongs to the government, and "national currency" must be used for the inflow and outflow of public funds. Old coins circulating in the market are governed by The government collects and exchanges them in "national currency". ④The warlords' melee made the provisional government's efforts to unify the currency in vain, and the phenomenon of excessive currency issuance by local banks became increasingly serious. Various currencies in Sichuan, Guangdong, Guangxi, Hubei, Jiangxi and other provinces were mixed and flooded, and the people suffered greatly. In 1913, the auxiliary coins in Hubei Province were only worth 70 cents per dollar, while those in Guangdong were 15% off. Small silver dollar bills in the Northeast fell to one-third. Sichuan military stamps were rampant. One dollar in Guizhou was only worth 40 cents. Shaanxi military pay was entirely dependent on officials. Issue banknotes. ⑤

The issuance of currency by foreign banks in China also has a negative impact on China's currency unification process. At that time, almost all foreign banks in Shanghai issued banknotes in China. Banks such as HSBC, Citigroup, Meifeng, and Huabei in Tianjin issued silver dollar banknotes, and banks in Beijing such as the British, French, American, Belgian, German, and Japanese issued banknotes. Due to the political chaos at the time, the government was unable to supervise foreign banks. Once a bank failed, only depositors would suffer losses. It is not uncommon for foreign banks to fail. In 1921, the Sino-French Industrial Bank ceased operations, and 2.25 million yuan in banknotes could not be cashed; in 1926, the Russian-Chinese Daosheng Bank closed down, and millions of banknotes issued became waste paper. ⑥

After the victory of the Guangdong Revolution, unifying the currency remained the National Government’s primary task in rebuilding the financial order. In 1924, the Guangdong Provincial Federation of Trade Unions submitted a letter to the National Government, requesting that "Western paper (money) be explicitly ordered to be used in the city." ⑦In August 1925, the Department of Commerce proposed to "reopen the mint to mint legal French currency...the currency shall first implement a legal virtual standard system to facilitate circulation throughout the country and to the outside world. Strictly crack down on illegal minting, and consider collecting light private coins in accordance with the law." Recasting will be handled jointly by the competent authorities and the central bank." 8 Then, the central bank began to issue banknotes, and the mint minted silver coins with the image of Dr. Sun Yat-sen on the front and the party flag and emblem on the back as standard currency.

The real currency unification came after the National Government established Nanjing as its capital. The Nanjing National Government inherited the previous policies and began planning for a unified currency when the capital was founded.

In June 1927, the Ministry of Finance ordered all mints to stop minting silver coins with Yuan Shikai's face and temporarily use the old mold of Dr. Sun Yat-sen's commemorative coins to mint silver coins. In March 1928, economist Ma Yinchu took the lead in proposing the "abolition of dual-purpose yuan" and theoretically demonstrated the necessity and possibility of "abolition of dual-purpose yuan". After deliberation, the Ministry of Finance believed that "the abolition of dual-use Yuancheng is the basis for unifying the currency system and reorganizing finances." ⑨As a result, "abolition of dual-use yuan" began to be put on the government's agenda. In 1928, the National Financial Conference was held, "It was decided that the two reforms to the Yuan should be abolished and implemented as soon as possible in order to unify the currency system." 10 To this end, the National Government hired American financial expert Gammel to come to China to organize a fiscal design committee. In November 1929, Ganmal proposed the "Draft Law on China's Gradual Adoption of the Gold Standard Currency", which stipulated that 1 sun (the currency unit under design) was equal to 4 cents of the US dollar. However, due to the Great Depression, the price of gold in the international market continued to rise, while the price of silver continued to fall. In February 1931, one son was worth only 2 cents of the US dollar. If the draft continues to be implemented, China cannot afford gold exchange losses. Currency reform had to fail again.

The fluctuation in the exchange rate of silver to silver dollar in 1932 finally became an opportunity for the National Government to unify the currency. In the winter of 1931, Northeast China fell, and a large number of silver coins poured into Shanghai from all over the country. The supply and demand of silver coins in Shanghai were out of balance. In the first half of 1932, about 55 million silver dollars flowed into Shanghai, and together with the original 420 million yuan locally, the price of silver dollars in exchange for silver taels increased. In the first half of the year, the silver dollar exchange rate reached 74 taels per 100 yuan, but after the signing of the "Shanghai-Shanghai Armistice Agreement" at the end of May, the exchange rate dropped to 70 taels per 100 yuan. Price fluctuations made it difficult for merchants to adapt. The decline in silver dollar prices caused huge losses to silver dollar holders who were indebted to silver liang. Calls for the abolition of the two taels and the reform of the yuan began to rise again. (11)

In 1932, the Ministry of Finance invited leaders from the Chinese and foreign financial circles in Shanghai to form a Research Committee on the Abolition of Dual-Use Yuan, which decided to start implementing the Abolition of Dual-Use Yuan in Shanghai. On March 8, 1933, the National Government Gazette No. 1098 promulgated the "Silver Standard Minting Regulations" formulated by the Ministry of Finance, instructing "the Central Mint to start casting at the same time, stipulating that the standard currency is the Yuan, with a total weight of 26.6971 centimeters , 88 silver, 12 copper, and each dollar contains 23.493448 centimeters of pure silver. "(12) This regulation stipulates that the casting rights of silver coins belong to the Central Mint, and other factories and bureaus are not allowed to cast them, which legally guarantees the unification of currency. . The regulations also provide detailed regulations on the weight and fineness of currency in circulation, while allowing the original currency to circulate within a certain period, achieving currency standardization, but do not provide for auxiliary coins.

Shanghai began to implement the abolition of dual-use yuan on March 10 of the same year. Since the overlapping circulation between silver liang and silver coins was reduced, the market responded well to the implementation of the new currency, so the Ministry of Finance decided to abolish the dual-use yuan in Shanghai. Based on Yuan's implementation experience, this policy will be implemented nationwide. On April 5, 1933, the Ministry of Finance issued Announcement No. 55 to inform the whole country that starting from April 6, the two currencies would be abolished and replaced by the silver standard currency: "All public and private payments, contract signing, instruments and all transactions must be converted to silver standard currency." Silver coins are no longer allowed to be used." "Before this day, those who originally paid in silver coins should be paid in silver coins at the standard of seven cents and one cent of the standard yuan in Shanghai. All places outside Shanghai should apply for exchange in the foreign exchange market on April 5th, first convert it into Guiyuan yuan, and then convert it into one silver coin at the rate of seven Guiyuan yuan and one cent and one cent. All payments will be made in silver coins after this date. If the receipt and payment of new contract instruments and all transactions in public and private transactions are still done in silver, it is legally invalid. If you still hold silver, you still need to request the Central Mint to mint silver coins on your behalf in accordance with the provisions of the Silver Standard Coin Mining Regulations. , or send it to the local Central Bank, China Bank, and Communications Bank for exchange for silver coins for convenience.” (13) The announcement stipulates in detail the exchange rate of silver taels to silver dollars under various circumstances, and also addresses possible issues that may arise during the transition from silver taels to silver dollars. Various issues were properly handled to ensure the smooth progress of this reform.

2. Abandon the silver standard and implement a fiat currency system

Not long after China’s monetary system reform based on the silver standard was implemented, the Great Depression in the early 1930s swept the Western world. Due to the severe domestic unemployment caused by the economic crisis, starting from April 1931, major capitalist countries such as the United Kingdom, Canada, Japan, and Austria successively abandoned the gold standard system and implemented currency devaluation in an attempt to open up the markets of other countries through exchange rate depreciation. The United States was also hit hard by this crisis. In order to get rid of the economic crisis, President Roosevelt began to implement the "New Deal" in 1933 to stimulate domestic economic growth by increasing government spending, which required the government to increase currency. Under the gold standard, currency issuance was limited by the government's gold reserves. As a result of the trade-off, the United States adopted a gold and silver bimetallic system. The U.S. government believes that purchasing silver in the market and increasing reserves can push up silver prices and increase the purchasing power of silver-standard countries such as China so that they can sell excess goods to these countries; (14) On the other hand, using silver as currency reserves can inflate inflation. . To this end, in 1933 and 1934, the United States promulgated a series of bills such as the Silver Act, which mainly included measures to increase silver prices, purchase silver, ban silver exports, issue silver certificates, and nationalize silver. The goals were It is to achieve the ratio of "gold, three silver and one" in the reserve fund. (15) At that time, the domestic silver reserves of the United States were only US$1.45 billion, only half of the target value. So the U.S. government began to purchase large amounts of silver in the New York and London markets.

The price of silver immediately soared on world markets. Data show that the London silver price was 19.96 pence per ounce in June 1934. The silver price rose rapidly to 36.25 pence per ounce in June 1935. The silver price rose by 81% within a year; during the same period, the New York silver price increased from 45.4 cents per ounce. It rose to 81 cents per ounce, an increase of 78%. According to statistics, the price of silver in London on April 26, 1935 was three times higher than in 1931, while the price of silver in the New York market was 3.3 times higher than in 1931. (16)

The rise in silver prices in the world market has dealt a heavy blow to China, which is still on the silver standard. Since the price of silver in the international market is much higher than the price of domestic silver dollars, foreign banks in China have purchased silver dollars domestically and shipped them to New York and London for arbitrage, resulting in a massive outflow of Chinese silver. Originally, China's silver inflow has been greater than its outflow since 1926, and the money supply is abundant. Starting in 1932, Chinese silver began to flow out. In 1934, affected by the U.S. silver policy, China's currency outflow reached 227 million silver dollars. Reuters reported that from the end of June 1934 to January 1935, the number of silver dollars in circulation in Shanghai decreased by 230 million yuan. Except for a small part that flowed into the mainland, the rest were all shipped to London or the United States. (17)

Faced with the outflow of silver, the Nationalist Government began to impose silver export tariffs and balancing taxes on October 15, 1934, in order to reduce silver exports. On October 16, a Foreign Exchange Leveling Committee was established to intervene in the foreign exchange market when necessary to stabilize the price level of the foreign exchange market. The committee entrusts the central bank to buy and sell foreign exchange and gold and silver based on market conditions. The flat market fund comes from the silver balance tax levied by the government and the Ministry of Finance.

However, these measures failed to fundamentally solve China's silver outflow problem, and instead promoted the prevalence of silver smuggling. In the last few weeks of 1934, more than 20 million yuan in silver was smuggled out. In order to combat the financial policies of the Nationalist government, the Japanese government deliberately smuggled silver into the occupied territories. As a result, the amount of silver dollar smuggling reached as high as 150-230 million yuan in 1935. (18)

The U.S. silver policy puts China’s silver-standard currency system, which has been implemented for less than two years, in jeopardy. The outflow of silver has posed a serious threat to China's economy, with frequent economic panics, domestic monetary tightening, instability in the market, and frequent bank runs, resulting in the collapse of many banks and small and medium-sized banks. In June 1935, among the 92 yarn mills in the country, 24 were suspended and 14 were under operation, reducing spindles by more than 40%. In 1934, 510 industrial and commercial enterprises closed down in Shanghai. From January to October 1935, the number of closed enterprises reached 1,065, which was 1.1 times the total number of closed enterprises in the whole year of the previous year. The rise in silver prices has also caused China's exchange rate to rise against the currencies of major Western countries, stimulating imports while exports have dropped significantly over the same period. In 1935, the export value of China's main commodities, such as raw silk and tea, was about 65% lower than in 1929. (19) The Nationalist Government has repeatedly negotiated with the U.S. government, asking the U.S. government to abide by the principles of the London Silver Agreement and stop purchasing silver. However, the U.S. government turned a deaf ear to the Nationalist Government’s request. The severe economic crisis forced the National Government to abandon the silver standard system and further reform the monetary system.

The United Kingdom is an old capitalist country and has huge economic interests in China, so it is very concerned about the National Government's choice of currency system. On June 7, 1935, the British government appointed Sir Liz Ross as China's financial adviser. On September 21, Li arrived in Shanghai and immediately inspected North China, South China and the Yangtze River Basin. He communicated with the National Government many times and put forward many suggestions on China's currency reform. Subsequently, the U.S. government also appointed Young to participate in China's monetary system reform. With the support of the British and American governments, the National Government began a new round of monetary system reform.

On November 3, 1935, the Ministry of Finance issued an announcement announcing the implementation of a legal tender system nationwide. The announcement pointed out: "Since the world economic panic in recent years, all important countries have successively changed their monetary policies and are not allowed to circulate coins. Our country uses silver as currency. Since the price of silver has changed dramatically, it has been greatly affected. The phenomenon of domestic deflation is extremely significant. . As a result of the industrial and commercial restructuring, all industries were sluggish, and capital was flowing out, the international balance of payments was adversely affected, and the national economy was deteriorating day by day, and various unfavorable conditions occurred one after another. "If no effective measures were taken at that time, the country would be in trouble. The current silver reserves are in danger of being exhausted. This is obvious to the people of the country. "This ministry specially implemented the levy of a silver export tax and a balancing tax on October 15 last year in order to prevent the spillover of resources and preserve the lifeline of the country's economy. , the emergency crisis has been saved. Although the effect has been achieved for a while, it is not a fundamental rescue method. "Recently, domestic deflation has become more and more panicked, and the market has become more depressed. If things go on like this, the government will inevitably cause an economic collapse." To save ourselves and revitalize the economy, we must preserve the currency reserves that are the lifeblood of the country in order to achieve permanent monetary and financial stability. We are hereby formulating measures to take effect today with reference to the precedents of various countries in recent times.

"(20) The announcement stipulated six measures, the main contents include: the issuing authorities of legal currency are the Central Bank, Bank of China, and Bank of Communications (the Agricultural Bank of China was granted the right to issue banknotes in 1936), while other bank banknotes were gradually withdrawn; the establishment of an issuance authority A management committee is prepared to keep reserves and manage the issuance of legal currency; the state manages silver uniformly, and legal currency must be used in industry, commerce, and public and private transactions. Silver held by individuals must be converted into legal currency; the central government, China and the Bank of Communications have no restrictions on the purchase and sale of foreign exchange. Stabilize the external value of the legal currency and maintain a stable exchange rate.

This currency reform completely decoupled the Chinese currency from silver. However, at that time, the Chinese government lacked enough gold or silver to determine the gold content of the legal currency, so the government planned to focus on the Chinese treasury and silver. Private silver and gold are sold in the New York and London markets in exchange for foreign exchange as reserves to ensure the issuance of legal currency. On November 5, the Central Bank announced the price of legal currency against the pound: 1 legal currency = 1 first. 2.5 pence (determined based on the average foreign exchange rate from 1930 to 1934). From this day on, the foreign exchange rate was announced on a daily basis, and the above three banks assumed the responsibility of stabilizing the market exchange rate. This regulation actually marked the entry of the National Government. The relationship between the Sterling Group, the Chinese economy and the British economy is even closer.

The U.S. government was very dissatisfied with China's joining of the Sterling Group. Before the National Government implemented legal currency reform, the United States purchased 100 million ounces of silver from China. As a condition, it required a fixed exchange rate between legal currency and the US dollar, but the Nationalist government did not accept it. Therefore, on December 9 of the same year, the United States stopped purchasing silver in the London market, and the price of silver in the international market fell. In this way, if the Nationalist government sold silver at the market price. , China will suffer huge losses. The unilateral plan to sell silver in exchange for legal currency reserves was frustrated. Forced by reality, the National Government contacted the US government again in 1936. Guo Bingwen, director of the International Trade Bureau of the Ministry of Industry, and Gu Yiqun, manager of Shanghai Zhongfu Bank, visited the United States to discuss currency issues with U.S. Treasury Secretary Morgan. According to the agreement, the U.S. government signed the Sino-U.S. Silver Agreement at 50 per ounce. Purchase 50 million ounces of silver from China at the price of US cents; the French currency is pegged to the US dollar, 100 French currency = 30 US dollars; in order to prevent the fluctuations in the currency exchange rates of the United Kingdom and the United States from exceeding the range limit and prevent triangular arbitrage, China has expanded the spread of foreign exchange buying and selling. (21) This agreement enabled the National Government to regain the support of the United States in its currency reform and maintain the stability of the external value of the legal currency.

Although the National Government established a fixed parity relationship with the pound and the US dollar, it The legal currency is not pegged to the pound and the US dollar. In fact, the National Government implements an adjustable exchange rate system. After the implementation of the legal currency policy, the external value of the legal currency is pegged to the pound and the US dollar. Restricting the buying and selling of foreign exchange, the selling price was 14.625 pence and the buying price was 14.375 pence. In September 1936, the National Government expanded the exchange rate spread according to needs, with the selling price being 14.75 pence and the buying price being 14.25 pence. The above-mentioned three banks still provided unlimited supplies. foreign exchange to keep exchange rates stable. Subsequently, the external value of legal currency gradually declined. After the outbreak of the Anti-Japanese War, in order to reduce the need for foreign exchange and prevent capital evasion, the Nationalist Government implemented financial stabilization measures and restricted depositors' withdrawals. During this period, the external price comparison of legal currency gradually decreased. In March 1938, in order to prevent pseudo-organizations from exchanging counterfeit currency for legal currency and obtaining foreign exchange, a method of requesting verification for foreign exchange purchases was implemented, and foreign exchange management during the war began. (22)

On the basis of the continuous reform of the main currency, the Nationalist Government also unified the standards of the auxiliary currencies and promulgated the regulations on auxiliary currencies on January 11, 1936, completing the last step of this round of reform. At this point, the National Government's currency modernization reform came to an end.

3. Evaluation of the effectiveness of the currency reform movement during the Nanjing National Government

The currency reform movement was an important measure taken by the National Government to develop the economy. Its implementation had a certain impact on the Chinese economy at that time and during the Anti-Japanese War. It enabled the National Government and Britain and the United States, the two most powerful capitalist countries in the world at the time, to form a political and economic alliance, creating a good foundation for the subsequent Anti-Japanese War. The external environment makes it easier to obtain international support. Judging from the currency reform process of the National Government, the "abolition of the dual-use yuan" unified the internal value of the currency, which is the prerequisite for unifying the external value of the currency; the legal currency policy of the Nanjing National Government had an extremely adverse impact on the domestic economy in the international economic situation. Forced by the situation, the National Government redetermined the external value of the currency through the legal currency policy.

First, this currency reform has achieved currency unification. The abolition of the dual-purpose yuan was the first step taken by the National Government in the currency modernization reform. It removed silver as a commodity from the circulation field, realized the standardization of the main currency in circulation, greatly simplified the complicated procedures in circulation, and directly Reduces transaction friction caused by currency issues in the circulation field. At the same time, because the state has taken away the authority to mint currency, unified the minting standards of currency, stabilized the pricing between commercial silver and silver dollars, reduced the losses caused by economic entities due to the price divergence of silver and silver dollars, stabilized and promoted economic development. The reform of abolishing the dual-use Yuan currency system was successfully and stably implemented across the country, making the two-bank currency system that had been popular in China for more than 400 years become history, and a currency system with modern significance was initially formed.

The abolition of the dual-purpose yuan promoted the change of the main currency in circulation and ended the circulation of silver taels in China. But the auxiliary coins are still not unified. What truly ends China’s currency chaos is its fiat currency policy. Although in the initial stage of issuance, the fiat currency policy was resisted by local powerful groups, in the end the fiat currency successfully entered the circulation field and completed the unification of currency.

Second, currency reform promoted the development of China’s national economy in modern times. The reform of the monetary system has stabilized the domestic financial situation, so that "those who used to hesitate in the middle and were reluctant to follow the middle path now have a basis and can turn to pre-planning for future plans." (23) In other words, this reform This has greatly reduced the economic fluctuations and economic uncertainties that occurred in the past few years, and economic entities can make reasonable plans for future development. The reform of the monetary system also promoted the development of domestic industrial and agricultural production. As shown in Table 1, China's gross national product (measured in 1933 currency) was 29.46 billion yuan in 1933 before the reform, 26.90 billion yuan in 1934, 29.09 billion yuan in 1935 after the reform, and reached 30.94 billion yuan in 1936. Yuan. Although there have been ups and downs in the past 10 years, the economy has generally shown a growth trend. Therefore, the period from 1927 to 1937 is called the second "golden period" of modern China's economic development, and monetary reform policy was an important driving force for this golden period.

Table 1 China’s total GNP and growth rate from 1927 to 1936 (unit: 100 million yuan)

Year GNP GNP growth rate % Year GNP GNP growth rate %

1927 248.58 1932 294.7 3.15

1928 257.11 3.43 1933 294.6 -0.03

1929 266.26 3.56 1934 269.0 -8.7

1930 276.21 3.73 1935 290.9 8.14< /p>

1931 285.70 3.44 1936 309.4 6.36

Note: This table is excerpted from Zhao Xin'an: "Empirical Analysis of China's Macroeconomics from 1927 to 1936", "Nankai Economic Research", No. 6, 1999 Expect.

Third, currency reform has eliminated the adverse impact of precious metal fluctuations in the international market on the Chinese economy. After experiencing the conversion from precious metals - silver standard - foreign exchange standard, the value of China's currency and economic activities in modern times have gradually declined due to the fluctuation of precious metal prices in the international market. The legal currency policy has also eliminated the negative impact of currency appreciation on trade caused by rising silver prices, and the foreign trade situation has been significantly improved. In early 1936, foreign trade recorded a surplus unprecedented in decades. Although the trade deficit continued to occur later, the relative deficit improved significantly. In 1936, the country's exports increased by 130 million yuan, while the added value of imports during the same period was 30 million yuan. (24)

After the implementation of the legal currency policy, the currency issuance gradually increased. In only about a year and a half, the circulation of legal currency increased more than three times. Due to the rapid increase in money supply, China's economy has entered the fast lane of development. However, an increase in the money supply also drives inflation. Starting from November 1935, China's price index got out of the downward channel. In 1936, the price index in Shanghai increased by 12.6% over the previous year, and by June 1937, the price index increased by another 16%. (25) Although the inflation caused by this currency reform was unexpected and was actually something that financial experts in Nanjing did not want to see, the reform still set the entire economy on the road to recovery. (26)

Modern money quantity theory tells us that if the government wants to reduce inflation and stabilize the value of currency, it must control currency issuance, because there is a negative correlation between currency circulation and price levels. Friedman even argued that stabilizing currency values ??must adhere to the "rules of a single currency." Japan's invasion of China in 1937 disrupted the pace of China's economic development. As a result of the war, military spending soared. More importantly, as the war situation went unfavorable, the National Government's main tax sources fell one after another, and the authorities' financial expenditures became increasingly tight. They had to rely on the issuance of currency to supplement military expenditures, which caused the National Government's currency issuance to grow rapidly. As shown in Table 2, in June 1937, the Nanjing National Government's legal currency issuance quota was 1.41 billion yuan. By the end of the Anti-Japanese War in August 1945, the currency issuance had increased to 556.9 billion yuan, an increase of 394.5 times compared with before the outbreak of the war. To finance the civil war, the Nanjing government further increased currency issuance, eventually leading to hyperinflation. From the perspective of currency purchasing power, the purchasing power of a unit of legal currency in May 1949 was only 7×10 of the purchasing power of a unit of legal currency in 1937[-14]. (27) Hyperinflation directly destroys the credibility of legal currency circulating in the market. The gold yuan coupons that appeared before liberation replaced the circulation of legal currency, and the people were unwilling to hold legal currency, which indicated the end of the mission of legal currency.