WHEN Japan invaded China in 1937, China's monetary system was prepared for the emergency. It can be said without exaggeration that were it not for the new monetary system which was introduced in November 1935, China could not have withstood the Japanese onslaught in the initial period of the war. A clear understanding of the new system and a knowledge of the way it has operated during the war are a necessary precondition for a fruitful discussion of the problem of the postwar adjustment of Chinese currency.
The importance of the new monetary system can best be suggested by a reference to the chaotic condition of the currency in the days of the Peking Government and during the early years of the National Government. As late as 1929, the report of the Kemmerer Commission stated that "China has unquestionably the worst currency to be found in any important country of the world." The major tasks of currency reform were the establishment of a uniform and convenient medium of exchange and the adoption of a monetary standard. In 1933, the first and comparatively easier problem was solved by the abolition of the tael and the adoption of the standard silver dollar as China's monetary unit. The much more difficult problem of the monetary standard was solved in November 1935 by the abandonment of the silver standard and the adoption of a managed currency.
The circumstances which precipitated the adoption of the new monetary system are of much more than academic interest. Now, when China's central financial problem is rising prices, it is interesting to recall that, although inflation is most undesirable, its immediate impact does not create difficulties as acute as those produced by deflation. The rise in the world price of silver after 1931, stimulated by the British devaluation of the pound and later to a greater degree by the American silver purchase program, led to a sharp fall in prices in China. Prices in Shanghai fell more than 30 percent from the summer of 1931 to the summer
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