How China Was Stolen

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Once
upon a time (before 1927), China had a relatively free banking system.
Privately owned banks operated throughout China. The largest Chinese
banks and all foreign-owned banks were headquartered in Shanghai.
Banks in China issued notes that were redeemable in silver, the
traditional Chinese medium of exchange. The notes from each bank
circulated freely with the notes from other banks. Chinese banks
did without government regulation; instead, competition prevented
“inflation” (aka counterfeiting).

In
1927, the Chinese banks were trapped between Communists and Nationalists.
Violence organized by Communist labor leaders crippled industry
in Shanghai. Chiang Kai-shek made Shanghai banks a deal they couldn't
refuse; his forces would suppress the strikes, in return for loans
to the Nationalist government.

In
1927, the first year of the Nationalist regime, these "loans"
accounted for 49 per cent of government revenue. The government
continued to increase its spending and debt.

In
the spring of 1928, T.V. Soong (Chiang's Triad-connected brother-in-law)
forced the Shanghai banks to become dependent on high-interest "guaranteed"
government bonds. Skeptical bankers were arrested. By 1932, Chinese
banks located in Shanghai were stuck with between 50 per cent and
80 per cent of Nationalist government bonds.

Also
in 1928 Soong founded a government "Central Bank" (patterned
on the US Federal Reserve), the “State Bank of the Republic of China."
Soong appointed many of the directors of private banks to a figurehead
board of directors of the Central Bank. Nationalist officials who
controlled the issuance of government bonds often gained seats on
the boards of private banks. Just as in the US, those with inside
information on Central Bank manipulations quickly became a privileged
class of kleptocrats.

The
final blow to the freedom of the Chinese financial system came from
Franklin Roosevelt's New Deal Administration. In 1933, the U.S.
government began to purchase large amounts of silver. In June 1934
the Silver Purchase Act was passed. This Act instructed the United
States Treasury to purchase silver until the world price of silver
rose above $1.29 per ounce, or until the monetary value of the U.S.
silver stock reached one-third the monetary value of the gold stock.
(Note that this huge US government expenditure occurred at
the worst time in the US Great Depression, when most ordinary Americans
were struggling desperately to avoid bankruptcy).

As
a result of the U.S. manipulation, from early 1933 to the middle
of 1935 the price of silver had tripled. Thus, suddenly Chinese
who owed silver-backed money had their debts tripled. Just as in
the US paper-money deflation of 1929, businesses went bankrupt and
laid off workers.

To
add to the disruption, the Nationalist government imposed export
controls on silver. Doubtless Soong's Triad pals made a bundle from
smuggling silver along with their previously favored opium.

The
new Central Bank was granted monopoly privileges, such as exemption
from the silver export controls. The Central Bank became the most
profitable financial institution in China. Although it held only
11 per cent of the assets of all Chinese-owned banks, it received
37 per cent of total Chinese banking profits in 1934.

Too
late, the largest private bank, the Bank of China, attempted to
cut its ties to the Nationalists. The Bank of China started selling
off government bonds at a loss.

On
March 23, 1935, the Nationalist government seized control of the
Bank of China as well as the second-largest private bank. Finance
minister H. H. Kung removed the managers and replaced them with
appointed officials.

In
June 1935, Kung used the three government-controlled banks – the
Bank of China, the Bank of Communications, and the Central Bank
of China – to buy up the notes of several smaller banks in Shanghai.
Then the three government banks simultaneously presented the notes
for redemption. The private banks were unable to redeem all the
notes at once. Kung declared the banks to be insolvent and seized
direct control.

By
July 1935, the Nationalist government wiped out private banking
in China. All Chinese banks were looted of real assets.

On
November 3, 1935 the Nationalists announced an unbacked paper money.
Only notes issued by the three largest government banks – the Bank
of China, the Bank of Communications, and the Central Bank of China
— would be legal tender in China. All institutions and individuals
who owned silver were ordered to exchange it for the new "fa-pai"
currency within six months (just as Americans had been ordered by
Franklin Roosevelt to turn in their gold in 1933).

Once
they had a fiat currency, the Nationalists counterfeited fast and
hard. Between 1935 and 1949, the price level rose by a factor of
over a thousand. Nationalist government printing presses were unable
to keep up with the deficits. Chinese currency printed in England
had to be flown in over the Himalayas on US C-47s.

So
that is how China was stolen from the Chinese people. Later the
original thief was robbed by another, and had to run to Taiwan to
live out his life on US foreign aid. In recent years the Chinese
people have wrested some of their property back from the second
thief's bureaucratic heirs… but that is another tale.

February
3, 2005

Bill
Walker [send him mail]
works as a Research Associate in telomere biology at an undisclosed
(thanks to legal threats from his tax-financed employer) location.

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