Development Financing and Urbanization

Wages of Neoliberalism

By
Henry C.K. Liu

Part I: Core Contradictions
Part II: The US-China Trade Imbalance
Part III: China's Internal Debt Problem

Part IV: Development Financing and Urbanization

This article appeared in AToL on July 22, 2006

Similar to other developing countries, the most fundamental development problem China faces in its path towards industrialization is urbanization. Yet China is unique because of its size. China has more than 200 cities with a population of over one million. While this is more than any other country, China today is still a country with a predominantly rural population.

The largest city is non-coastal Chongqing (15.3 million with 30 million in its metropolitan area) on the bank on the Yangtse River upstream in Sichuan province in the southwest interior; next is coastal Shanghai (13.1 million with 20 million in the metropolitan area) at the mouth of the Yangtse; and next is Beijing (12.2 million with 15 million in metropolitan area), the nation’s capital.

Only 515 million (40%) of the 1.3-billion Chinese population are urbanized as of the end of 2003, compared to an average 70% for developed countries. Britain was 37% urbanized in 1850, the US 41% in 1910 and Japan 38% in 1950. During the past two and a half decades, China has industrialized to a far greater extent than it has urbanized. By developed country standards, China’s current industrialization level should have generated 60% urbanization instead of 40%. That is an urbanization gap of 280 million people, larger than the population of the US. Its level of economic development has also outpaced its urbanization which should be 50% rather than 40%.

China’s Historical Conditions

Yet Chinese historical conditions raise doubt on whether Western norms of urbanization have any relevance for China. Some six decades ago China emerged from a century of semi-colonial feudal economy dominated by foreign interests into the beginning of a sovereign modern socialist society based on agrarian revolutionary ideology which continues to inform Chinese politics today. The path of escape from semi-colonialism was through anti-imperialism by political revolution against a decrepit dynasty. The political struggle for national revival was complex and protracted, spanning over almost a century of violence that includes a post-revolution civil war that has yet to end almost six decades after the establishment of the People’s Republic. After political revolution succeeded on the mainland in 1949, the path from a feudal economy has been through modernization and the path towards building a modern socialist society is through continuing socio-economic revolution, not neo-liberal revisionism. These three paths intertwine inseparably in Chinese politics. None of them should be confused with the insipid infiltration of Westernization which has manifested itself in the form of cultural imperialism disguised as universal modernity during the past two centuries and as global neo-liberalism in the past two decades.

Today, some 800 million people of China’s population of 1.3 billion still live in rural areas. While China has begun to industrialize at a fast pace, industrial workers are still a minority constituent in the Chinese political structure. When the Communist Party of China (CPC) was formed 85 years ago on July 1, 1921 in Shanghai by a group of young intellectuals influenced by new exposure to Marxist ideology, the Party Congress was attended by only 58 delegates. They elected Chen Duxiu as the party’s first chairman who viewed the urban industrial worker as the natural ideological base for socialist revolution. The rural peasantry was considered too conservative and provincial to be a fertile revolutionary base on which to bring China into socialism in the modern world through revolutionary communism. The CPC at its very beginning constituted itself as a minority party of industrial workers and had to pay a high price for the ideological mistake.

Still, according to Harvard political scientist/historian Benjamin Schwartz (Chinese Communism and the Rise of Mao, Cambridge, Mass. 1958), by 1927 the communist-organized “All China Federation of Trade Unions” grew to a membership of 2.8 million concentrated in a few coastal cities while the rural peasant associations represented by Mao Zedong had only around 2 million members, too widely scattered all over the countryside to be taken seriously as a potent revolutionary force. While this achievement in organizing industrial workers made the CPC one of the larger communist parties in the world at the time, it camouflaged its irrelevance in Chinese political reality.

Yet this was when the Koumingtang (KMT) right-wing, representing the interests of the budding national bourgeoisie and established landlords, newly under the nationalistic influence of rising fascism, and focusing on urban centers as seats of political power, became alarmed at the spread of communist influence among China’s new factory workers. This fear was not based on any long-range vision of national revival needs, but on short-sighted desire to keep wages low to ensure easy profit for a new class of national capitalists and their foreign partners and creditors. Within the KMT, the fascist right-wing broke with the socialist left-wing, and with the assassination in 1925 of Liao Zhongkai, Sun Yatsen’s top aide and heir apparent, seized control of the coalition government to suspend cooperation with the CPC by abruptly disarming the Shanghai workers militia and liquidating with mass terror all communist organizations in urban areas.

Mao Zedong escaped the anticommunist White Terror in Shanghai and went to the rural interior where, with the help of peasant general Zhu De, he founded a guerrilla army in rural Jinggangshan on the border of Hunan and Jiangxi provinces to continue resistance. Under the leadership of Mao, a vast region with over 60 million inhabitants soon turned enthusiastically to support a communist administration. The basis for this popular support was not abstract Marxist ideology but a practical program of socialist land reform that brought long-denied social justice to the suffering peasants.

In the spring of 1934, Chiang Kai-shek, led an army of 550,000 newly trained and equipped by Nazi Germany to undertake an anti-communist “Bandit Extermination Campaign” (Qiao-fei) that encircled the 100,000-member, ill-equipped Red Army and threatened it with complete annihilation. In response, the out-numbered Red Army embarked on a historic and heroic Long March of 7,000 circuitous miles to finally reach its home base in Yenan in northern Shaanxi province in October 1935 with only 20,000 survivors. At the bleakest point of the Long March, an enlarged meeting of the CPC Politburo was held in January 1935 at Junyi at Guizhou to consider desperate options to breakout of the KMT encirclement to avoid total destruction. In the emergency meeting Mao proposed a shift in strategy to rely not on the urban industrial worker but the peasantry for support of the revolution. On this populist platform, Mao was elected as the new leader of the CPC. This strategy, being responsive to Chinese political reality, eventually led to total communist victory over the whole nation. Henceforth, the CPC has been a majority party of the Chinese peasantry. The term “proletariat class” has since been interpreted in Chinese political lexicon as “property-less” class, which in Chinese culture has traditionally meant farmers without their own land, not just industrial workers.

While the factors behind the defeat of the Koumingtang by the CPC have since been controversially debated among conservative Western historians, to most Chinese observers the key factor behind the failure of KMT was clearly its self-inflicted inability to cultivate and keep the support of the Chinese peasantry. It is the unavoidable fate that awaits any political party in China should it make the same mistake, be it imperial, monarchist, fascist, capitalists or communist. In Chinese political culture, support from the peasantry is known commonly as the Mandate of Heaven (Tian-ming). Chinese communism has strong and distinctive historical and indigenous roots that 19^th-century Marxism and 20^th-century Leninism reenergized.

At the top of the list of obvious reasons why the KMT fell was pervasive official corruption, which was related to inflation. Prices rose throughout KMT rule at more than 30% a year but the salary of government officials, already suffering from traditional institutional defect of below-market pay for the bureaucracy, were not indexed, so bureaucrats could not survive financially without corrupt sources of extra income. Yet the real and fatal corruption was the super greed at the highest levels of government which set unsavory standards for the entire public sector. Perpetrators could feel safe from persecution as long as they did not steal more than their superiors. It was open secret that after the Nationalist Treasury ran dry from official corruption and war, the three top political families, the Chiangs, the Songs and the Kungs, related through marriages, were the exclusive beneficiaries of massive US financial aid to China from 1942 to 1949.

Hyper-inflation in the last days of KMT rule, which was caused in no small way by high-level corruption in large-scale monetary fraud, robbed the KMT of all popular support. On August 19, 1948, with US aid, a new gold-backed yuan was issued at an exchange rate of 4 yuan to a US dollar. By mid May 1949, the yuan fell to 23.3 million to a dollar. Less than five months later, on October 1, 1949 when the People’s Republic was proclaimed by the CPC, the KMT had already fled to Taiwan. The fact that the KMT fell from power with the free fall of its currency explains why China is hyper-sensitive about the danger of hyper-inflation associated with a free-floating and freely convertible RMB yuan.

Another reason for the demise of the KMT was that, due chiefly to its elitist outlook, the party suffered from a preference for a small number of elite cadres from the time of its very founding. The shortage of committed cadres was further exacerbated by the war with Japan in which over 100,000 young officers became casualties, two thirds of the new graduates of the Central Military Academy, plus 19,000 of the 24,000 young civilian cadres trained for mass mobilization and development tasks.

Even before the war, the KMT had put low priority on social and land reform, particularly the redistribution of land. The KMT relied on the conservative absentee landlord class living in luxury in cities for support in its half-hearted resistance against Japanese aggression. After the war, US anti-communist influence prevented the KMT from introducing critically needed social reform. KMT policies, hijacked by the national bourgeoisie and conservative landlords, neglected the interior countryside and its peasant population in favor of coastal cities artificially buoyant with foreign capital, giving a false impression of a growing economy while the nation was actually falling into socio-economic chaos.

Finally, the KMT, as a political amalgam of diverse special interest groups and privileged social classes, exclusive of the peasant masses, the only class that really counts in Chinese politics, became paralyzed by internecine factional conflicts that prevented the natural emergence of any politics of self-preservation as it did in the US during the Great Depression through a general election.

Today, the 71-million-member Chinese Communist Party, to various degree of seriousness, is faced with several similar if not identical shortcomings that brought down the KMT, such as a cadre corps demoralized by a social milieu that celebrates money ahead of revolutionary ideology, as symbolized by the inclusion of capitalists into the membership of a supposedly proletariat revolutionary party; rampant official corruption that has become structural; and until recently, deliberate policy neglect of the rural peasantry. While none of these have so far reached crisis proportions, the experience of the KMT shows that such problems can accelerate to crisis proportions surprisingly quickly if left unattended under a rug of false prosperity.

US propaganda tries to create a false impression that communism is popularly opposed in China by a majority of freedom-starved people who are congenitally antagonistic towards big government. This propaganda describes a China that exists only in the wishful Western mind. The historical fact is that in China, the masses always look to a strong central government to protect them from abuse of power at the local level. Notwithstanding US propaganda, communism has not been arbitrarily imposed on the vast nation by force by a dictatorial minority but has been welcomed by the peasant masses that constitute over 80% of the population because communism provides practical solutions to their real problems. Communism is opposed in China only by a minority bourgeoisie and a foreign-influenced comprador class. At long last, the newest generation of Chinese leadership is finally taking measures to reverse the two-decade-long policy neglect of the welfare of the peasant masses. History has shown such neglect to be politically cancerous without fail.

The Land Reform Movement of 1950-53

The slogan: “Land to Every Tiller” (geng ze yu qi tien) came from KMT leader Dr. Sun Yat-sun as a key revolutionary slogan of the Nationalist revolution of 1911. It was adopted by the Communist Party of China (CPC) in the Chinese Soviet period in the early 1930s in South China where the CPC started to institute a program of equal distribution of land among the peasantry. This populist policy cemented the backbone of popular support for the CPC. After the 1937 War Against Japanese Aggression ended in 1946, the CPC began to rearrange the pattern of farm land ownership in the areas it controlled immediately after Japanese surrender, distributing all lands dispossessed from big landlords to destitute landless peasants, tenant farmers and rural workers. This land reform program won the overwhelming support of the land-hungry peasants and was fundamental in the CPC’s final victory in the pursuing civil war against the KMT.

With the establishment of the People’s Republic in 1949, the CPC immediately set about a nation-wide, all-embracing redistribution of agricultural land with three aims: equality; permanent elimination of counter-revolutionary opposition; and mobilization for mass movement for national reconstruction.

The Land Reform Law decreed in 1949 by the provisional Central Government Administrative Council provided the legislative foundation by which the rural population was classified into five categories: landlords, rich peasants, middle peasants, poor peasants, tenants and rural workers. The classification criteria differed from region to region in response to socio-economic traditions and geographical variations. There was considerable on-the-spot circumstantial adjustment and creative interpretation in sorting out the categories, as rigid class distinction of social groups existed more in the Chinese cultural consciousness than reality. However, the categorization, imperfect and unwittingly inequitable as it was in many cases, served the revolutionary purpose of identifying potential reactionary forces of political resistance.

Deng Zihui, the senior cadre in charge of the land reform movement, who later became Minister of Agriculture, wrote on December 28, 1950 in the People’s Daily: “Land reform is the most fundamental struggle against the feudal system … … to regard it as a technical affair, namely the redistribution of land, would be a grave political mistake; for the feudal system can be removed only by the complete extermination of the landlord class through a number of military, intellectual and economic confrontations,”

The land reform of 1950 redistributed almost 50 million hectares, about 40% of cultivated land of the nation at the time. It solved the inequality problem in society but it did not solve the technical production problems of China’s antiquated and inefficient agriculture in the economy which had reached its operative optimum when the population it supported was not more than 100 million. It soon became clear that land reform needed to be accompanied by social reform to initiate agriculture collectivization towards “socialist transformation”.

Social reform began with a movement of marriage reform to secure the emancipation of women, to prohibit marriages arranged by parents to liberate the young generation for modern life and to break down the residual feudal family clan system. The new Civil Laws proclaimed by the KMT government after the 1911 bourgeois revolution had forbidden polygamy, but had continued to allow the feudal custom of second wives and concubines to remain. This feudal practice was terminated by the new Marriage Law of the People’s Republic.

To solve the agricultural production problem, collectivization was necessary to assembly larger tracts of farmland needed for mechanization and to pool financial resources to buy farm machinery and build support facilities and related infrastructure. This practical necessity was in line with the aim of the transformation of the “national, bourgeois democratic revolution” of Dr. Sun Yatsen to the “socialist revolution led by the dictatorship of the proletariat”, the property-less class.

On October 1, 1953, four years after the founding of the People’s Republic and with initial success of the land and marriage reform programs behind it, a new “General Line of Socialist Transformation” was proclaimed after having been discussed democratically in two National Work Conferences on economic and organization issues three months earlier. By the summer of 1953, it became clear that land reform alone could neither guarantee adequate food supply to the nation, particularly the heavily populated cities, nor to provide sufficient savings and investment for national industrialization, not even farm mechanization. Peasants understandably but thoughtlessly preferred to sell their produce to inflation-causing speculators in the open market at momentary higher prices rather than to price-stabilizing government farm administration, not realizing that volatile speculative high prices would cause a general collapse of farm prices in the long run because it drains wealth from the farming sector into the financial sector through the manipulation of market prices. Tax evasion was rampant through unreported transactions in the private markets. Collectivization was not just a theoretical aim, it was a practical necessity.

Land Reform in Chinese History

Land reform has been a fundamental socio-political movement throughout Chinese history. The 4^th and 3^rdcenturies BC were a period of rapid economic development and technical innovation in China when the central and southwestern plains came under continuous cultivation through extensive land clearing encouraged by various political regimes. A proficient husbandry developed allowing the use of manure as fertilizer, differentiating of soil types for different crops, incorporating plough and sowing dates into the calendar, use of drainage to drying out marshy regions and detoxifying salty terrains and using irrigation to bring new arid land into cultivation. These collective undertakings were all deliberate policies of agricultural development promoted by rulers of petty kingdoms to competitively enhance the wealth and power of the state. State control of agriculture, the indispensable source of food supply, has been the foundation of Chinese civilization, not markets. Socialistic statism is a founding principle of Chinese political culture, just as Jeffersonian representative democracy is for US political culture.

Market fundamentalism, which even in the US has been a creature of the state, is the very antithesis of four millennia of recorded socio-economic history in Chinese civilization. Even then, statism in agriculture is operative in all modern nations in the world today. US insistence on China to adopt market economy is nothing but cultural imperialism and US assertion that market fundamentalism is the most efficient economic arrangement is merely a sign of conceptual narrow-mindedness that comes from self deception and ignorance of history, if not disingenuous self-service. Market fundamentalism can perform efficiently only if the state sets rules to allow it to do so. Without state regulation, market fundamentalism degenerates into failed markets quickly through the natural concentration of market power.

Karl Polanyi’s Origins of Our Time: The Great Transformation (1945) points out that the modern world’s market economy was of very recent origin and had emerged fully formed only as recently as the 19th century, in conjunction with capitalistic industrialization which is also a development of state policy. The current globalization of markets following the fall of the Soviet bloc is also of recent post-Cold War origin, in conjunction with the advent of the information age and finance capitalism, all creatures of the state. Prior to the coming of capitalistic industrialization, the market played only a minor part in the economic life of societies. Even where market places could be seen to be operating, they were peripheral to the main economic organization and activity of society. Polanyi argued that in modern market economies, the needs of the market determined social behavior, whereas in pre-industrial and primitive economies the needs of society determined economic behavior. Polanyi reintroduced social concepts of reciprocity and redistribution in human relationships.

Reciprocity implies that people produce the goods and services they are best at producing, and share them with others with joy rather than for financial profit. This is reciprocated by others who are good at producing other goods and services. There is an unspoken agreement that all would produce that which they could do best and mutually share and share alike, not just sold to the highest bidder. All find their fulfillment in separate productive livelihoods. The motivation to produce and share is not personal profit, but personal fulfillment, and avoidance of social contempt, ostracism, and loss of social prestige and standing. This was the historical experience in China until the arrival of Western imperialism to proselytize mercantilism, a controlled form of trade imposed by a foreign state of superior power in the name of free market.

Shang Yang (died 338 BC) of the Kingdom of Qin in the Warring States period (408-221 BC) built the state’s legal system based on the Book of Law, introduced a legalist government in the midst of Confucian culture and propelled the Qin state to prosperity that enabled it to unite all of China, ushering in the Qin Dynasty (221-206 BC). He introduced a new, standardized system of land allocation, reformed taxation, encouraged the cultivation of new frontiers and favored agriculture over commerce, all implemented with state action. Shang Yang burned books by Confucians in an effort to curb the conservative philosophy’s pervasive and undesirable influence against change. Shang Yang was credited by Han Fei-zi with putting forth two precepts: Ding Fa (fixing legal standards) and Yi Min (all people as one). Han Fei was a prince of the state of Han who joined the state of Qin, but eventually he became a victim of deductive conflict of loyalty and was granted the princely privilege of committing suicide in 233 BC by Qin Prime Minister, Li Si (died 208 BC), as Socrates was by an Athenian court for similar thought crimes. In reaction to a Qin edict to deport immigrants, Li Si wrote Advice Against Driving Away Guest Immigrants (Jian Zhu Ke Shu) by arguing that the expulsion of immigrant only enriches and strengthens foreign countries. Members of the US Congress can benefit from reading Li Si’s treatise at this time of anti-immigrant hysteria.

In Chinese history, merchants have never been celebrated as important figures of society, reflecting the social and cultural distain accorded to the market and its participants. In contrast to the US, in Chinese cultural awareness there is no equivalent to the likes of Morgan, Rockefeller or Mellon, robber barons of the market. To call a person a merchant is an insult in China even today. Hydraulic engineers who successfully controlled flood and improved irrigation, not rich merchants who gained wealth from trade, were national heroes and their names were recorded in official historiography: such as Xi Zi in the Wei Kingdom and Li Ping and his son Cheng Guo in the Qin Kingdom.

The primitive state of agriculture and transportation of the Chun-Qiu/Jian-Guo (Spring-Autumn/Warring-States) period (770-226 BC) could not support large population centers of high density. The 3^rd century text by Han Fei referred to a large increase in population in the country that continued during the Han dynasty (206 BC-220 AD), which provided the earliest official census in Chinese history, recording 57,617,400 taxable individuals in the year 2 AD. This population increase was directly related to improvements in farming.

Sui and Tang Dynasties Land Reform

In the 8^th century, the height of the Tang dynasty (618-907), China’s population centroid shifted from the Wei valley and the central plains, where it had remained relatively fixed since Neolithic times, towards the plains of the lower Yangtse basin due to the adoption of wet rice cultivation in the south. The population south of the Yangtse River tripled from 3 million taxable individuals to 10 million between the years 600 to 742 during the Sui dynasty (581-618) and the first part of the Tang dynasty, about one fifth of the total 50-million population. The 900-kilometer-long Grand Canal was built by the first Sui dynasty emperor linking Luoyang and Huai-an near the sea coast in modern-day Jiangsu province and connecting Huai-an with the Yangtze River in the south. An annual volume of 5 million bushels of rice was transported by barge to the north to overcome recurring food shortage previously suffered by the arid north. Luxury goods were also part of the freight traffic. Song dynasty conservative historian Sima Guang described in his famous work: Integrated Political History (Zi Zhi Tong Jian, 1066) that fresh abalones, a delicacy in Chinese haute cuisine, were captured alive from the Yellow Sea and sent up to Changan from Jiangdu via the Grand Canal. Five barrels of sea water had to be stored on board transport barges to keep just 500 abalones alive for the month-and-a-half journey.

Exploiting the prosperity created by 19 years of sagacious rule of the first emperor, the second ruling Flaming Emperor (Yangdi) of the Sui dynasty that preceded Tang embarked on an ambitious program of spectacular construction and expeditionary military campaigns. The legendary excesses of the Flaming Emperor would be identified by future Confucian historians as a direct cause for his abrupt loss of the Mandate of Heaven (Tianming) after only a relatively brief reign of 12 years.

For example, the reconstruction and expansion of Luoyang and its ancient palace had required two million conscript workers. Another million workers had been mobilized to construct a 900-hundred-kilometer-long Grand Canal. The original aim had been to make it possible, upon completion of the canal, to ship grain from the south to the arid north. But the Flaming Emperor soon used the canal for him and his court to travel from Luoyang, his new capital 330 kilometers to the east of ancient Changan, to the then most prosperous commercial city in the land, Jiangdu, 100 kilometers east of modern-day Nanjing. Newly designed imperial dragon barges for this purpose had been on order from the southern provinces at great expense.

Along the 900-kilometer-long canal route, more than 40 luxurious palaces were built as resting places on route at points of scenic beauty. Known as departure palaces (ligong), they were built according to the latest design trend, of grand proportions and fine material, and decorated by celebrated painters and master sculptors of wood and stone. Concurrent with these major projects, construction of the famous West Villa (Xiyuan) was ordered by the Flaming Emperor on the western outskirts of Luoyang,. West Villa occupied a site measuring 100 square kilometers. Within this large site, 5 square kilometers were devoted to a series of man-made lakes of artful shapes. Artificial mountains were formed by the excavated earth. On these miniature mountains were studded with delightfully-sited pavilions high above the monotonous, flat landscape of the plains of central China where Luoyang is situated.

A private canal connected the string of man-made lakes of West Villa to the city of Luoyang via the Luo river from which Luoyang received its name and much of its charm since the beginning of civilization. Along the private canal, between West Villa and Luoyang Palace in the imperial capital, 16 royal palaces were built, known as the Sixteen Estates (Shiliu Yuan). Each estate housed three hundred court beauties in a network of exquisite pavilions, luxuriously furnished, as a mortal’s make-believe paradise.

Imperial outings were frequently organized by the Flaming Emperor of the Sui dynasty on the private canal around West Villa (Xiyuan), with the imperial entourage numbering several thousands, often in the evening to enjoy the full moon, especially in autumn. The peripheral ranked aristocrats rode along both banks of the canal on horseback and in open carriages, lit by hundreds of lanterns. Waving enthusiastically, they provided a moving stage of choreographed excitement for the royal inner circle, whose members enjoyed the spectacles on shore from well-lit imperial barges of dragon motif. The royals themselves, in turn, formed the centerpiece of a real-life opera, with music and incense filling the air, and with laughter, shouts of poetic riddle games and expressions of sycophantic flattery mingling joyously.

Occasionally, firework displays were presented, viewed by an audience of up to 18,000 invited guests. The sounds and lights were visible from several kilometers away, to the delight of the local populace.

To project an image of absolute imperial power, the Flaming Emperor of the Sui dynasty took on the role of a vigorous patron of the performing arts. He ordered the construction of grand facilities for circus performances, staged with hundreds of exotic animals from all parts of the immense empire. Theaters with orchestras of 300 musicians were built, presenting operas using male singers dressed in women's costumes, a practice that would survive to the present time in traditional Chinese opera and Japanese Kabuki theater.

Street festivals were periodically organized with performers numbering over 30,000 parading a route two kilometers long, with the audience seated on viewing stands lining both sides of the parade route. To meet rising popular demand for public entertainment, the court established a school for musicians, training 30,000 professionals to support frequent, court-sponsored ceremonial events and festivals in Luoyang, new imperial capital of the soon-to-fall Sui dynasty.

With completion of the Grand Canal, the Flaming Emperor, before his precipitous downfall, embarked frequently by barge from Luoyang to enjoy his tours of Jiangdong, a resort region in the Yangtze delta located 1,000 kilometers southeast.

The main imperial dragon barge used by the Flaming Emperor consisted of four attached sections totaling 2,000 feet in length, with a height of 45 feet above water. The front section consisted of the main imperial room, the inner imperial room, and the east and west rooms. The middle two sections housed one hundred and twenty imperial cabins, all elaborately decorated with gold and jade. The back section housed imperial household servants and support facilities. The empress (huanghou) traveled on her own phoenix barge, smaller than the Flaming Emperor's imperial dragon barge, but equally elegantly decorated, though appropriately subdue.

The imperial dragon barge, surrounded by nine floating scenery barges in three sections, formed the lead of a fleet of several thousand other court barges, housing members of hougong (rear palace), the sovereign's personal household, composed of imperial concubines (huangfei) and palace eunuchs (huanguan). Still other barges followed, housing the princes, the princesses, ministers, Buddhist monks (seng), Buddhist nuns (nigu), Daoist priests (daoshi), Daoist priestesses (nuguan) and distinguished foreign guests and envoys, including exhibition barges showcasing tribunal gifts from foreign lands.

On upstream return trips, the whole imperial flotilla was towed by a force of 80,000 men dressed in special tow-gang uniforms, in formations that were distributed with military precision and engineering balance along both banks of the Grand Canal.

Adding to the imperial flotilla were several thousands more military barges for the Imperial Guards. The whole imperial fleet routinely numbered over 10,000 barges, stretching over several kilometer, disrupting commercial barge traffic, the accommodation of which the costly Grand Canal construction program was originally intended morally and justified economically.

Cavalry formations in ceremonial armor galloped along both banks of the Grand Canal, with imperial flags and regimental standards fluttering in the wind for as far ahead as the eye could see. It was a most impressive sight, reinforced by heart-pounding military drums and exhilarating imperial bugles announcing in advance the pending arrival of imperial presence.

Food and wine were provided to the imperial flotilla by local administrative units within 100 kilometers on either side of the Grand Canal, each vying for imperial attention by providing the best of local cuisine and specialty produce to both the moving fleet and the 40 departure palaces (li gong) en route.

Such regal pleasure, described admiringly in detail in Song dynasty neo-Confucian conservative historian Sima Guang’s famous work: Integrated Political History, was meant to symbolized the absolute power of the state, personified in the Emperor. To Sima Guang, such glory justifies the bloody treachery of high politics as worthy of princely pursuit, self-restraint as ordained by Confucian ethics notwithstanding, not to mention the heavy burden of the peasant masses.

Two other major construction projects also contributed to the dubious fame of the late Flaming Emperor (Yangdi) of the Sui dynasty. The first was a network of highways with a standard width of 50 feet to accommodate unobstructed two-way chariot traffic. Its main arterial was a 4,000 kilometer route running from Zhuojun, modern-day Beijing, westward to the garrison town of Yulin in the west, where the construction of a new section of the Great Wall extension had taken place. The highway ended at Yutian, modern-day Hetian (Khotan), in the Tarim Basin in the far west. The second project involved a system of grain storing garrisons. The garrisons, each with enclosure walls running 100 kilometer in total length, and boasting 3,000 grain silos guarded by 1,000 troops, were designed to facilitate rapid deployment of troops in war and to provide food reserve for the populace in peace. The exorbitant cost of all these projects fell mostly on the peasants and the resultant discontent contributed to the abrupt fall of the Sui dynasty.

Land reform in the Tang dynasty aimed at correcting the wasteful ways of the second Sui emperor to provide each family with enough land to support itself and to establish an empire-wide agricultural system that would ensure the regularity of tax revenue and social stability. The provision of the means of livelihood for every family, the equivalent of full employment in the modern market economy, was guaranteed by the government through equal distribution of public land. Unlike the modern market economy where structural unemployment was maintained by central bank monetary policy to combat inflation, the traditional Chinese economy considered full employment an undeniable responsibility of the state.

In Tang time, land was distributed equally as annuities to be held only for the lifetime of the recipient. Taxes were levied not according to property size but to population count. For every able-body individual, the state imposed a tax called zu payable in cereal. There was also a system of corvée called yung and a tax paid in cloth named tiao. The founding emperor of the Tang dynasty adopted the populist policies that had begun by the first emperor of the preceding Sui dynasty. The Sui ruler upon gaining power opened state land reserves to the landless, distributed 5,000 buffalos from government lots free to impoverished farmers to restore production, forbade the military to draft men under the age of twenty-one, reduced the annual tax burden on farmers by as much as 80%, shared with the common people revenues from state monopolies on wine and salt, exempted the elderly, those over fifty, from taxes and reduced the state’s take from farm harvests by one third. A central bureaucracy was established and staffed with literati selected on merit through public examinations. Within a few years of these populist policies, the Sui economy recovered totally from three centuries of war and destruction and grew with unprecedented prosperity, with state grain reserve sufficient for feeding the nation for the next sixty years. Yet all this was frittered away by the second Sui emperor’s extravagance within two decades.

Cottage industries were always part of the Chinese agricultural economy. Taxes on high population density regions with small farm plot were higher than that on larger farms with low population density. There was no financial incentive for the average farmer to acquire more land than he could cultivate as he would not be able to find tenant farmers since every able-body farmer could claim his own land. The land pattern required regular meticulous census and regulation on personal mobility. In Tang China, the Emperor held sovereign title to all land in the empire, and granted land with the population on it to meritorious aristocrats and approved clergies, and also directly to the general public individually who must cultivate it himself. Aristocrats were entitled to collect revenue from the farming individuals living on their lands. Aristocrats in turn must pay a commission on their revenue to the imperial house unless specifically exempt.

In areas of historically high population density, or even in fringe areas that through the influx of immigrants experienced sharply increased population over relatively short periods, a continuous redistribution of public land has become operationally impracticable. Furthermore, the Equal Field System (Juntian Zhi) was tied to the Tax Laws of Rent, Corvée and Cloth (Zu Yong Tiao Fa) of the 2nd year the Reign of Martial Virtue (Wu'de), proclaimed in 619. It was principally a poll tax with no direct relationship to land, except the implicit equality in universal land-allotment to able-body males.

Under the Tax Laws, taxes were regularly required of the population in 3 forms: rent, paid in the form of grain (zu), labor or corvée (yong) in kind and cloth (tiao). Cloth was frequently used as a form of common currency during Tang time. Each able-body male age 21 to 60 was required to pay an annual rent of 2 piculs (266.6 lbs) of grain, 70 yards each of damask, brocade and silk, or 300 yards of cotton cloth, plus 20 days of labor. If labor was not provided or not required, an additional 1 yard of each type of cloth is taxed for each day of grace. Labor worked in excess of the normal 20 days earned credit against other taxes: 5 days earning an exemption from cloth payments and 10 days earning exemptions from both payments in grain and cloth. A maximum credit of 50 days of labor was permitted after which direct cash compensation must be paid by the government to the laborer.

A special tax called Miscellaneous Labor (Zayao) was levied under exceptional circumstances, such as defense construction or major public projects. Generally, a sovereign who decrees Miscellaneous Labor too frequently would run the risk of being labeled immoral by Confucians at his own peril. Such a label would expose the sovereign to the danger of having the Mandate of Heaven (Tian-ming) taken from him forcibly by ambitious aristocrats poised to readily exploit the dissatisfaction of the people.

Taxes were collected from the family as a unit and not from individuals, but the rate is applied to the number of able-body males in the household, excluding servants and slaves. Imperial family members (huangshi) and aristocrats (guizu) were exempted from taxes on their private estate and on the income from their fengwu (fief), as were families of meritorious ministers (gongchen). Commoners (sheren) beyond the age of 80 and in poor health are granted 1 male helper at state expense, beyond age 90, 2 helpers and beyond 100, 3 helpers. There are, unfortunately, not too many of those in Tang society, given a low average life expectancy in the 7^th century.

Peasant families within a fengwu (fief) pay two thirds of their taxes to their local lords, with one third of the payments reserved for the Emperor, the Son of Heaven, whose agents do all the collecting. Labor or corvée can be substituted by grain or cloth, and sometimes by coins, which were in constant short supply. Hereditary fiefs were called shifeng (solid grants) and nonhereditary grants are called sifeng (consumable grants).

Despite increasingly uneven shifting of geographical distribution of the population, the poll tax remains geared to the ideal, though increasingly fictitious, system of equal land allotment. As a result, many families over time fell into dire circumstances, unable to pay their taxes because they had not received their allotment of land at locations of their preference. As the population became more mobile due to structural changes in the economy as well as new socio-political developments, the resultant disorder in tax collection eventually reached the point where reform would become critically necessary. It was in this agitating climate for tax reform that political pressure was created in mid-7th century Tang China for a ruler who had little connection to traditional, vested feudal interests. That ruler was Wu Ze-tian, a 53-year-old woman of merchant roots, known as Heaven Empress (Tainhou), and later became the only female emperor in Chinese history.

In 780, 162 years after the founding of Tang dynasty, about midway through its 289-year history, the Duo Tax system (Liang Shui Fa) was introduced which levied taxes twice a year in the 6th and the 11th lunar months. It would be a land tax, proportional to acreage held by each land owner.

Henceforth, with replacement of the traditional poll tax by a land tax, the imperial government would lose interest in limiting the size of land holdings. Fiscal incentive for official opposition to formation of large estates would then evaporate. In fact, large estates would then be preferred by the central imperial authority because such estates would allow more efficient collection of taxes.

The growth of a system of big non-aristocratic landlords would be ensured when tax becomes based on land rather than on population, and state revenue would not be threatened by the concentration of large land holdings within any one family, provided the family did not enjoy tax exemption.

Moreover, a land tax would place an indirect tax on previously non-tax-paying servants and slaves, because of the direct relationship between land productivity and manpower needs. It would also provide financial incentives for the efficient use of land. Under this tax regime, the land-owning merchant class prospered and grew as a political force in Tang society, even if it continued to suffer traditional social stigma.

As government appetite for additional revenue increases, state monopoly of production and sale of important commodities, beginning with salt, and later to include wine, iron and bronze, were re-instituted. Tea drinking became popular in Tang time and eventually tea also becomes a state-monopolized commodity. The British had the same idea which led them to impose a salt monopoly on British India in 1929, against which Gandhi organized a satyagraha, a campaign of civil disobedience expressed in the form of nonviolent, passive resistance to unjust laws. In France, high tax on salt emerged as one of the underlining causes of the French Revolution. The salt-works at Arc-et-Senans and the custom barrières ringing Paris at which tolls on salt and other commodity were collected, became symbols of oppression. Even the architect of the salt-works and custom barrières, Claude-Nicolas Ledoux (1735-1806), would be imprisoned after the revolution for his role in the design of the oppressive facilities. Salt had been used as currency in ancient societies and men had been known to have sold their family members into slavery for it.

Sung Dynasty Socialism

The 11^th century was a watershed of political and social reform in China. The reform movement of the Sung dynasty (960-1279), though inseparable from ideology and philosophy of its time, was motivated by historical contingencies that presented themselves as clear and present danger to the state. The successes of northern barbarian invasions from the Liao and Xia tribes caused thinking men in Sung society to question and seek remedies to the deficiencies in the established national culture that had resulted in an ineffective defense system. They critically examined existing institutions in society and the organization of the state within the socio-economic and political context of the time. While the Chinese state had always drifted towards centralism, the responsibility of national policy always resided in a State Council with decentralized representation. In the Sung dynasty, the State Council consisted of five to nine members chaired by the Emperor. Councilors are responsible for presenting the varied views of different constituents of society. On every policy issue, the Council heard the opinion of every councilor representing diverse interests, with the Emperor only ratifying the majority council decision or casting a tie-breaking vote. The Emperor’s authority was moral rather than political. This State Council system continues today, chaired by the Prime Minister, reporting to the politburo chaired by the President of the Republic and Chairman of the Communist Party.

The emergence of a market economy during Sung time resulted in a widening disparity of income and wealth beginning around the 11^th century. A new class of rentiers came into existence and grew larger to overwhelm the ancient aristocracy whose privileged station came from past martial feats. The rentiers lived handsomely off the rent from their land. The wealth and leisure associated with unearned income gave rise to new generations of men who were learned of the classics and who delighted in philosophical musing, wrote essays on political theory and became active in the appreciation and making of the arts, but who were economic parasites whose estates increasingly escaped taxes, while the tax burden fell increasingly heavy on small farmers, tenant farmers and landless laborers. Sung culture flourished among the elite while Sung society slid into decline.

By mid-11^th century, a new meritocracy was changing the socio-political balance within the Sung ruling class away from the traditional hold of the ancient aristocracy. Prior to the Sung dynasty, from the Han to Tang dynasties, the aristocrats formed a close clique that jealously guarded their genealogies. They could often preserve their social privileges to survive the rise and fall of dynasties as long as they were willing to shift political loyalty to the new regime. But the ancient aristocrats were frugal compared to the free-spending luxurious life-style of the new rentiers who began to siphon off larger and larger shares of the national wealth for their own conspicuous consumption. Still, the new meritocracy inevitably produced reform-minded thinkers among the elite whose sense of moral propriety trumped the selfish interests of their own class. And the apprehension of external threats to the state created a receptive climate for the social reform movements.

The gradual collapse of the system of allocating land only for life began in the 8^th century at the height of the Tang dynasty, with the transfer of taxes onto cultivated land rather than on individuals of working age. This meant that land-use rights could be sold by a farmer’s estate or be forfeited from failed farmers or those who defaulted on their monetary debts, producing a new group of landless peasants amid an economy of rising land prices. Land leaseholds became a commodity that could be traded in the market and investors could buy land to be farmed by landless tenant farmers for profit and to speculate on a rising land market. By Sung time, this land market had created a economy of severe disparity.

The increase in rice production also brought profound changes in the economy through the growth of commerce in surplus agricultural produce and arts and craft products. The profit became concentrated in the hands of large land owners rather the dispersed throughout the farming population. The surplus farm labor energized the arts and crafts with apprentices. The production of porcelain reached perfection in the 12^th century and spilled over from imperial kilns that produced exclusively for the imperial household to quality commercial kilns that produced for the aristocrats and a wealthy urban bourgeoisie. Big commercial conglomerates were formed from dealing in surplus grain and consolidating small crafts cottage industries into large factories in specialized factory towns, such as Jingdezhen for porcleain.

The mercenary army also siphoned off surplus labor from small farms as large estates and monastery compounds encroached on them. Absentee landlord families lived in luxury in the imperial capital or provincial capitals and towns, enjoying the wealth produced in their rural estates by tenant farmers and wage earners while the landlords escaped taxes. This led to a new kind of urbanization where cities became good places to spend money rather than to earn it, except for the service sector which must follow where the money was being spent. Busy trading towns multiplied in all parts of the empire. Foreign trade with imports of exotic goods such as incense, rare gems, ivory, coral, rhino horns, ebony, sandalwood, etc, produced a deficit for the Sung treasury which had to be paid in copper, sliver or gold coins. Sung copper coins were so abundant in Japan that it was accepted as local currency.

The principal wealth of the economy came increasingly from craft manufacturing and commerce with agriculture as a supporting base. Printed books also became a major trade. With trade came a monetary economy with the rise of credit. The supply of metal coins could not keep up with the expansion of commerce and the world first paper money was issue by the Sung authorities in 1024 and quickly spread throughout the entire economy. Bills of exchange, known as “flying money” (fei-qian), were received by merchants at points of sale some distance from home, with which they could exchange back into coins after a safe journey back home.

Intellectual flowering in art and science, philosophy and ethics, literature and poetry, history and archaeology, astronomy and cosmology, came from this new material prosperity out of which a naturalist philosophy emerged to fuse into unity nature and humanity. It was a philosophy of optimism based on a belief in universal reason, in the promise of education, in the possibility to improving society and politics through the primacy of mind, while discounting practical knowledge and physical power. Some historians identify this purist philosophy of anti-materialism as the cause of the decline of the Sung dynasty, and as the reason why China fell behind the West in science and technology after the 17^th century.

Sung dynasty was a bifurcated society with culture and philosophy flourishing at the wealthy top and misery and resentment simmering at the bottom. But the unhappy situation at the bottom was not well acknowledged by history as little written record of it survived compared to the voluminous record of high culture and art. The agricultural economy simply could not sustain indefinitely an economy in which 20% of the populations were unproductive officials and literati, with 5% of population owning 90% of the land and wealth and living in luxury while the rest of the population drifting toward subsistence.

As the Sung dynasty came under imminent external threat from the Northern barbarians, the state began to look to reform as a survival strategy. The most celebrated reformer was neo-Confucian Wang Anshi (1201-86) who has since been credited by historians with reintroducing state socialism beyond historical natural socialism into Chinese society.

Henry A. Wallace, as US Secretary of Agriculture during the Roosevelt administration, adopted Wang’s idea of subsidized farm credit and price guarantee and applied them to New Deal programs during the great Depression of the 1930s. Wallace, a liberal Republican turned Democrat, later became Franklin D. Roosevelt’s 3^rd-term Vice President but was replaced by Harry Truman in FDR’s 4^th term as a result of conservative opposition domestic and foreign, including Winston Churchill who complained of Wallace’s being soft on communism. Had Wallace been still Vive President when FDR died in office in his fourth term, Henry Wallace would have been president in place of Harry Truman, and no atomic bombs would have been dropped on Japan and the Cold War might have been avoided.

Wang’s Green Sprout Money Law and Market Law were pioneer programs of state farm credit and price subsidy that constituted Chinese state socialism which grew out of an ideology of equalitarianism and social justice beyond the utilitarian social hierarchy of Confucianism. Antagonistic to despotism and believing in the need for a regulatory regime to protect social justice for the weak and powerless, Wang saw heavy tax and corvée burdens concentrated on farmers as the structural weaknesses of the state’s fiscal difficulties. He believed that equalizing the tax burden on all socio-economic classes according to their ability to carry would strengthen the state financially. Regulation against usury and loan-sharking and trade monopolies would also strengthen the economy which in turn would increase tax revenue. Between 1069 and 1076, Wang initiated major economic reforms in the interest of small farmers, artisans and tradesmen, including reduced interest rates, commutation of labor services to the state, price stabilizing measures and land taxes. He also set up state financial planning, reduced the professional army, built up a cavalry militia, and carried out a wide range of educational reforms to equalized opportunities for the rural poor.

By giving low-interest government loans to farmers to reduce their debt burden, Wang reduced the number of destitute families who would otherwise become a threat to society and a burden for the state. Farmers would continue to pay their taxes and to make improvements in productivity if they were not constantly in fear of losing everything to their creditors. An updating of the tax registers to increase revenue prevented corrupt officials from pocketing unregistered taxes they collected. Population was rising but not all were duly recorded on the registers to be officially liable for taxes. The Treasury profited from a new census that allowed collection of taxes from all to prevent corrupt officials from only passing on the amount stipulated in the out-of-date registers while keeping the surplus collection from non-registered farmers for themselves. Taxes in kind were translated into money taxes. This encouraged trade because farmers needed to sell some of what they produced to get cash to pay their dues. Trade was also taxed so government revenue benefited twice over.

Wang’s reforms were opposed by conservative Neo-Confucian Sima Guang (1019-86) who represented the interests of big land owners and their entourage of sponsored conservative historians, literati and social philosophers. Wang Anshi and Sima Guang, personal friends, were supported by opposing factions within the bureaucracy that competed for the emperor’s attention. Factional politics were conducted by means of writing memoranda to the throne, presenting arguments for and against particular ideas, policies and people. The officials in charge of presenting a summary of all key memoranda were accordingly very powerful in policy formation. This method of conducting politics is ironically indispensably valuable to historians because many of the memoranda survive to posterity, preserving a written record of the policy debates.

Opposed by the big landowners, Wang’s reforms were rescinded after Sung Emperor Shenzhong’s death in 1076. Sung society thereafter embarked on a gradual decline with its anti-materialist optimism. Another problem that beset the Sung economy was the uneven development between the north and south regions with the center of economic activities shifting from the Yellow River (Huang He) valley, the cradle of Chinese civilization, towards the Yangtse River valley and the coastal regions. Still, the three great inventions of Chinese civilization: printing, the compass and gunpowder were invented during the Sung dynasty.

Mongol Rule

During the time of Genghis Khan’s rule (1210-27), the Mongols had no administrative institutions for ruling an empire. Unlike the Khitans and the Jurchens earlier, the Mongols did not benefit from adopting Chinese administrative art and institutions before they started their territorial conquest although Genghis Khan benefited from Chinese artillery science in his military exploits. It was only in the reign of Ogodei (1229-41) that the occupation of China was completed and Chinese wealth and culture were exploited to solidify Mongol rule by Kublai Khan as the first emperor of the Yuan dynasty (1279-1363). The conquest of South China, the expedition against Japan, Burma, Vietnam and Java were organized by the Mongols with troops and resources raised in China and with Chinese fleets.

Yelu Zhuzai (1190-1244), a descendant of the Khitan Liao dynasty (907-1125) and a minister of the Jurchen Jin dynasty that fell to Genghis Khan, demonstrated to Ogodei the benefits of an annual fiscal system and estimated that tax revenue could yield annually 500,000 ounces of silver, 80,000 rolls of silk and over 20,000 tons of cereals in North China alone. In 1229, an empire-wide postal relay system of pony express that had been established 6 centuries earlier during the Tang dynasty (618-907) was restored, a system of property taxes revived and public granaries rebuilt. An unfrocked Zen Buddhist monk, Liu Ping-zhong (1216-74) advised Kublai Khan at Karakorum in 1249 with famous Han dynasty adage: “One can conquer the world on horseback; one cannot govern it on horseback.”

The Mongol rulers adopted many of the institutions of Sung state socialism which produced the prosperity that Marco Polo (1254-1324) wrote about glowingly. Unfortunately for the Mongol imperial house, the socialist reforms of Wang Anshi adopted by the first Yuan emperor was reversed by the conservative neoclassical Confucians ministers and the Yuan dynasty fell after only 89 years of rule as a result while the Sung dynasty, benefiting from the residual effects of the reform measures of Wang Anshi, lasted 320 years.

Ming dynasty Land Reform

The effort on land reform by the early rulers of the Ming dynasty (1368-1644) which liberated China from Mongol rule was in many ways comparable to that of the People’s Republic in the 1950’s. In two decades, Ming reform achieved impressive targets in irrigation, land restoration, reforestation and flood control. In 1395 alone, 40,987 reservoirs were repaired or built. Large areas were restored for cultivation and resettled by a massive transfer of population. In 1371, some 576,000 acres were reclaimed for cultivation and in the next three years, a whooping additional 6 million acres were restored, with 5 million acres alone in 1374. Taxes in the form of grain tripled to one million tons in 1393 compared to a third of a ton under Mongol occupation. The most impressive achievement was in reforestation. Over 50 million sterculia trees, palm trees and vanish trees were planted in the Nanking region with a view of constructing a high-seas fleet that carried Moslem sailor Cheng He (1371-1433) in his famous ocean expeditions. In 1392, each household in Anhui province were obliged to plant 200 mulberry trees to support the silk industry and 200 persimmon trees. This obligation was extended to the whole empire two years later. In 1396, over 84 million fruit trees were planted.

But the prosperity soon led to fiscal abuse. By the end of the Wan-li reign in 1619 more than half of state revenue was devoted to supporting the imperial court and its aristocratic entourage. The rising state deficit led to a sharp rise in taxation on the peasantry. By 1627, a series of bad harvest due to drought caused a serious famine and peasant revolts were setting the stage for recurring Jurchen attacks from Manchuria which ended the Ming dynasty in 1644 and ushered in the Qing dynasty (1644-1911).

Agricultural Policies of the Qing Dynasty

Qing early policy of low taxes on peasants cemented popular support among the majority Han Chinese for the new minority Manchu dynasty and disarmed residual Ming resistance fanned by early Qing atrocity and wholesale appropriation of peasant land after 1644. Beginning with the reign of Kang-xi (1661-1722), an agricultural policy favoring small farmers was instituted. Adequate salaries for officials reduced corruption in government. Chinese agriculture reached a high point of pre-industrial development in the 18^th century. Along with traditional crops such as wheat, barley, millet and rise, new crops such as sorghum (gao-liang), maize, sweet potato and ground nut allowed year-round harvest and bridged the winter gap as well as making drier soils productive. Vegetables and fruits became a regular part of the national diet and the rearing of pigs and poultry as well as advances in fish farming increased the protein intake in the population. Commercial crops such as cotton, tea, sugar cane expanded rapidly. Historian Jacque Gernet noted in his A History of Chinese Civilization that the Chinese peasant of the founding Yung-zheng reign (1723-36) and the early Qian-lung reign (1736-96) of the Qing dynasty were much better off and more content than their counterparts in the France of Louis XV, even better educated due to the proliferation of public and private schools that many farmers could afford for their children. Some great Chinese literati of the 18^th century came from humble farm origins. This was because Qing agricultural policy favored small farmers who were moderately taxed. A 1711 ordinance forbade any increases in tax quota even as population rose.

It was only in the final two decade of the Qian-lung reign in the mid 1770s that the burden of an extravagant court and its unproductive aristocratic entourage re-imposed high taxes on the peasants and rekindled peasant rebellions. But while the Chinese peasant gradually fell into aggregate poverty, the finally collapse of the Qing economy was caused by the advance of Western imperialism through the illegal smuggle of opium into China, paid for by an outflow of silver. What is yet to be fully recognized by economic historians is the adverse effect on the Chinese economy from the massive outward drain of silver from the illegal opium trade Britain and the US imposed on China as a result of the inability of the Qing state to regulate illicit trade in opium and, more importantly, free trade in silver. The collapse of the Qing economy in the 19^th century was largely a monetary event.

Silver had been used widely as currency in China since the 15^th and 16^th century with imports from the Americas as a result of Chinese trade surplus. Around 1564, Mexican silver coins began circulating widely in Chinese coastal trade towns such as Guangzhou and Fuzhou as payment for Chinese exports. The 19^th century reversal of China’s trade to deficit was due to Western opium smuggling between 1820 and 1825. This trade was denominated in silver until China ran out of silver after which point the illicit trade was denominated in porcelain that steadily fell in price.

The outflow of sliver from China coincided with the collapse of silver prices in the international market as Western economies adopted the gold standard. Silver was leaving China in huge quantity while the price of silver was falling in the international market. Yet while the price of silver fell in the international market, its price rose in the Chinese domestic market, accelerating and exacerbating real trade inflation in the Chinese economy through domestic price deflation.

This monetary collapse inflicted great financial damage on China’s poorest peasants. While peasant income was denominated in copper coins, their tax obligation to the state was denominated in silver coins because the state’s trade deficit was denominated in silver. The scarcity of sliver created by the massive outflow pushed domestic silver price sky-high in terms of copper coins. International bi-metalism greatly disadvantaged the Chinese silver-based export economy and domestic bi-metalism greatly disadvantaged the copper-based finances of the Chinese peasantry. China suffered protracted economic recession all through the 19^th and 20^th centuries as it came into commercial contact with the Western economies. This two-century-long recession was the result of the structural monetary disadvantage dual bi-metalism imposed on the Chinese silver-based monetary system and fatally wounded the Chinese economy. The bankrupt economy reduced China to a failing state unable to defend itself from aggressive Western powers until the founding of the People’s Republic.

Next: Land Reform in the People’s Republic