Monday, August 11, 2008

The Myth of Chinese Gold in the Economic Development of Taiwan

It's quite common for the ignorant, duped, and malicious to claim that Taiwan got rich because Chiang Kai-shek looted all the gold from China, and that gold then formed the financial foundation for Taiwan's development. Like most pro-KMT claims, only the looting part is true.

Our tale begins with a post at Forumosa by Feiren responding to one of these claims.
According to the memoirs of Zhou Hongtao, an aide to Chiang Kai-shek who served in the presidential office and was from Fenghua, about 3.75 million taels of gold reserves from the National Treasury were brought to Taiwan in 1949 and were exhausted by September of 1950. Much of this was spent on supporting 600,000-strong Nationalist Army, which cost 180,000 taels a month to feed. Most serious historical accounts of the period say the basically the same thing.

One tael is 37.2 grams, so 3.75 million taels would have been about 139 million grams or 139,000 kilos of gold. That would have been about 4.9 million ounces of gold, which sold for an average price of US$34.72 an ounce in 1950. If Zhou is correct, that means the value of the gold from the treasury was about US$170,128,000, slightly less than what the US would loan the ROC biannually thereafter.

Interestingly, in its 2006 asset report, the KMT put gold reserves brought from China as 2.27 million taels and repeats the unfounded claim that these funds were "a stabilizing pillar of Taiwan's finances. That gold of course belonged to the national government not the KMT.

US aid to Taiwan in those days was about $100 million annually, so you can see that the value of the gold was less than two years of US aid. I then followed up:

To add to Feiren's numbers, what actually happened to the gold is even more interesting. To help industry after losing the war, the Nationalists followed an easy money policy. The money supply doubled and inflation boomed. Many a TIer got their start in the double whammy of Nationalist looting of the island in the '45-6 period and then losing their shirt in the inflationary period after that. At that point the military budget accounted for 90 percent of government expenditure.

To compound the problem, the brilliant Nationalists decided it would be a brilliant idea to make short-term deposits redeemable in gold. Given a choice between holding worthless Nationalist scrip or actual gold, what would you do? As a result, there was a massive outflow of gold into private hands, some $US50.8 million, according to Ho (1980). Even the KMT finally saw the unwisdom of this policy and it was halted in Dec of 1950.

How did the government halt inflation? Two ways. The minor effect was by raising interest rates to 9% -- a month! 180% annually, baby. But the real thing that stopped it and stabilized the currency was the resumption of US aid, which Ho refers to as "the main reason inflation was kept under control" and "the prime stabilizer of the economy." Because the KMT had no food reserves and no foreign exchange, only US aid kept the regime from going under. In the 1950s nearly 40% of Taiwan's gross domestic capital formation was aid financed, according to Ho -- aid financed 30% of imports from 1951-1968, and stuff brought in as "military assistance" was NOT counted in that figure. As I recall from my poor memory, US agricultural products were brought in under the PL 480 laws and then sold, and the accumulated funds deposited in the national treasury, stabilizing the currency. Not sure about the exact process.

Ho also says that a major source of destabilization was the military budget, which US aid officials attempted repeatedly to get the KMT to reduce. In brief, the KMT totally neglected the domestic economy to fund their military state, leaving US aid to make productive investments in infrastructure that made the private economy go.

What actually happened was that the KMT government budget went almost entirely to the military -- the development money was provided by US aid. During the period 1950-1965, according to Ho, Taiwan got $187 per capita in non-military aid. Not merely money, in-kind aid of food, fertilizers, equipment, raw materials and other items kept Taiwan from starving and kept its industries going.

Not only was military budget enormous but its demand drove nasty and unpredictable inflation. Taiwan also had an import surplus until late in the 1960s -- a surplus that did not include military imports, and a surplus financed by US aid. Finally, a key effect of US aid was the creation of a Taiwanese capitalist class. As Ho notes (p117):

Because it would have been consistent with government ideology and because it would have strengthened its control of the island, one suspects that the Nationalist government would have preferred the public sector to spearhead Taiwan's economic development.

Instead, the KMT confronted a US aid program strongly committed to private sector development, and strongly committed to the development of a Taiwanese entrepreneurial class. It was those small and medium Taiwanese firms who drove Taiwan's export boom in the 1970s and 1980s. Because US aid went primarily to investments in infrastructure and human resources, it facilitated the growth of private industry.

There was one other positive effect of US aid. Ho notes (p118):

Throughout the 1950s and 1960s AID brought intense pressure to bear upon the Nationalist government to exercise fiscal restraint and hold down its military spending. Despite these pressures the [KMT] government adhered to its preference for the military and continued to enlarge its military budget. But had AID not exerted pressure, the size of the military budge conceivably could have increased at a still more rapid rate.

The recovery and early stages of the export boom were a US project. At that time up to 90% of the budget went to the military (and we know whose pockets were being lined out of that!). Not until much later would KMT policy become more development oriented.

Interested readers should consult the Bible of Taiwan economic history, Samuel Ho's Economic Development of Taiwan 1860-1970 (I quoted from pages 110-120) and Jacoby's US Aid to Taiwan.


LA said...

I have always read that it was land reform and good governance, like encouraging private entrepreneurship and creating a system for an export economy, that are responsible for Taiwan’s economic miracle. No mention of moving gold from mainland to Taiwan being the sole culprit, although it certainly doesn’t hurt.

LA said...

BTW, the Vietnam war and US aid didn't hurt either.

STOP Ma said...

Very interesting post, Michael!

On the topic of Chinese "myths", I just read that a part of the Olympic opening ceremony was actually fake.

It involved the impressive footage of a helicopter flying over Beijing with footprint fireworks blasting off in perfect synchronization just below the helicopter -- advancing towards the Bird's Nest stadium. Well, it turns out this part was 100% computer generated.

I've been trying to find someone who thought these opening ceremonies were over-the-top and a self-congratulatory orgy of nationalist pride, as I did. Well, I found it in this article, too. The one who shares this opinion is none other than one of the Chinese architects that helped design the Bird's Nest stadium.

The ceremony has also been strongly criticised by architect Ai Weiwei, who helped design the Bird's Nest stadium.

Writing on his blog, Mr Ai described the ceremony as "a recycling of the rubbish of fake classical culture tradition; a sacrilegious visual garbage dump and an insult to the spirit of liberty; low class sound play that's just noise pollution".

He was directly critical of China's ruling communist party, characterising the ceremony as "a showcase of the reincarnation of the Marxist imperialism; the ultimate paragon of an all embracing culture of fascist totalitarianism; an encyclopaedia that encompasses total defeat in intellectual spirit."

I know a lot of the artists participating in this event have done stellar work before, but I would have been infinitely more impressed if they would have refused to participate at this particular spectacle.


Arty said...

Don't forget the Kyoto thesis...using US figures

Not debating with you...

Anonymous said...

I think the Taiwan economic history you link to is very interesting.

The TI people often accuse the KMT of failing to achieving some objective when that objective was never the KMT's goal. The DPP criticizes the KMT for not asserting Taiwan's identity as an independent country; but when has that ever been the KMT's stated goal?

Yes, the KMT failed to initially make Taiwan's economic development its first priority but when did the KMT ever say that that was their initial goal? The KMT's stated goal at that time was to regroup and retake the mainland which explains the disportionate defense spending at the time. Only after their effort to retake the mainland failed did the KMT feel they needed to turn their attention to Taiwan.

I agree with Ia's comment about the economic boost the Vietnam War gave to Taiwan. My dad worked for China Airlines in the 1960s and he said it was almost entirely because of the business generated by the Vietnam War that gave China Airlines the capital and experience to become a true international player. Taiwan's shipbuilding, automotive, and aircarft industries were also jump started from Vietnam War related business.

Thomas said...

"The KMT's stated goal at that time was to regroup and retake the mainland which explains the disportionate defense spending at the time. "

This is well-known to the point of being banal in its repetition. The "myth" is only related to the attempts of some current KMT apologists to retrospectively attribute the foundations of Taiwan's solid economy to the gold they took from China when they left in order to gain brownie points from current Taiwanese. Nobody here has implied that the KMT ever wanted to lay the foundations for an independent Taiwan. In fact, the implication of is the contrary.

Anonymous said...


Well, there was report that opening ceremony video has parts of firework tests. so much to "live reporintg".

Anonymous said...

Talking to Taiwan's New President,8599,1831748,00.html


A Taiwanese newspaper says fans are preparing to skirt a Chinese ban on displaying the Taiwan flag at the Olympics by waving the Myanmar flag instead.


Chinese man swims to Taiwan from China to seek asylum

channing said...

Off-topic, but it's very obvious from NBC coverage that the birds-eye view of the fireworks was CG, because a helicopter cannot fly directly above active pyrotechnics. The animation wasn't even that realistic.

Blogger Ai can call all the Communist and Totalitarian names he wants...all of his criticisms of the Opening Ceremony are shamelessly subjective and hold no technical merit. The point of the display was to put on an impressive show, and here in northern California, just about everyone was breathtaken.

...and why shouldn't any appreciative artist take the chance to participate in a great show? The Chinese public would love to express their appreciation of a boycott. They couldn't care less that Spielberg didn't attend, because they know that their nation is so much more than some crappy policies on Tibet, Taiwan and Darfur.

channing said...

Back to topic, it's quite certain from the clear evidence that the gold itself wasn't the driving force of KMT-era economic explosion. The loot was one part of a complex structure of domestic and foreign factors that enabled the KMT to maintain its hold on Taiwan and keep the Communist army out, thus leaving the door open to the economic miracle that eventually came some decades later.

Readin said...

Speaking of the Olympic openening ceremonies, anyone know how the Taiwanese aboriginal dancers were introduced? Did China try to use the introduction or the order of performances to make a claim on Taiwan? I haven't been able to find any news about it.

STOP Ma said...


You mean like this child artist? As it turns out, she was lip-synching to another girls voice during this touching moment at the Olympic opening ceremony. More nationalist fakery by the PRC to make the "spectacle" perfect.


Anonymous said...

Why does the TI brain trust describe the gold reserves of the Central Bank of China that werer transferred from Shanghai to Taiwan to be "loot"?

Had the UK transferred its govt to Canada in WWII, surely they would have taken their gold reserves with them. Would that gold be considered "loot"?

Actually, the only people who should consider the transferred gold reserves to be "loot" are the Communists when they entered the abandoned Central Bank of China compound and found the empty vaults.

channing said...

I hadn't read about the child singer until this morning. I agree that the old guard are still too paranoid about a lot of petty things.

Anonymous said...

"As it turns out, she was lip-synching to another girls voice during this touching moment at the Olympic opening ceremony."

This poor kid will have to emigrate to the UK or Japan where people with crooked teeth are considered beautiful.

STOP Ma said...

I've GOT to leave a supplemental comment to my previous post (even though it is slightly off-topic.

It turns out it was a member of the politburo that made the decision to use the girl that he thought looked "prettier". Absolutely revolting that this would be done against 2 innocent children by the government that actually states that this was...get the national interest.

In. The. National. Interest.

What a fitting tribute to the song that was mimed:

"Ode to the Motherland"

Sorry, this just gets under my skin when these bastards use children like this.

marc said...

Supplement to Stop Ma's comment:

If we assume that the Chicoms don't miss an opportunity to wring out symbolism of the great Motherland at every turn, choosing Yao Ming to lead was an interesting choice.

The original Olympics (the ancient ones) were held in honor of its mythological founder, Hercules. As a mythographer, it didn't escape my notice that Yao Ming is China's Hercules - the undefeatable half-man, half-god (who, by the way, is a lousy basketball player when pitted against the US "myrmidons" of basketball).

Thomas said...

Actually, a lot of Chinese people don't seem to see the harm. Some saner ones do. And I have to admit that this sort of thing has been done since the invention of Talkies, so it is hard to be 100 percent critical.

What gets me was the comment that her appearance just wasnt suitable for the Olympics. Come on! Everyone can tell you mean "she is just not pretty enough". If they had just said what they meant, I would be less annoyed. And what annoys me even more is that we all know that nobody except nitwits would have criticised the other girl for her less-than-perfect looks. What kind of message does this send to those with confidence issues: Physical beauty above all else?

Patrick Cowsill said...

The US poured some 44 billion US dollars into Taiwan from 1950 to 1965. In 1965, aid was said to have been "cut off". But stats out of the US show that Taiwan still receives aid money from the US to this day. This, in combination with the hard work of Taiwanese people, who never got a sniff of that gold, is what really accounts for Taiwan's wealth.

I've heard that prior to 1950, the US was frustrated with how things were going, so much so that if the Korean War hadn't of come along, Taiwan would've been left for the Communists. Chiang Kai-shek is reported, get this, to have pocketed a third of all aid during the war. So annoyed was Roosevelt that he had to be talked out of taking Chiang out by Churchill, who figured that at least the "bas*&^% was theirs." I can't help feeling the contributions of Chiang and his cronies, and all of the supposed gold, are overstated.

Anonymous said...

This whole passage is just crap. You put too much attention to the American aid. And comparing the looted gold to the afterward aid or GDP without considering the time cost and opportunity, why dont you compare it with Taiwan's current GDP to make it even less significant? Losers.... So you are ignoring the fact that this gold is looted and robbed away the Mainland's opportunity to develope. You bunch of pathetic people whines about everything which is good to the Mainland, you are nothing but a buch of pathetic morons trying to criticise other people's lives just cause you think you had some business in it, I'll tell you the sad effect, you can meddle into the cross strait relationship the day that you ugly faces is right under Chenshuibian's bottom and sucking the hell out of it

Michael Turton said...

It is not me but Ho who emphasizes American aid.

The idea that Chiang's looting of China's gold stopped China's development is completely ridiculous, as modern history shows. It was Mao and Communism that made China weak and poor.


Anonymous said...

The ROC gold reserves from the ROC mainland were also the collateral for defaulted ROC gold bonds from 1898-1949. Many of these bonds were marketed to the overseas Chinese and were paid by ROC Bank of China in New York City. Today it is Megabank International Bank.
But the ROC payments on gold bonds stopped in 1939 and the gold reserves were laundered into British offshore banks accounts and the Bangkok gold bourse. The British estimate that 50% of USD deposit in Hong Kong banks were related to gold smuggling in 1950. Please see