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.

[Taiwan]