China’s journey toward modernizing its fiscal and monetary systems during the early 20th century was a complex and transformative process. Following the fall of the Yuan dynasty, China gradually adopted a silver-based currency system that persisted well into the Qing dynasty’s final years and beyond. However, this monetary system was riddled with complexities, high transaction costs, and regional fragmentation, which hindered economic unity and development. The era between 1927 and 1935, marked by political upheaval, military campaigns, and the eventual consolidation of power by the Nationalist government , became pivotal in reforming China’s currency and tax systems, culminating in the abolition of the archaic “li jin” tax system and the establishment of a modern paper currency regime. This article explores the historical context, key reforms, and lasting impacts of this crucial period in China’s financial history.

The Complex Monetary Landscape of Early 20th Century China

To appreciate the reforms of the late 1920s and early 1930s, it is essential to understand the monetary and fiscal conditions inherited from previous dynasties. Since the Yuan dynasty, China’s currency system had been based predominantly on silver. Under the Qing dynasty, this silver standard remained the backbone of monetary transactions. However, despite its long-standing usage, China’s monetary system was far from unified or efficient.

China’s currency system was characterized by a bewildering array of coins, banknotes issued by various banks, and regional variations in currency standards. This multiplicity increased transaction costs significantly and impeded the formation of a unified national market. Additionally, the government’s taxation framework was equally fragmented. One of the most problematic elements was the “li jin,” a form of transit tax or tariff charged on goods as they moved from one jurisdiction to another. This tax system was deeply ingrained in the fiscal policies of regional warlords and local governments, especially during the fragmented era of warlordism following the Qing dynasty’s collapse.

The Political Turmoil of 1927 and the Quest for National Unity

The year 1927 was tumultuous in Chinese history, marked by intense political strife and shifting power bases. The Northern Expedition, led by the National Revolutionary Army under the Kuomintang, was steadily advancing to unify China under a central government after years of warlord fragmentation.

During this period, several significant political events unfolded:

– The Nationalist government relocated to Wuhan following military successes.

– On April 12, Chiang Kai-shek orchestrated the Shanghai purge, known as the “April 12 Incident,” targeting communists and leftists, which fractured the previous alliance between the Kuomintang and the Chinese Communist Party.

– In mid-July, the Wuhan Nationalist government, led by Wang Jingwei, broke definitively with the communists in what was known as the “July 15 Incident.”

Despite internal divisions, the Nationalists ultimately succeeded in their Northern Expedition by 1928, culminating in the symbolic “northeast flag change” by warlord Zhang Xueliang in Manchuria, which signaled formal allegiance to the Nationalist government and nominal reunification of China.

The Nationalist Government’s Economic Priorities: Tax and Monetary Reform

With national reunification on the horizon, the Nationalist government faced the daunting task of consolidating fractured fiscal systems and stabilizing the economy. One of its first major priorities was the abolition of the “li jin” tax system, which was not only a barrier to a unified national market but also served as a financial pillar for regional warlords.

“Li jin” taxes were notoriously burdensome and complex. For example, in Sichuan province, the tax burden increased more than twentyfold compared to the late Qing period. Transporting 100 yuan worth of goods from Chengdu to Chongqing required passing over 50 tax checkpoints, cumulatively paying more than the value of the goods themselves. Such heavy taxation distorted trade, inflated costs, and entrenched regionalism.

Recognizing these challenges, the Nationalist government sought to centralize fiscal authority and streamline taxation. On July 1, 1928, the government convened its first national finance conference in Nanjing, where it designated several key taxes—including salt tax, customs duties, tobacco and alcohol taxes, and the contentious “li jin”—as central government revenues. The conference also approved a phased plan to bring “li jin” collection under central control before eventual abolition.

Soon after, on July 15, 1928, the government established a dedicated “Li Jin Abolition Committee” which met for the first time on July 18. This committee drafted detailed guidelines for replacing “li jin” with special consumption taxes and set a timetable for the reforms. By July 20, the government officially announced the abolition plan and promulgated a series of tax ordinances to facilitate the transition.

The Gradual Abolition of Li Jin and Tax System Rationalization

While the central government declared “li jin” its revenue, local governments continued to collect similar taxes, often accompanied by new levies. This duality underscored the fragile balance between central authority and local autonomy during the early Republic era.

Nevertheless, the Nationalist government’s fiscal reforms progressed steadily:

– In early 1929, new tax codes were implemented, and a two-year deadline for “li jin” abolition was set.

– By January 1, 1931, official abolition of “li jin” and related transit taxes took effect.

– By 1934, as the central government expanded its control over more territories, the “li jin” system had been eliminated in most regions except a few outliers.

This fiscal centralization was crucial in weakening the warlords’ financial bases, enabling the Nationalists to exert greater control over the economy and infrastructure.

From Silver to Paper: The 1935 Currency Reform and the Modernization of China’s Monetary System

While tax reforms addressed one aspect of economic fragmentation, China’s currency system required modernization to support national economic development and integration. Although late Qing officials such as Empress Dowager Cixi, Li Hongzhang, and Zhang Zhidong had recognized the need for monetary standardization, the Qing dynasty’s internal turmoil prevented meaningful reform.

China’s currency system remained a confusing mix of silver coins, foreign silver dollars, and various local currencies. The silver standard itself was subject to fluctuations in international silver prices, which complicated fiscal management.

Recognizing these challenges, the Nationalist government undertook a landmark reform in 1935, known as the “Legal Tender Reform.” This reform marked the official end of the traditional silver-based currency system and introduced a centralized, government-issued paper currency known as the “fabi” or legal tender.

Key features of the 1935 currency reform included:

– Abolishing the silver standard in favor of a fiat currency backed by state authority.

– Centralizing currency issuance under the Nationalist government to replace competing regional banknotes.

– Establishing the conditions for a modern, manageable currency system capable of supporting industrialization and national economic planning.

This reform was a milestone in China’s financial history, signaling the transition from a fragmented, metallic currency system to a unified, modern paper-based monetary regime.

The Broader Historical Significance and Legacy of Fiscal and Monetary Reforms

The period between 1927 and 1935 represents a critical juncture in China’s path toward modern economic governance. The Nationalist government’s efforts to abolish the “li jin” tax system and establish a centralized taxation framework laid the foundation for a unified national market.

Simultaneously, the 1935 currency reform tackled one of the most entrenched economic legacies of imperial China by replacing the silver standard with government-issued paper money. This transition was vital for integrating China into the global economy and facilitating domestic industrial growth.

However, these reforms were not without challenges. The Nationalist government struggled with regional resistance, bureaucratic inefficiencies, and the looming threat of Japanese aggression, which would soon plunge China into war and disrupt economic progress.

Despite these obstacles, the reforms set important precedents for later economic modernization under the People’s Republic of China. The abolition of regional transit taxes and the adoption of a unified currency system remain foundational steps in China’s economic development narrative.

Conclusion

China’s fiscal and monetary reforms from 1927 to 1935 illustrate the profound challenges and ambitions of a nation striving to overcome fragmentation and modernization hurdles. The abolition of the burdensome “li jin” tax system and the establishment of a centralized, modern currency not only facilitated economic integration but also symbolized the Nationalist government’s broader project of national unification and state-building.

While political turmoil and external threats complicated this process, these reforms were crucial for laying the groundwork for China’s later economic transformation. Understanding this period offers valuable insights into how fiscal policy and monetary innovation can serve as engines of national cohesion and development during times of profound change.