This article examines the significance and limitations of the legal currency economic zone that was expanded around the Southwest rear area during the Sino-Japanese War (1937-1945). The Nationalist government, having initiated a capital reconstruction project, faced the important task of economic development alongside wartime military operations. To achieve this, they established a financial network based on large-scale bank construction. In the process, the legal currency, which had been concentrated in the eastern regions, began to expand significantly. However, the Nationalist government had to revise its original plan of achieving economic unification through a single legal currency, which had been pursued since the legal currency reform. This was because Japan’s invasion of China was not merely a military aggression but also was accompanied by an economic offensive. Due to the war, disruptions in the transportation of legal currency to various regions caused delays in its circulation. As a result, they faced a situation where it was difficult to manage the economy using only legal currency. Thus, the Nationalist government allowed provincial banks to issue provincial banknotes again, which had been previously prohibited or restricted, in order to supplement the legal currency. Through the circulation of provincial banknotes, the spread of Japanese puppet currency system could be hindered, and through close coordination with the central government, the provincial banknotes, along with the legal currency, developed in forming a legal currency economic zone.
The evolution of warfare was strongly influenced by international factors, and along with shifts in the domestic situations of both China and Japan, it was also impacting the legal currency economy. The Second World War and the announcement of the abolition of the treaty of commerce and navigation between the U.S and Japan dealt a severe blow to both the collaborationist governments and the Japanese economy. As this crisis unfolded, with the rise of Wang Jing-wei’s collaborationist government and the intensification of the blockade along the Chinese coast to prevent the outflow of materials to the rear area, the nature of the war shifted from a currency war to a material war. In response, the Nationalist government sought solutions through active taxation policies to stabilize prices.
However, war financing shifted from urban to rural areas due to the recession of rear industrial sectors. The government sought to address both the financial shortfall and the difficulty of procuring military provisions by shifting from monetary payments to grain collection for the land tax, which had been the most important source of local taxes. Additionally, local taxes were integrated into central taxes. This new policy led to a drastic reduction in provincial finances, causing provincial financial independence to be lost and absorbed into national finances. The centralization of provincial finances also accompanied a reduction in the issuance of provincial currency by local banks.
In this way, the goal of financial unification through a single currency in the modern state was partially achieved. However, this process also involved the centralization of provincial finances and the inclusion of land tax paid in kind, which had been the most important source of revenue for the provinces. This severely impacted the self-sufficient, decentralized rural economies. The government was unable to propose effective alternatives for rural economies, which were vulnerable to large-scale capital, and led to a decline in rural economies. Moreover, this process failed to address the fundamental issue of inflation, which was a serious economic problem at the time.