In this series of articles, the history and politics of mainland China and Taiwan are addressed. When I was a kid, I did not understand the word “politics”. So I searched for it, not with Google, but in a dictionary. I couldn’t agree more on the definition of politics I learnt from that book: Politics is the concentrated expression of economy. In this series, we’ll see how economic policies shaped the political map of both sides of the Taiwan Strait, and how political decisions lead to economic consequences.

The story began in 1945 after the end of WW2… No, not really, the story began far earlier than that. 120 years ago, in the year 1894, China lost the First Sino-Japanese War against Japan. After the war, China was forced to sign a treaty, which includes one term, the cession of full sovereignty of Taiwan to Japan. This was the starting point of the Japanese ruling of Taiwan for half a century.

The Japanese took Taiwan seriously, which can be seen from the list of Governor General of Taiwan. On this list, there are Katsura Tarō (桂太郎) who later became the prime minister of Japan; Nogi Maresuke (乃木希典) and Kodama Gentarō (兒玉源太郎) who lead the Japanese army to win Russo-Japanese War; Akashi Motojirō (明石元二郎), a super spy who financed Lenin to overthrow the Russia imperial government.

But people in Taiwan were furious at this cession. Many upraised against the Japanese, and many have died. According to the autobiography of Gotō Shinpei (后藤新平), former head of the civilian affairs of Taiwan under Japanese rule, the number of people who got executed in the first 8 years of Japanese occupation was more than 1% of the total population of that island.

After all the  Japanese antagonists were killed, Japan began to treat Taiwan no longer as a colony but as an extension of Japan. The current best university in Taiwan, National Taiwan University was built in that era, as one of the nine Japanese imperial universities. To be objective, the Japanese did help a lot with the infrastructure, education, public health and economy of Taiwan. And the attitude of Taiwanese towards Japan was also changed. People born after the Japanese occupation started to identify themselves not as Chinese, but as Japanese. Lee Teng-hui (李登辉), the third “president” of Taiwan was born in this period. He has a Japanese name “Iwasato Masao (岩里政男)”. One of his brothers even joined the Japanese army and died in the Pacific War. This period has such a deep influence in Taiwan that many people in Taiwan still have a Japanese complex after so many years.

Meanwhile, in mainland China, people were still fighting Japanese invaders. In 1945, as a part of WW2, the Second Sino-Japanese War was over. And after a century of humiliation, China was first time a winner in a war against another country. By accepting the Cairo Declaration, Japan acknowledged Taiwan as a part of China. The 4 years between 1945 and 1949 are the only four years in these 120 years, that Taiwan is a part of China, de jure and de facto. But in these 4 years, Chinese people were not happy. Instead, they suffered from the War of Liberation, where the People’s Liberation Army (PLA) led by the Communist Party of China (CPC) fought the Republic of China (ROC) government organized by the Chinese National Party (Kuomingtang or KMT). With some ten million troops mobilized in total, it was probably the biggest civil war in human history.

The result of the war was  the victory of the CPC. But what really defeated the KMT was not the CPC, but KMT’s poor economic policies. In 1935, KMT government issued the legal tender Fabi (法币), which replaced silver and became the national currency. Fabi could be freely traded to US dollars and British pounds with a fixed exchange rate, where 1 USD = 3.33 Yuan (Fabi). However, only two years after, the Second Sino-Japanese War started. The Japanese used Japanese Yen to exchange for Fabi in their controlled area, then ship the Fabi to Shanghai to exchange for foreign currencies. The central government was soon out of foreign currency reserve and had to borrow from other countries. After the borrowed money fell into the hands of the Japanese, the KMT government finally stopped the free trading. And a horrible hyperinflation started. In 1948, a bank note of Fabi was even less valuable than the paper it was printed on.

That was not the end of it. In 1948, right before the CPC launched the three major campaigns, the KMT government issued a replacement of Fabi, the Gold Standard Scrip, or the Gold Yuan. The president Chiang Kai-shek signed on a special law to enforce Chinese citizens to surrender their gold, silver and foreign currencies in exchange of the Gold Yuan. However, once again, they did not limit the amount of the Gold Yuan as they promised, and thus it soon became toilet paper, too. Only in a few months, the central bank started to issue single banknotes of 5,000,000 Gold Yuan, which had a purchase power of 1 kg of pork. Moreover, the city middle class, who trusted this government and exchanged their jewelry to the toilet paper, lost everything but many zeros printed on paper.

There was no more reason for this government to keep ruling China. Chiang Kai-shek knew it. In 1949, he and his followers fled to Taiwan, with all the gold, silver and US dollars they collected. The island, which was already isolated to the mainland for too many years, started a new round of isolation for decades.