A Turning Point for Taiwan

Friday, April 10, 2009

Scholars have long been curious about how the Nationalist government of Chiang Kai-shek turned aside from a command economy on Taiwan and instead built a market economy more productive than any in Chinese history. A pivotal moment in that transformation took place in 1947, midway between the Allies’ defeat of Imperial Japan and Chiang’s own defeat on the Chinese mainland by communist forces. The catalyst was violence: that year, an uprising on Taiwan was suppressed by the Nationalists, and as Chiang pondered the causes of that revolt, according to newly available volumes of the generalissimo’s diaries housed at the Hoover Institution, he decided to change course.


In the fall of 1945, soon after the Japanese surrender, Chiang appointed Chen Yi as the first governor-general of the Taiwan Provincial Administration Executive Office whose duties were to help Taiwan recover from Japanese colonial rule. Chiang’s Nationalist (Kuomintang) government, still based in Nanjing, was struggling with the communists led by Mao Zedong. During the next two years, Chen nationalized all physical assets on Taiwan having to do with industry, trade, commerce, and transportation.

A half century of Japanese rule and heavy war damage had taken their toll. Taiwan was plagued by lack of industrial production, distortions in agriculture, a foreign exchange shortage, serious inflation, and a rapidly increasing population. Chen, a devoted believer in Sun Yat-sen’s doctrines, interpreted Sun’s theory of "restricting private capital while promoting state capital" (jiezhi siren ziben, fada guojia ziben) to mean that transactions should be bankrolled and approved by the state.

Chen, who often said that "there would be no future for China if we failed to develop state enterprises," complained that all capitalists were selfish and wanted to create monopolies.

Chiang shared Chen’s belief that state enterprises were superior to private enterprises and that a planned, command economy would strengthen China’s national security and improve people’s welfare. Most Nationalist leaders, in fact, believed in the power of a command economy during the 1930s and 1940s. In his 1943 book China’s Destiny, Chiang stressed that "only a state-controlled planned economy could integrate defense with economic development."

Thus, with Chiang’s support, Chen rapidly consolidated his enormous political and economic power as garrison commander and executive administrator of the Taiwan Provincial Administration Executive Office. He declared that he would use the Japanese wealth produced during the colonial period to make Taiwan "an experimental incubator of the Three People’s Principles": Sun’s doctrine of nationalism, democracy, and people’s livelihood.

Chen’s consolidation of Taiwan’s assets called for all Japanese and Japanese- Taiwanese industrial and mining organizations to transfer their wealth to the new Nationalist state enterprises. The compendium of laws making this transfer legal and workable was called "An Outline Plan for the Take- Over of Taiwan’s Wealth" (Taiwan jieguan jihua gangyao). Following the plan, Chen ordered the provincial government to confiscate all industrial and mining business (Article 32), all public and private transportation (Article 52), all food production and distribution (Article 68), and all land previously owned by the Japanese (Article 82), a transfer of wealth that took place from November 1945 through June 1946.

Chen ordered that the School Property Committee manage all educational structures and property and the Land Committee manage land disputes. The four largest private sugar companies under Japanese control were amalgamated into the Taiwan Sugar Company. Taiwan’s six oil companies were merged into the China Petroleum Corporation.

Taiwan’s first postwar governor often said that "there would be no future for China if we failed to develop state enterprises," and he complained that all capitalists were selfish and wanted to create monopolies.

Chen’s administration also set up new economic control agencies. The Trade Bureau dictated the import and export of major goods and raw materials. The Monopoly Bureau regulated weights and measures and oversaw the production and marketing of salt, camphor, opium, matches, liquor, tobacco, and other products. Privately manufacturing or selling those products was strictly prohibited. The Food Bureau set up food policy, purchased foodstuffs, levied land taxes, and oversaw food production. The Coal Adjustment Committee monopolized the energy supply, forcing private miners to sell all their coal to the committee.

By late 1946, Taiwan’s provincial government controlled a command economy made up of 70 percent of industrial wealth and 72 percent of Taiwan’s land, but Chen’s command system was unable to revitalize the island’s economy. Moreover, it poisoned relations between the pre-1945 and post- 1945 inhabitants of Taiwan. The power of economic monopoly corrupted Chen’s administration and led it to rely on police power to eliminate competitors.

The challenges confronting Chen’s administration quickly grew more serious. By the end of 1946, frustration and grievances were widespread in Taiwan, especially in the cities. Inflation had become hyperinflation, unemployment was skyrocketing, and the political rift between the mainlanders and the pre-1945 Taiwanese had worsened. Taiwanese resentments toward the provincial administration and the mainlanders were on the verge of boiling over.


Thus on February 27, 1947, a revolt finally erupted. The flashpoint came when a Taipei cigarette vendor was roughed up by an agent of the Monopoly Bureau. Angry crowds surrounded a building where the agent had fled, demanding that he be brought forth.

Violence ensued the following morning, February 28, when security forces at the governor-general’s office fired machine guns at demonstrators protesting the incident, killing several. The Taiwanese soon took control because Chiang had transferred the bulk of his forces to the mainland to fight communists, leaving only some 5,000 police officers and soldiers on the island.

The command economy poisoned relations between pre-1945 and post-1945 inhabitants of Taiwan. Chen Yi’s administration grew corrupt and leaned on police power to eliminate black-market competitors.

The uprising lasted a week, at which time a large force of Chiang’s troops arrived from Fujian to suppress it. Damage was extensive, and the death toll was estimated to be as high as 20,000. (In the following years, the "228 uprising" was a taboo subject in Taiwan. Today, however, Taiwan commemorates every February 28 as Peace Memorial Day.)

The uprising’s impact was enormous. Most historians and political scientists agree that it had a more profound and enduring effect on Taiwan than any other single event after World War II. The Chiang diaries at the Hoover Archives bear this out. Chiang, then in Nanjing, didn’t take the uprising seriously at first, not mentioning it in his diary until March 1, the day after the revolt broke out. In his diary, Chiang wrote that Chen was mostly responsible for the uprising because of his "ignorance and incapability." Chiang also acknowledged that his own decision to transfer "most of the troops to the mainland" contributed to Chen’s inability to control the situation.

As Chiang realized that the problem was worsening, he began to take Taiwan’s security seriously. He summoned Li Yizhong (chairman of the Kuomintang Taiwan Provincial Commission) back to Nanjing to apprise him of the situation and, at the same time, sent Yang Lianggong (the censor of Fukien and Taiwan from the Control Yuan) to Taiwan to investigate why and how the uprising had occurred.

On March 8, Li reported to Chiang that tight political and economic control had mainly provoked the disaster. To win Taiwanese support for the Nationalist government, Li made the following four suggestions: abolish the Taiwan Provincial Administration Executive Office and replace it with a new provincial government; appoint more Taiwanese to top provincial administrative positions; speed up local elections; and downsize state enterprises and create private ones.

Chiang listened carefully, for he now realized that the uprising had divided Taiwan’s people. He also came to believe that the uprising had infuriated more Taiwanese than he had first realized and that his government must win the support of the island’s people if the Kuomintang were to win their respect and admiration. Chiang, also seeing Taiwan as the last bastion of his government and party, could not face another loss to the communists. After discussing Li’s suggestions with other Nationalist leaders, Chiang accepted them "with a little revision," according to one published account.

On March 9, then, Chiang sent Defense Minister Bai Chongxi to Taiwan to express Chiang’s sympathy to the people and to calm them by insisting that order should now prevail. That evening, Chiang noted in his diary that "studying how to sell state enterprises" must become an important objective and be taken seriously in the coming days, marking the first time that Chiang indicated he was thinking of selling out state enterprises, a tone very different from his previously stated beliefs in the superiority of a command economy.

Both Bai and Yang returned to Nanjing in late March and reported to Chiang their conclusion that applying rigid economic policies was the major reason behind the uprising.

Thus in his report to the Kuomintang Central Committee on April 17, 1947, Bai recommended that political and economic reforms take place as quickly as possible. He stressed that the government should help the private sector develop and reform the state enterprises by restricting their number and limiting their influence.

Yang suggested abolishing the notorious Monopoly Bureau and Trade Bureau, reorganizing the administration government, and recruiting more Taiwanese to top jobs in the provincial government.


Chiang, by now convinced that Taiwan’s weak security and social disability were major problems demanding government and party reform, paid close attention to the suggestions offered by Li, Yang, and Bai. Accepting their ideas, Chiang abolished the Taiwan Provincial Administration Executive Office, installed a new provincial government, and replaced Chen with a new governor, Wei Tao-ming, on May 15, 1947. (Two years later, Chen was accused of collaborating with the mainland communists. He was executed in 1950.)

Chiang believed that Taiwan was the last bastion for his government and party. He could not tolerate another loss of territory to the communists.

Governor Wei (who had previously served as secretary-general of the Executive Yuan and ambassador to the United States) took steps to repair the damage. He reformed the Monopoly Bureau, abolished the Trade Bureau, privatized some public enterprises—such as the Taiwan Matches Company, the Printing Department, and the Taiwan Mining Company—and undertook to make public enterprises responsible for producing intermediate products and the private sector, for consumer goods. The Wei administration also sold public land to Taiwanese farmers and encouraged free markets for the distribution of food and special crops.

Wei also hired more Taiwanese and began appointing qualified, experienced Taiwanese to high positions in the administration. Although Wei’s actions did not greatly reduce the huge command economy, they did provide new incentives to form private enterprises to manufacture products for a market economy that had now begun to expand.

The February 28 uprising is not the only explanation for Chiang’s shift, but his diaries show that the uprising challenged him and other Nationalist leaders to ask, "What has gone wrong with the planned economy?" As Chiang looked anew at an economic system rigidly controlled by the state, he realized that it was the source of many problems.