Money value is usually expressed in terms of commodity prices internally and the exchange rate externally. In discussing the problem of money value, commodity prices and the exchange rate have to be dealt with. In China, as the prices of precious metals, such as gold and silver, are also regarded as a measurement of money value, the prices of such metals are also often taken into account.
Gold Reserve
The Government has always recognized the need to pay the closest attention to the stabilization of money value of the local currency. ,When the monetary reform was first carried out in June, 1949, which gave birth to the New Taiwan currency (NT$), the new Taiwan notes were fully backed with gold reserve. The maximum of the note issue was set at 200 million dollars. Against this amount, 800,000 ounces of gold were laid aside by the Central Bank of China as its reserve with the conversion rate being fixed at one ounce of gold for NT$280. That is to say, the total gold reserve was worth some NT$224,000,000 and the new Taiwan notes were backed with more than 100 per cent gold.
In order to make the notes redeemable, the Bank of Taiwan was authorized to adopt an open-market-operation measure in selling and buying gold in the form of the so-called "gold saving deposits." Anyone could deposit NT$ 280 in the bank and demand one ounce of gold after a certain period of time, ranging from 10 days to several months if he chose to do so. In case he was in need of cash when the deposit becomes due, he could either surrender his gold to the Bank or draw the gold from the Bank and sell it to goldsmiths or other brokers in the open market. In other words, the new Taiwan currency was practically redeemable in gold. The measure was continued for nearly two years, although some readjustments in the conversion rate had been made during the period.
In addition to the strong support of the gold reserve, large quantity of "surplus materials" of World War II taken over from the United States by the National Government was rushed into Taiwan just around die time of the currency reform and left to the Taiwan Provincial Government for disposal. This also helped replenish the supply of commodities and had a desirable effect on the stabilization of the money value of the new Taiwan currency.
Externally, the Regulations Governing the Issuance of the New Taiwan Dollar Notes provided that they can be used to buy foreign exchange from the Bank of Taiwan to finance imports. All of the export proceeds of Taiwan are made available as the reserve. During the past five years, the amount of foreign exchange thus settled for imports totaled US$417,655,414.
Another powerful bolster of the new Taiwan currency is, of course, the supply U. S. aid commodities. Immediately following the currency reform, the island began to receive U.S. economic aid. According to official statistics appearing in the China Year-book, the total Aid imports in the latter part of 1949 amount ed to US$8,688,239 or 33% of the imports valued at US$25,990,173 financed with government foreign exchange during 1949. In 1950, the imports financed with government exchange increased to US$91,617,574 while the aid sup plies totalled US$20,484,186. Beginning from 1951, the percentage which the aid imports occupied in the total volume of import trade steadily increased. The detailed figures for the two kinds of imports are given below:
|
Year Imports Financed U.S. Aid |
Percentage of | |||||
|
with Government |
Supply |
Aid Supply | ||||
|
Exchange |
Against Gov. | |||||
|
(Unit: US) |
Exchange Imports | |||||
|
1949 |
25,990,173 |
8,688,239 |
33.5 | |||
|
1950 |
91,617,574 |
20,484,186 |
22.3 | |||
|
1951 |
84,318,612 |
56,621,030 |
67.2 | |||
|
1952 |
115,225,072 |
89,163,050 |
80.4 | |||
|
1,53 |
100,503,983 |
81,384,673 |
82.9 | |||
|
Total 417,655,414, 258,341,173 |
61.8 | |||||
The huge volume of the aid imports has contributed a great deal towards balancing the foreign payments and stabilizing the commodity prices during the past five years. So, judging from the reserve situation of the new Taiwan dollar notes, the currency was the best supported in the world, especially when it first came into being.
Changes in Exchange Rate
However, due to the political unrest in the country and the rapid increase in population on the island resulting from the Communist seizure of the mainland in 1949, the new currency has been depreciating both internally and externally. During the past five years, both the commodity prices and the market rate of exchange have registered continuous rises. Consequently, the gap between the originally set official exchange rate and the market rate began to widen. This over-valuation of the local currency was naturally unfavorable to the export trade and caused much trouble to the public and private exporters. It also tended to reduce exchange receipts in the long run.
In order to promote exports, a more realistic rate of exchange, commonly known as "Bank of Taiwan rate", at which the bank bought and sold foreign exchange, was set. Following the adoption of the rate, readjustments had been frequently made with a view to bringing it closer to the rate on the open market. In March 1950, it was raised to NT$7.50 to US$ 1.00. In the following month, three more re adjustments were made. From July, 1950 on, it had, however, remained at NT$10.30 to US$1.00 until its repudiation.
In April, 1951, another exchange rate named "certificate rate" was fixed at NT$15.65 to US$1.00 (Bank of Taiwan selling). It has been applied to certain kinds of imports and exports since then. Hence, there were three exchange rates at that time: one was the official rate of NT$ 5.00 to US$1.00, which was only for accounting purposes. The other was the Bank of Taiwan rate of NT$ 10.30 to US$ 1.00. And the third was the certificate rate. The system of dual exchange rates, the Bank of Taiwan rate and the certificate rate, was in operation for about two years until the spring of 1953 when the former was abandoned. During this period, the Bank of Taiwan rate as applied, in principle, to exports and imports of government enterprises, 20 per cent of private exports, and some "essential" import items. The certificate rate was generally applied to private imports, 80 per cent of private exports, and all of the sluggish export items.
All these exchange rates are, however, artificially fixed. What reflects the real money value externally is the market rate which has been advancing with a much greater speed than the official rates since the currency reform. At the end of 1949, for instance, the market rate of U. S. notes stood at NT$ 8.17 to US$1.00, or over 60% higher than the official rate. In 1950, the market rate of U. S. notes increased, on the average, to NT$11.20; in 1951, to NT$ 21.50; in 1952, to NT$23.60; and last year to NT$ 27.00. In the last few months, it has remained unchanged. The market rate of Hongkong dollars has fluctuated with that of U. S. notes. The following table shows the changes in the exchange rates of the new Taiwan currency during the past five years:
|
Exchange Rates of US$ (selling) | |||||
|
Bank |
Market |
Market | |||
|
Period Official |
of Certifi- |
Rate |
Rate | ||
|
Taiwan |
cate |
of US$ |
of HK$ | ||
|
June |
|||||
|
1949 |
5.00 |
- |
- |
5.90 |
0.93 |
|
Eec. |
|||||
|
1949 |
5.00 |
- |
- |
8.17 |
1.28 |
|
1950 |
5.00 |
10.00 |
- |
11.20 |
1. 78 |
|
1951 |
- |
10.00 15.65 |
11.50 |
3.91 | |
|
1952 |
- |
10.00 15.65 |
23.60 |
4.30 | |
|
1953 |
- |
- |
15.65 |
27.00 |
4.42 |
|
Note: (1) Market rates of U.S. dollars and | |||||
|
H.K. dollars are listed according to | |||||
|
the vernacular -magazine |
Financial | ||||
|
and Economic Monthly, vol. 4, No. 1 | |||||
Price Movement
In addition to the exchange rate, another measurement of money value is the commodity "price. It reflects the purchasing power of a currency within the country. A rise in commodity prices may indicate a devaluation of the currency. On the other hand, a downward trend in the price movement may show its growing strength. Stability of money value cannot be achieved without a stable price level.
The new Taiwan currency, although sufficiently backed with gold, foreign exchange, and commodities as has been mentioned above, was born in a politically precarious atmosphere. The monetary reform took place on June 15, 1949, only 20 clays after the Communist seizure of Shanghai, the financial and economic center
of China. This caused great anxiety on the part of the people in Taiwan and exerted a bad influence on the economy of the island. Over 1,000,000 mainlanders rushed into Taiwan within a few months. The rapid increase in population caused a much greater demand for commodities, especially consumer goods.
As a result, commodity prices moved upward with great speed during the first several months following the currency reform. According to the statistics of the Bureau of Accounting and Statistics of the Taiwan Provincial Government, the general index of 'wholesale price in Taipei in December. 1949 climbed to 182.87, taking June 15 of the year as 100, registering an increase of more than 82% within half a year.
In the following two years, the upward trend was continued. Thus in December 1950, the general index of wholesale prices in Taipei came to 344.71. By the end of 1951, the figure climbed to 526.24. Prices were comparatively stable in 1952, when the index was increased by only 3%. In December, last year, the index was increased to 630.81. In the first quarter of this year, the index has registered a slight decline.
The movement of retail prices