4 Anatomy of Money

It was imperative for soviet economy to fulfill at least two elementary functions：to feed and equip the Red Army, and to bring immediate relief to the poor peasantry. Failing in either, the soviet base would soon collapse. To guarantee success at these tasks it was necessary for the Reds, even from the earliest days, to begin some kind of economic construction.

Soviet economy in the Northwest was a curious mixture of private capitalism, state capitalism, and primitive socialism. Private enterprise and industry were permitted and encouraged, and private transaction in the land and its products was allowed, with restrictions. At the same time the state owned and exploited enterprises such as oil wells, salt wells, and coal mines, and it traded in cattle, hides, salt, wool, cotton, paper, and other raw materials. But it did not establish a monopoly in these articles, and in all of them private enterprises could, and to some extent did, compete.

A third kind of economy was created by the establishment of cooperatives, in which the government and the masses participated as partners, competing not only with private capitalism, but also with state capitalism！But it was all conducted on a very small and primitive scale. Thus although the fundamental antagonisms in such an arrangement were obvious, and in an economically more highly developed area would have been ruinous, here in the Red regions they somehow supplemented each other.

The Reds defined the cooperative as "an instrument to resist private capitalism and develop a new economic system, "and they listed its five main functions as follows："to combat the exploitation of the masses by the mer chants; to combat the enemy's blockade; to develop the national economy of the soviet districts; to raise the economic-political level of the masses; and to prepare the conditions for Socialist construction"——a period in which "the democratic revolution of the Chinese bourgeoisie, under the leadership of the proletariat, may create energetic conditions enabling the transition of this revolution into socialism."^[*]

The first two of those high-sounding functions in practice meant simply that the cooperative could help the masses organize their own blockade-running corps, as auxiliaries to the blockade-running activity of the government. Trade between Red and White districts was prohibited by Nanking, but by using small mountain roads, and by oiling the palms of border guards, the Reds at times managed to carry on a fairly lively export business. Taking out raw materials from the soviet districts, the transport corps in the service of the state trade bureau or the cooperatives exchanged them for Kuomintang money and needed manufactures.

Consumption, sales, production, and credit cooperatives were organized in the village, district, county, and province. Above them was a central bureau of cooperatives, under the finance commissioner and a department of national economy. These cooperatives were really constructed to encourage the participation of the lowest strata of society. Shares entitling the purchaser to membership were priced as low as fifty cents, or even twenty cents, and organizational duties were so extensive as to bring nearly every shareholder into the economic or political life of the cooperative. While there was no restriction on the number of shares an individual member could buy, each member was entitled to but one vote, regardless of how many shares he held. Cooperatives elected their own managing committees and supervisory committees, with the assistance of the central bureau, which also furnished trained workers and organizers. Each cooperative had departments for business, propaganda, organization, survey, and statistics.

Various prizes were offered for efficient management, and widespread propaganda stimulated and educated the peasants concerning the usefulness of the movement. Financial as well as technical help was furnished by the government, which participated in the enterprises on a profit-sharing basis, like the members. Some $70, 000 in non-interest-bearing loans had been invested by the government in the cooperatives of Shensi and Kansu.

Only soviet paper was in use, except in the border counties, where White paper was also accepted. In their soviets in Kiangsi, Anhui, and Szechuan the Reds minted silver dollars, and subsidiary coins in copper, and some also in silver, and much of this metal was transported to the Northwest. But after the decree of November, 1935, when Nanking began the confiscation of all silver in China, and its price soared, the Reds withdrew their silver and held it as reserve for their note issue.

Paper currency in the South, bearing the signature of the "Chinese Workers' and Peasants' Soviet Government State Bank, "was excellently printed, on good bank paper. In the Northwest, technical deficiencies resulted in a much cruder issue on poor paper, and sometimes on cloth. Their slogans appeared on all money. Notes issued in Shensi bore such exhortations as："Stop civil war！""Unite to resist Japan！""Long live the Chinese revolution！"

But how could merchants sell articles imported from the White regions for currency which had no exchange value outside the soviet districts? This difficulty was met by the state treasury, which had fixed an exchange rate of soviet $1.21 to Kuomintang $1. Regulations provided that "all goods imported from the White districts, and sold directly to the State Trade Bureau, will be paid for in foreign[Kuomintang]currency; imports of necessities, when not sold directly to the State Trade Bureau, but through cooperatives or by private merchants, shall first be registered with the State Trade Bureau, and proceeds of their sale for soviet currency may be exchanged for White paper; other exchange will be given when its necessity is established."^[*] In practice this of course meant that all "foreign"imports had to be paid for in "foreign"exchange. But as the value of imported manufactures (meager enough) greatly exceeded the value of soviet exports (which were chiefly raw materials, and were all sold in a depressed market as smuggled goods), there was always a tendency toward a heavy unfavorable balance of payments. In other words, bankruptcy. How was it overcome?

It was not, entirely. As far as I could discover, the problem was met principally by the ingenuity of Lin Tsu-han, the dignified white-haired Commissioner of Finance, whose task was to make Red ends meet. This interesting old custodian of the exchequer had once been treasurer of the Kuomintang, and behind him lay an amazing story.

Son of a Hunanese schoolteacher, Lin Tsu-han was born in 1882, educated in the Classics, attended normal college at Changtehfu, and later studied in Tokyo. While in Japan he met Sun Yat-sen, then exiled from China by the Manchus, and joined his secret revolutionary society, the Tung Meng Hui. When Sun merged his Tung Meng Hui with other revolutionary groups to found the Kuomintang, Lin became a charter member. Later on he met Ch'en Tu-hsiu, was much influenced by him, and in 1922 joined the Communist Party. He continued to work closely with Dr. Sun Yat-sen, however, who admitted Communists to his party, and Lin was in turn treasurer and chairman of the General Affairs Department of the Kuomintang. He was with Sun Yat-sen when he died.

At the beginning of the Nationalist Revolution, Lin was one of the several elders in the Central Executive Committee of the Kuomintang who held seniority over Chiang Kai-shek. In Canton he was chairman of the Peasant Department and during the Northern Expedition he became political commissar of the Sixth Army, commanded by General Ch'eng Ch'ien——the late chief of staff at Nanking. When Chiang Kai-shek began the extermination of the Communists in 1927, Lin denounced him, fled to Hongkong, and then to Soviet Russia, where he studied for four years in the Communist academy. On his return to China he took passage on the "underground railway"and safely reached Kiangsi. Now a widower, Lin had not seen his grown-up daughter and son since 1927. At the age of forty-five he had abandoned the comfortable assets of his position and staked his destiny with the young Communists.

Into my room in the Foreign Office one morning came this fifty-five-year-old veteran of the Long March, wearing a cheerful smile, a faded uniform, a red-starred cap with a broken peak, and in front of his kindly eyes a pair of spectacles one side of which was trussed up over his ear with a piece of string. The Commissioner of Finance！He sat down on the edge of the k'ang and we began to talk about sources of revenue. The government, I understood, collected practically no taxes; its industrial income must be negligible; then where, I wanted to know, did it get its money?

Lin began to explain："We say we do not tax the masses, and this is true. But we do heavily tax the exploiting classes, confiscating their surplus cash and goods. Thus all our taxation is direct. This is just the opposite of the Kuomintang practice, under which ultimately the workers and the poor peasants have to carry most of the tax burden. Here we tax less than 10 per cent of the population——the landlords and usurers. We also levy a small tax on a few big merchants, but none on small merchants. Later on we may impose a small progressive tax on the peasantry, but at the present moment all mass taxes have been completely abolished.

"Another source of income is from voluntary contributions of the people. Revolutionary patriotic feeling runs very high where war is on and the people realize that they may lose their soviets. They make big voluntary contributions of food, money, and clothing to the Red Army. We derive some income also from state trade, from Red Army lands, from our own industries, from the cooperatives, and from bank loans. But of course our biggest revenue is from confiscations."

"By confiscation, "I interrupted, "you mean what is commonly described as loot?"

Lin laughed shortly. "The Kuomintang calls it loot. Well, if taxation of the exploiters of the masses is loot, so is the Kuomintang's taxation of the masses. But the Red Army does no looting in the sense that White armies loot. Confiscations are made only by authorized persons, under the direction of the Finance Commission. Every item must be reported by inventory to the government, and is utilized only for the general benefit of society. Private looting is heavily punished. Just ask the people if Red soldiers take anything without paying for it."

"Well, you are quite right. The answer to that naturally would depend on whether you asked a landlord or a peasant."

"If we did not have to conduct incessant war, "Lin continued, "we could easily build a self-supporting economy here. Our budget is carefully made, and every possible economy is practiced. Because every soviet official is also a patriot and a revolutionary, we demand no wages, and we can exist on but little food. It will probably surprise you to know how small our budget is. For this whole area^[*] our present expenditure is only about $320, 000 per month. This represents goods value as well as money value. Of this sum, from 40 to 50 per cent comes from confiscations, and 15 or 20 per cent comes from voluntary contributions, including cash raised by the Party among our supporters in the White districts.^[**] The rest of our revenue is derived from trade, economic construction, Red Army lands, and bank loans to the government."

The Reds claimed to have devised a squeeze-proof machinery of budgeting, of receipts and disbursements. I read part of Lin Tsu-han's Outline for Budget Compilation, which gave a detailed description of the system and all its safeguards. Its integrity seemed to be based primarily on collective control of receipts and disbursements. From the highest organ down to the village, the treasurer was accountable, for both payments and collections, to a supervising committee, so that juggling of figures for individual profit was extremely difficult. Commissioner Lin was very proud of his system, and asserted that under it any kind of squeeze was effectively impossible. It may have been true. Anyway, it was obvious that in the Red districts the real problem as yet was not one of squeeze, in the traditional sense, but of squeezing through. Despite Lin's cheerful optimism, this was what I wrote in my diary after that interview：

"Whatever Lin's figures may mean exactly, it is simply a Chinese miracle, when one remembers that partisans have been fighting back and forth across this territory for five years, that the economy maintains itself at all, that there is no famine, and that the peasants on the whole seem to accept soviet currency, with faith in it. In fact this cannot be explained in terms of finance alone, but is only understandable on a social and political basis.

"Nevertheless, it is perfectly clear that the situation is extremely grave, even for an organization that exists on such shoestrings as the Reds feed upon, and one of three changes must shortly occur in soviet economy：(1) some form of machine industrialization, to supply the market with needed manufactures; (2) the establishment of a good connection with some modern economic base in the outside world, or the capture of some economic base on a higher level than the present one (Sian or Lanchow, for example); or (3) the actual coalescence of such a base, now under White control, with the Red districts."

The Reds did not share my pessimism. "A way out is sure to be found."And in a few months it was. The "way out"appeared in the form of an "actual coalescence."

Lin didn't seem to be "getting ahead"financially very fast himself, by the way. His "allowance"as Commissioner of Finance was five dollars a month——Red money.

^[*]Outline for Cooperative Development, Department of National Economy (Wayapao, Shensi, November, 1935), p. 4.

^[*]"Concerning Soviet Monetary Policy, "Tangti Kungtso[party Work], No. 12 (Pao An, 1936).

^[*]Then about the size of Austria.

^[**]At that time this soviet area was probably receiving little or no financial aid from Russia, with which it had no direct geographical connection.