A Political and Economic History of China, Part 34: Japan and World War II, Part 3

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs wraps up his 20,000 foot view chronology of World War II in China, discussing the dispositions of the Nationalists and the Communists by war’s end.

Photo: Chinese zones of factional control at the end of World War II. Note communist controlled areas in vertical red/white striping. Stars indicate Nationalist provisional capital of Chungking (blue) and communist base of Yan’an (red).

Readers who missed Parts 1 and 2 of this very abridged summary of World War II in China can go to:

1) Japan's modernization and expansionist ambitions up to the 1931 invasion of Manchuria.

https://www.cautiouseconomics.com/2025/04/china-history32.html

2) The invasion of the Chinese mainland and several years of brutal warfare.

https://www.cautiouseconomics.com/2025/04/china-history33.html

After the Xi’an Incident of 1936 Chiang Kai-shek reluctantly agreed to the united front with the Communists to resist the Japanese. The combined armies, of which the Communists were by far the smaller at the time, were renamed the Nationalist Revolutionary Army. 

Communist soldiers wore the Nationalist blue sun insignia and on paper they took orders from Chiang Kai-shek. However given ideological differences and the geographical distance between Nationalist and communist bases of control, cooperation quickly broke down. In practice the Nationalists and Communists operated independently with little coordination/cooperation.

THE COMMUNISTS

While the Nationalist government remained holed up in the Sichuan basin city of Chunking, its stalemate with the IJA provided a golden opportunity for Chinese communist rebels.

When the Japanese entered rural areas they mercilessly killed the peasantry. It didn’t matter whether village dwellers resisted the IJA or cooperated, the Japanese looted, raped, and massacred. 

In the north, the Japanese “Three Alls” policy of 1941-42 (“kill all, burn all, loot all”) was aimed specifically at civilians of which 2.7 million were killed in that campaign alone.

Given no real choice, the peasants cooperated with the communist resistance since there was no incentive to remain neutral. Either way the Japanese would kill you.

The CCP’s base of Yan’an in northwest China also conveniently bordered Japanese occupied territory in northeast China. Given the sheer size of the country, Japanese occupation was limited mostly to urban areas with little presence in the countryside. Thus communist activity spread deep behind enemy lines and infiltrated the rural landscape of Japanese controlled provinces.

The Communists were also smart enough to treat the Chinese peasants well. Mao Zedong gave strict instructions to his soldiers not to steal and to always pay for whatever food they received from Chinese civilians. This, combined with seizing land and redistributing it to the peasants, won the Communists much support among the rural Chinese population in north and northeastern China. By contrast KMT troops, themselves poorly fed, equipped, and hungry, routinely looted their fellow Chinese.

Communist military leadership was also good. Famous commanders like Zhu De and Peng Dehuai successfully harassed Japanese troops with guerilla tactics similar to those they had used against the KMT during the Jiangxi Soviet days of the early 1930’s.

Although guerilla warfare was insufficient to change the outcome of the larger war, the perception that the Communists were going on the offensive—while the Nationalist government had retreated, sacrificed land for time, and was eventually holed up in Sichuan and playing defense—transformed the Communists into heroes who were “doing something.”

Thus millions of everyday Chinese—mostly young people and idealistic university students who were unhappy with the corruption and inefficacy of the Nationalist government—made pilgrimages to Yan’an from all over the country and joined the communist resistance. During the war the communist 18th Army Group’s numbers swelled from just 20,000 at the time of the 1936 Xi’an Incident to 1.2 million by war’s end. This doesn’t include another 2 million “People’s Militia” troops.

Most of the idealistic youth had no idea how communism worked and were unaware of the repeated famines in communist Russia, Stalin’s notorious NKVD police state, the Soviet Great Terror, or the Ukrainian Holodomor. Knowing nothing about the dangers of communism, they only saw the CCP fighting and harassing the Japanese invaders and poured into Yan’an as volunteers.

Fifteen years later these idealistic students would learn for themselves what life is really like under communism when the Great Famine of 1958-1961 came, but that's a subject for later.

By war’s end the Communists had infiltrated and controlled nearly all the countryside in northeast China and much of the Yangtze region, a major factor that would determine the outcome of the upcoming Chinese Civil War.

THE WAR TURNS

As Japan ravaged China Chiang Kai-shek’s wife Soong Mei-ling, American educated and fluent in English, routinely visited the United States in search of aid. While President Franklin Roosevelt and most of Congress were sympathetic to China, the American public remained generally isolationist so all the United States would offer was modest financial and humanitarian support.

The bombing of Pearl Harbor changed all that, drawing the United States directly into the war, and the Chinese were elated to have a new, powerful ally. FDR dispatched General Joseph Stilwell (aka. “Vinegar Joe”) to Chungking to assume the role of Commander all U.S. forces in China, Burma, and India (of which there were actually few Americans) and Chief of Staff to Chiang Kai-shek.

The U.S./Nationalist China relationship was strained from the start.

Although Stillwell mastered both written and spoken Chinese, his lack of diplomacy didn’t go over well with the Nationalist government. Appalled by widespread KMT corruption, Stillwell was soon referring to Chiang Kai-shek as “Peanut” and his internal memos and discussions were so laced with personal insults that word eventually got back to Chiang.

Chiang himself was not personally corrupt (a subject for another column) but his government certainly was, especially his wife and her family. During the 1940's, as U.S. aid poured into China, Soong Mei-ling’s brother T.V. Soong, a former banker and KMT finance minister and premier, was speculated by the western press to be the richest man in the world.

Meanwhile Chiang Kai-shek frustrated Stillwell by preserving his best remaining forces for an eventual showdown with the Communists while granting only his inferior troops and what few Americans were there to do most of the fighting against the Japanese. Stillwell also clashed with the British over operations in the China/Burma border region.

The disagreements and conflicts escalated to the point that Chiang asked FDR to replace Stilwell who was recalled to the United States and replaced by General Albert Wedemeyer.

Wedemeyer was more diplomatic and restrained in his disagreements with the KMT, but he saw the same problems that Stilwell did and conveyed similar reports of Nationalist corruption and poor leadership to his superior, George C. Marshall. 

Under FDR’s presidency massive amounts of U.S. aid flowed to the Nationalist government, much of it ultimately into the bank accounts of corrupt KMT officials. Meanwhile Nationalist troops suffered from shortages of food, weapons, and even boots. KMT officials and Soong Mei-ling’s own family made fortunes during the war while Nationalist soldiers, lacking basic necessities, routinely looted Chinese villages for food. 

Wedemeyer reported large numbers of KMT conscripts, snatched from their homes, died of disease or hunger before even reaching training camp. Many who did make it were immediately sent to “hospitals” which Wedemeyer’s report compared to German extermination camps at Buchenwald.

According to Wedemeyer, the “Chinese army was starving to death in the field.”

Nevertheless, the tide of the war turned against Japan in the Pacific. By late 1944 the U.S. Navy and its submarines controlled sea lanes to and from the home islands and the Nationalists won a few battles in mid-1945, mostly pushing the Japanese back in the southern and extreme southern provinces of Hunan and Guangxi. Even when the atomic bombs were dropped on Hiroshima and Nagasaki and the Soviet Union invaded Manchuria there were still 1.2 million Japanese soldiers stationed in China.

While the United States had carried out nearly all the offensive successes against Imperial Japan, there is something to be said for China’s role pinning down over a million Japanese soldiers on the mainland, something the CCP reminds Chinese citizens today. In some propaganda the CCP claims America’s role was secondary and that it was they, the Communists, who actually defeated Japan. This is of course an exaggeration, but there can still be no question that China, with all its suffering and losses tying up the IJA, still played a significant role in Japan’s defeat. It was a period of sometimes uneasy cooperation between the Americans and the Chinese, but it ultimately worked.

Either way the final death tally was enormous. Nearly 20 million Chinese had died, mostly civilians, a number rivaled only by Soviet losses on the European Eastern Front. The Chinese economy lay in ruins with inflation running rampant. When Chiang moved the Nationalist capital back to Nanjing and attempted to rebuild the economy while simultaneously preparing for another civil war, the Communists had likewise established themselves in northern China and Manchuria and their numbers had swollen into the millions.

Once again, an outside intervention had aided the CCP. The Japanese invasion had taken the Communists from a force of perhaps 20,000 men on the brink of annihilation by the KMT to effective control of northern China and an army of millions.

This was the state of China right before the outbreak of the second Nationalist-Communist civil war of 1945-1949.

A Political and Economic History of China, Part 33: Japan and World War II, Part 2

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs continues his history of China series outlining the general chronology of the Second Sino-Japanese War, better known as World War II.

Photo: IJA Chinese territorial gains by 1940. Note that nearly every major Chinese city is occupied including Beijing, Tianjin, Shenyang, Shanghai, Nanjing, Hangzhou, Wuhan Guangzhou, Fuzhou, and Xiamen. Only Hong Kong—British territory that Japan would take in late 1941—and the remote Sichuan cities of Chengdu and Chongqing remain under Nationalist (KMT) control.

In the last column the Economics Correspondent planned to post one column summarizing the main events of World War II in China followed by one more on the aftermath effects for the rival Nationalist and Communist factions.

But upon writing it’s become clear that even a highly abridged version of the war with Japan will require more than a single column, so today’s article will be the first of two on the subject.

The Economics Correspondent doesn’t claim to know each and every battle between Chinese and Japanese forces during World War II. Like a lot of Americans he’s always been more interested in the battles between the U.S. and Japan, or between the Allies and Nazi Germany. The military campaigns in China were mostly land battles with infantry, limited armor—particularly on the Chinese side—and modest air support when compared to the European theater or great carrier battles of the Pacific.

In China, historians record 22 major battles from 1937 to 1945, defined as involving at least 100,000 soldiers. And China lost them all until mid-1945 at which point Japan was already nearly defeated by American naval blockades and strategic bombing.

FULL BLOWN INVASION

Just as it had during the invasion of Manchuria, Japan manufactured another pretext for invading the Chinese mainland in 1937: the so-called Marco Polo Bridge Incident.

On July 7, 1937 the IJA demanded to cross the Marco Polo Bridge border just outside Beiping to look for a missing solider (who had already returned to his unit the night before). When Chinese troops guarding their side of the bridge refused, the Japanese shelled their garrison and quickly moved 180,000 troops and armor into the area. Within two weeks the IJA had taken most of the Beiping and Tianjin areas.

The Marco Polo Bridge Incident marks the official start of Japan’s invasion of China proper.

Side note: Beijing was the capital of China during the Ming and Qing dynasties. The words “bei” and “jing” in mandarin mean “north” and “capital.” 

However in 1928 Chiang Kai-shek moved the Nationalist Chinese capital south to Nanjing (“south capital”) and consequently Beijing was renamed Beiping or “northern peace.” When the CCP won the Chinese civil war in 1949 they moved the capital back north and the city was once again named Beijing.

CHINA RETREATS

From 1931 to 1937 Chiang Kai-shek had pleaded with the public that China wasn’t ready for all-out war with Japan and his predictions proved correct. Nationalist forces were generally no match for Japan’s modernized army which rapidly moved south down the eastern coast and was already threatening to take Shanghai by the fall of 1937.

It didn’t help that Chiang is also considered by historians to be a poor military commander. Chiang often gave contradictory orders and he frequently countermanded his field commanders without telling them, leading to confusion on the front lines. 

While Chiang adopted a strategy of organized retreat when confronted with superior enemy firepower—a rational enough strategy—he sometimes impulsively threw divisions of his best troops at the Japanese to fight for strategically unimportant but symbolically prestigious objectives.

One of these times was the Battle of Shanghai. In fact, of the 22 major battles between China and Japan, the most consequential were at the war’s beginning as their outcomes laid the critical foundation for a large-scale Japanese occupation and eventual stalemate for the remainder of the war.

At Shanghai Chiang Kai-shek threw his best, crack German-trained KMT troops into the battle and put up a much tougher resistance than the Japanese had anticipated. Japanese generals predicted conquering the city within days, but the fighting lasted three months, eventually becoming door-to-door in what was the largest urban battle of World War II before Stalingrad. 

Chiang’s initial decision to commit his elite divisions was logical as it bought time for the Nationalist government to plan and execute a retreat from the nearby capital of Nanjing. The KMT also needed time to deconstruct and relocate a great deal of its industrial capacity. However once that objective was met Chiang ordered his crack units to keep fighting to the death and the KMT’s best soldiers were eventually annihilated.

Chiang could have ordered retreat and preserved much of his most capable forces. The government’s retreat was by then well underway, but he still insisted on fighting as long as possible. Reason? Shanghai was the fifth largest city in the world with a large presence of westerners and western investment. Chiang hoped that keeping the battle alive in the world press would gain sympathy from the western powers who would intervene on China’s behalf.

The west didn’t come to China’s aid and the Battle of Shanghai kneecapped Chiang’s fighting capacity for the remainder of the war.

As KMT troops fell back inland the Japanese pursued. Many sought revenge for the losses they had suffered at the hands of the stubborn Chinese. By the time the IJA reached the Nationalist capital of Nanjing (Nanking in Wade-Giles Romanization) their troops went berserk and carried out the six week-long “Rape of Nanking.”

The Correspondent doesn’t want to go into detail about the specific atrocities at Nanking. Facebook would probably censor or deboost this article based on the explicit nature of a detailed description anyway. But readers are encouraged to do a little research of their own including, for those who want to do more than just a little, reading the late Iris Chang’s book “The Rape of Nanking” (1997) which is credited for popularizing the previously little-known subject with western audiences.

A shorter summary of the Nanking atrocities, which surpassed the Nazis for brutality and sadism, is available on Wikipedia at:

https://en.wikipedia.org/wiki/Nanjing_Massacre#Rape

The Rape of Nanking is just one of countless atrocities carried out by the IJA upon Chinese civilians during the eight year war, but it’s the most famous in the west.

MORE RETREAT AND STALEMATE

Outgunned and having lost his best troops, Chiang Kai-shek borrowed a strategy from the Russians during Napoleon’s time: trading land for time.

Chiang knew China was so large there was no way Japan could control all of it. It would take the deployment of millions of Japanese soldiers and several years just to hold key areas and their supply lines would be thinly stretched. In the meantime Chiang hoped that foreign military help would come to the rescue.

The IJA in turn was smart enough not to attempt to occupy every square inch of China, limiting itself to key coastal regions and major commercial corridors such as major cities along the Yangtze River. This left the countryside mostly unoccupied which provided fertile ground for Chinese communist guerilla operations.

By late 1938 the Nationalist government had retreated all the way to Chungking (modern pinyin: Chongqing) in the western Sichuan basin, making the remote city the provisional capital where it remained until 1945. 

During its 1938 retreat the KMT destroyed Yellow River dykes in a defensive scorched earth campaign. The flooding and destruction stopped the advance of the Japanese in the north, but drowned up to 90,000 Chinese civilians and 500,000 more died in the ensuing famine. Later the Chinese communists, also operating out of northern China, used the disaster area as a successful recruiting ground against both the Japanese and the Nationalist government.

The Sichuan basin was surrounded by mountains and its isolation made the provisional capital of Chungking difficult to capture. Japanese ground forces were unable to concoct any serious threat at taking the city. All they could accomplish was aerial bombardment and holding the Nationalist government in check while they went about exploiting the Chinese mainland.

On another side note, Japan invented and carried out the first civilian firebombing in history and its target was—you guessed it—the provisional capital of Chungking. This version of strategic bombing would later be adopted by the U.S. Army Air Force on an immeasurably larger scale when U.S. B-29’s virtually incinerated most of the Japanese home islands' cities in 1945.

However, when reading through many historian condemnations of America's cruelty there’s rarely any mention that Japan pioneered the tactic years prior on Chinese civilians. There’s also little mention of the concept of karma.

Chiang’s retreat to Chungking certainly provided geographic protection from the IJA, but it also isolated the KMT. The primary coastal cities and commercial corridors like the Yangtze River were cut off as were the tax revenues they generated. The KMT government was increasingly forced to use the printing press for war finance and high inflation plagued Nationalist-controlled China through 1945 and into the Nationalist-Communist Civil War.

Chiang was also cut off from his urban political base and the Sichuan basin was marginally controlled by warlords, leading to political isolation as well.

Ultimately both sides settled into a stalemate with Japan controlling most of the important cities and coastal areas. The ever opportunistic Wang Jingwei, Chiang’s former KMT rival, was installed as president of a subordinate Chinese puppet government, and Japan resorted to frequent bombing of the provisional capital while waiting for the Nationalist government to collapse, but it didn’t. 

Wang Jingwei is roundly considered a traitor to Chinese of all persuasions, but in 1944 he left for medical treatment in Japan for an injury he had incurred from a failed assassination attempt in 1939.

Wang died in November 1944 which was probably a blessing for him. The Allies would almost certainly have extradited him to China where the Chiang Kai-shek government would have executed him along with many other convicted wartime traitors.

Stay tuned for the closing chapter of the war in the next installment.

A Political and Economic History of China, Part 32: Japan and World War II, Part 1

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs apologizes for his extended under the weather absence but returns with a new article on Japan’s invasion of China during World War II, a conflict estimated to have killed 19 million Chinese.

The Second Sino-Japanese War is a massive story that, even when abridged, will require several articles. In this first installment the Economics Correspondent will lay out the background leading to Japan’s full blown invasion of mainland China in 1937, using some material already covered in previous articles. Next we’ll follow up with a high level overview of the war’s chronology, and lastly with the war’s aftermath for China’s rival Nationalist and Communist parties.

BACKGROUND 

The roots of Japan’s ambitions to colonize China begin in the 19th century.

Before 1839 both China and Japan were largely closed off to the western world. The Chinese Qing Dynasty traded reluctantly with the west and only through a single port—the southern city of Canton (today Guangzhou)—while the Japanese Tokugawa Shogunate traded exclusively with the Dutch and Chinese and also through only one port: Nagasaki.

Both the isolationist Qing and Tokugawa resisted foreign interaction, Japan even beheading shipwrecked sailors the moment they washed ashore, and the western powers countered with varying levels of force. 

The British forced more trading ports and concessions from China by winning the First Opium War of 1839-43. The United States sent Commodore Matthew Perry’s “black ships” into Tokyo Bay who announced his arrival by loudly firing his cannons into the water (1853).

China and Japan reacted very differently to the west’s more forceful demands.

China’s Qing Dynasty, ruled first by the incompetent and hedonistic Xianfeng emperor (r. 1850-1861) and after him the far more important but ultra-reactionary Empress Dowager Cixi (r. 1861-1908) continued to resist western trade and influence by every means necessary, culminating with the disastrous Boxer Rebellion in 1901. While the western world was undergoing the Second Industrial Revolution, China fell hopelessly behind.

In Japan the 265-year old Tokugawa Shogunate, having no answer to Perry’s cannons, lost face and succumbed to reform-minded officials. The emperor, for centuries merely a figurehead subservient to the shogun, regained power and the shogunate was banned forever.

Japan’s young and renown Meiji Emperor’s calendar years in power (1867-1912) nearly mirrored Cixi’s (1861-1908), but their policies couldn’t have been more different. While Cixi believed China’s cultural superiority could overcome western technology, the reform-minded Meiji recognized Japan had fallen behind and needed to learn all it could from the west. While Cixi resisted western trade, western technology, and western ideas as much as possible, Meiji opened Japan to the world.

Japan went on a crash course signing diplomatic and trade treaties with the western powers while enthusiastically importing western goods, technology, weapons, and advisors at a frenetic pace. Japan sent its officials throughout Europe and the United States to learn as much as possible and the end result was a spectacular ascent nearly unrivaled in history. In one generation an isolated, primitive, agricultural island nation modernized into a major world power.

Unfortunately Japan’s imperial ambitions grew as quickly as its economic and military power. By 1894 it was engaged in its first major regional war: the First Sino-Japanese War which is little known in the west compared to the Second Sino-Japanese War (aka. World War II).

Japan’s smaller navy routed the corrupt Qing Dynasty’s fleet at the battle of the Yalu River while its modern army humiliated Qing forces at several key Chinese ports. In the 1895 Treaty of Shimonoseki China was forced to cede Korea and Taiwan which Japan colonized for the next fifty years.

Japan then shocked the world by defeating Russia’s navy at the Battle of Tsushima Strait (1905).

Side note: Admiral Isoroku Yamamoto, the man who planned Pearl Harbor, was a gunnery ensign at Tsushima and lost two fingers in the battle.

By 1905 Japan had wrestled away territory from Russia: more Manchurian ports, control over the South Manchurian Railway, leases over Manchurian territory including the city of Dalian, and half of Sakhalin Island.

And Japan’s Chinese ambitions hardly ended in 1905.

During World War I Japan sided with the Allied Powers and made small contributions (mostly rhetorical) as a tactic to expand its sphere of influence. Japanese representatives at the Treaty of Versailles demanded and were granted formerly German Micronesian islands such as the Marianas, Carolines, and Marshalls. Japan was also handed China’s previously German-administered Shandong province, but the unexpected public outrage and demonstrations it ignited in China forced the Allies to pressure Japan into returning the territory in 1922.

MANCHURIA

Japanese ambitions for Chinese territory were hardly satisfied after World War I. By the late 1920’s the Japanese government was becoming militarist-fascist and it focused on gaining control of all Manchuria—a frigid, resource-rich territory in China’s northeast roughly the size of France, Germany, and Switzerland combined.

By now China had entered its chaotic “warlord era” and Japan cooperated with Manchurian warlord Zhang Zuolin, the Japanese providing Zhang military and economic support in exchange for permission to make large commercial and strategic investments in the industrial north.

By 1928 the Japanese believed Zhang's son and opium addict, Zhang Xueliang, would be easier to manipulate than his more powerful father, so they assassinated the elder Zhang by blowing up his railcar on a bridge. However the younger Zhang shook off his drug habit and resisted the Japanese who in turn responded with a full invasion of Manchuria in 1931.

The invasion of Manchuria, beginning September 18, 1931, is considered by many historians the true opening salvo of World War II as it preceded Hitler’s invasion of Poland by eight years.

As a pretext for invasion the Japanese army incited the Mukden Incident, a false flag operation whereby the IJA exploded dynamite near a Japanese-owned railroad and then accused Chinese dissidents of carrying out the attack. After five months of fighting Japan had assumed full control of the Manchurian northeast.

Japan had hoped to provoke then-Chinese leader Chiang Kai-shek into an all out war, but Chiang understood China’s military was hopelessly behind Japan’s and he used diplomacy and stalling tactics to avoid war. In the ensuing six years Chiang tried to simultaneously crush China’s Communist Party rebellion movement, modernize the Chinese economy and military, and hold off the Japanese.

As Chiang stalled for time, the Japanese worked on consolidating their gains. They set up the puppet state of Manchukuo headed by the former Qing boy-emperor Pu Yi. They also opened the notorious Unit 731—at that time the world’s most advanced biological warfare program—in the northern city of Harbin and tested experimental bacterial agents on eventually tens of thousands of live Chinese (and a few ethnic Russian) subjects throughout the country, a topic the Correspondent will discuss more in a future column.

Then, as a plan to sever more Chinese provinces from the mainland, the Japanese declared three autonomous Chinese regions bordering southern Manchuria. The justification was a claim that the people of these three territories no longer wished to live under Chinese rule and wanted to join Japan. Using this pretext Japan set up puppet administrative councils and demanded Chinese Nationalist (aka. Guomingdang or KMT) officials leave the area.

Chiang Kai-shek, once again not ready to enter into a major war with Japan, didn’t resist. Now the Japanese controlled not only Manchuria but also Chinese territory as far south as Beijing, stretching from Mongolia to the Bohai Sea.

All this time the Chinese public and Chinese communist rebels agitated for the Nationalist government to fight Japanese aggression, but Chiang Kai-shek knew China wasn’t ready and would lose a full scale war. It was only when Chinese dissent reached a head in 1936—when Chiang was kidnapped by Zhang Xueliang and forced to agree to unite with the Communists in a united front to resist Japan—that the policy of appeasement ended.

To read more details on Chiang’s kidnapping, the so-called “Xi’an Incident,” go to:

https://www.cautiouseconomics.com/2025/03/china-history31.html

Upon hearing that the Chinese KMT and Communists were no longer fighting one another and had agreed to unite, the Imperial Japanese Army (IJA) moved up their timetable for their invasion of the Chinese mainland where we’ll resume in the next article.

Why Is Inflation “Always and Everywhere” A Monetary Phenomenon? Part 2 of 2

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff concludes his commentary explaining why inflation is always and everywhere a monetary phenomenon.

In Part 1 we reviewed Milton Friedman’s famous witticism that “Inflation is always and everywhere a monetary phenomenon.”

We also looked at the three factors that drive changes in the price level: money, economic output, and monetary velocity, expressed as:

p = mv/y

And we debunked one argument that claims to prove empirically that inflation is not always caused by growth in the money supply.

Part 1 can be reviewed at:

https://www.cautiouseconomics.com/2025/05/inflation-currencies46.html

In this second and final installment we’ll address critics of Friedman—most notably Modern Monetary Theory (MMT) devotees—who claim inflation, and even hyperinflation, are caused instead by changes in output. We’ll also discuss the final variable of velocity.

OUTPUT

The next variable in the equation of exchange is “y” or real goods and services. 

This is one that’s not too hard for the public to understand either. Anyone who’s ever said “Inflation is too much money chasing too few goods” has a good grasp of how “m” (money) and “y” (output) affect changes in prices.

Some Friedman critics, particularly MMT theorists, argue that inflation is sometimes caused not by an increase in the money supply, but instead a big drop in output.

The most popular MMT example the Correspondent has heard is Venezuela where they argue “Venezuela’s hyperinflation wasn’t caused by printing too much money. It was their socialist policies that caused a huge drop in economic production. Too few goods led to higher prices.”

Now keep in mind that at its peak Venezuela’s inflation rate surpassed 100,000%, with some outside economists estimating the actual inflation rate was closer to 1,000,000%.

100,000% inflation means prices rise about one thousand-fold per year. This should clue some people in right away that the MMT “falling output” explanation is already on thin ice.

Because simple math informs us that if a thousandfold increase in prices is the result of fewer goods and services, Venezuela’s real economic output would have to have contracted to 1/1,000 (one-one thousandth) the level of the prior year; i.e. down 99.9%.

Venezuela’s economy undoubtedly contracted in the late 2010’s, but it did not shrink by 99.9% in one year. Furthermore another year of 100,000% inflation means the economy shrank by another 99.9% for a grand two-year total of 99.9999%.

Venezuela’s workforce was estimated at 13.2 million people in 2017. For output to have fallen by 99.9999% in two years the entire national economy would have to have withered down to just 13 Venezuelans working, down from 13.2 million.

With that kind of decline literally everyone in the country would have starved to death with the urban geography of the entire country totally depopulated—all corpses being eaten by stray animals except for 13 people: likely President Nicolas Maduro and his cabinet.

Scratch that. Those thirteen socialists couldn’t produce enough of anything to maintain even 0.0001% of the country’s original output so let’s call it 13 factory workers instead.

Obviously falling output, or “y,” did not cause Venezuela’s hyperinflation.

But money did.

In 2018 Venezuela’s money supply is estimated to have increased by 82,500%, although output fell as well, by a stunning 19% (not 99.9%). 

If we still want to blame output in a scenario where money stays constant, then a 19% decline in real GDP would have led to prices rising by just 1 / 0.81 = +23.4%. Again, 23.4% is not 100,000%, not even close.

The same MMT fallacy can be discredited simply by looking at the USA during the inflation of the Biden presidency.

From January 2021 to January 2025 official CPI increased by 21.5%. If this is to be explained by shrinking output then the real economy would have to have contracted by a catastrophic 17.7%.

But real GDP actually grew by 11.8%.

In fact, trying to blame any period of serious U.S. inflation on lower output is kind of ridiculous when simply looking at math again.

If one looks at the Great Recession of 2008-09, real output peak to trough fell by about 4% in a little over a year. That period, when so many people were losing their jobs, losing their homes, and the entire country felt like it was mired in misery and hopelessness, reflected a 4% decline in output.

So if we repeat the same scale of recession again and money remains constant, the resulting annualized inflation would be just 1 / 0.96 = +4.2%.

Official inflation in 2022 alone was up 6.3%.

And what about the inflation of the 1970’s? When annual inflation exceeded 8% in six out of ten years? Obviously the USA was not experiencing a Great Recession level contraction six out of ten years. And remember, even a Great Recession level contraction is only enough to produce inflation of 4.2%.

Simple math once again tells us if the MMT “output” theory is correct then 4% inflation would require Great Recession level contractions of economic output. 9% inflation would require Great Depression levels of contraction. 

4% and 9% inflation has happened many times in the Fed era and never have they coincided with Great Recession and Great Depression slumps.

And 20% inflation would require catastrophic slumps in output with widespread hunger plaguing the country. Mid-double inflation levels would mean mass famines like those seen during Stalin’s Holodomor, Mao’s Great Leap Forward, or the 1990’s North Korean famine. Yet mid double-digit inflation is an everyday occurrence in many developing countries today where mass famines aren't taking place (Sri Lanka: 48%, Turkey: 73%, Haiti: 29.7%).

Bottom line: Inflation levels like those in 2022, the 1970’s, and especially hyperinflations, simply aren’t caused by falling output (y).

The only way falling output could ever cause high double-digit or even low triple-digit level inflation would be if half an entire nation’s productive capacity was wiped out by war—at which point the losing government would be printing money like crazy anyway—or some cataclysmic natural disaster.

But not in the USA. If we go back to the stagflation era of the 1970’s the money supply measured by M2 rose by 232% from 1970 to 1982.

Shocking. Once again, inflation was a monetary phenomenon.

VELOCITY

The last variable is monetary velocity, or how quickly money changes hands via spending or borrowing.

The Economics Correspondent hasn’t heard too many people try to discredit Friedman using velocity, but it could be tempting. Because rising velocity *does* legitimately cause inflation.

What was that? Something other than money really does cause inflation?

Not, exactly. Keep reading.

When consumers and businesses expect high inflation to continue into the future, they tend to spend their money faster because they fear it will lose value if they hold it. 

The best example that springs to mind is the Weimar Republic hyperinflation where factory workers, once paid, immediately ran to the plant entrance gates to hand the banknotes to their wives and instructed them to spend all the money as fast as they could on anything they could find (before the notes lost value the next day).

The entrenchment of higher monetary velocity is called “inflation expectations” and it has frustrated the Fed’s efforts to rein in the recent inflation of its own creation. Even though the Fed was able to stop money growth in its tracks back in 2022—M2 is still 2.1% lower today than it was in April of 2022—prices have continued to rise even in the face of growing real GDP because consumers have been spending their money faster and faster.

So does this problem of higher velocity disprove Friedman’s assertion that inflation is “always and everywhere” a monetary phenomenon?

Nope, for the simple reason that you have to look at what caused the inflation that led to higher velocity in the first place.

Every example of observed velocity-driven inflation has been preceded by an actual monetary inflation first. Once that monetary inflation settles in, consumers and businesses have responded by changing their expectations, and then changing their behavior by spending money faster (i.e. rising monetary velocity).

This vicious cycle of more money followed by higher velocity leading to even faster inflation has been especially acute in history’s hyperinflations such as the aforementioned Weimar Germany example along with Venezuela, Zimbabwe, late 1940’s Nationalist China, post-WWII Hungary and Yugoslavia, the post-breakup Soviet Republics, etc. 

The list is quite long, and we even witnessed it during the 1970’s and early 1980’s. The Paul Volcker Fed jacked up interest rates and drastically slowed the rate of money growth, yet prices kept rising quickly anyway. Inflation expectations had become engrained in the public's thinking leading to higher velocity.

Volcker was forced to push rates up even higher—to a punishing 21%—and leave them there for a while to finally get Americans’ spending habits to revert back to pre-inflationary behavior. In the process of slowing both money growth and monetary velocity Volcker was forced to produce the sharp 1982-83 recession where unemployment reached 11%.

So if Friedman wanted to be more technically accurate in addressing velocity he might have instead said:

“Inflation is always and everywhere a monetary phenomenon, and where it’s driven by rising velocity the velocity itself was spurred by a monetary phenomenon too.”

But that would be too much of a mouthful. Not very catchy and quite forgettable.

The original quote suffices quite well:

”Inflation is always and everywhere a monetary phenomenon.” 

And so it remains.

Why Is Inflation “Always and Everywhere” A Monetary Phenomenon? Part 1 of 2

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4 MIN READ - As high inflation slowly fades away the Cautious Optimism Correspondent for Economic Affairs wants to address Milton Friedman’s famous witticism in a little more detail—before inflation leaves the news headlines.

Milton Friedman said it.

CO preaches it.

The Cautious Optimism Economics Correspondent agrees with it.

“Inflation is Always and Everywhere a Monetary Phenomenon”

But why? After all there are plenty of critics—such as Elizabeth Warren, AOC, and Modern Monetary Theory scholars—who disagree that inflation is always caused by expansion of the money supply. They think there are other factors that cause the general price level to rise consistently and relentlessly.

So perhaps it would help to explain why inflation is always caused by money, and more importantly why some of the most popular alternative explanations are really fallacies.

ONCE AGAIN: THE EQUATION OF EXCHANGE

First of all, let’s establish that even though low inflation is also caused by money, for the purposes of this discussion we’ll use examples where inflation has been high enough for the public to feel real pain. That would include the 2021-2023 period where official annual CPI peaked at 9% in June of 2022, the 1970’s decade where inflation routinely measured for six years from the high single digits to even 15%, or much worse hyperinflations in places like Zimbabwe and Venezuela.

So going back to the all-important equation of exchange, which is indispensable for understanding inflation:

mv = py, or better yet

p = mv/y

Changes in “p” (prices) are driven by three factors:

-Changes in “m” (the money supply)

-Changes in “y” (real output), and

-Changes in “v” (monetary velocity)

Yes, there are people like AOC and the media who argue there are even more reasons for rising prices: “corporate greed,” “cost-push inflation” where the price of one major input like oil goes up and causes a ripple effect, or “supply chain disruptions.”

The Economics Correspondent isn’t going to focus on those in part because he’s already addressed the first two. You can read more about “corporate greed” at:

https://www.cautiouseconomics.com/2024/09/inflation-currencies42a.html

…and “cost push” at:

https://www.cautiouseconomics.com/2025/01/inflation-currencies45.html

And "supply chain disruptions" are not only already reflected in a decline in output ("y"), thereby being superfluous, but the reality is Covid lockdown-related supply chain disruptions were largely ironed out by 2022, yet the inflation rate did the opposite of what it was supposed to. Instead of falling, the inflation rate went straight up.

OBJECTIONS TO "MONEY" (YES, REALLY)

But back to the equation of exchange and the three elements that actually drive price changes. We’re going to address objections to the money part here and talk about output and velocity in the second installment.

The “m” (money supply) is a pretty easy concept for people to grasp. The public sees prices rising quickly and they notice the central bank’s figurative printing press is also running hot.

And if you look at any period in American history—or any other country’s history for that matter—where price inflation takes off, you’ll find a sizable increase in the money supply at the same time, or in some cases slightly beforehand.

(More on the “slightly beforehand” part when we get to explaining velocity in Part 2)

Here’s just one recent corroborating example: When inflation took off in late 2021 and 2022, the money supply measured by M2 also increased by 13% from January 2021 to April 2022, much faster than the 4% expansion of real output.

What a shock. Prices started rising rapidly.

And for those old enough to remember it, there’s also the famous “stagflation era” of the 1970’s and early 1980’s. From 1970 to 1982 prices rose by 157% meaning the dollar's purchasing power fell to 39 cents in twelve years, which was a killer for retirees and savers.

Unsurprisingly M2 expanded sharply over the same period: by 238%.

But believe it or not, there are actually some people who argue that sometimes inflation simply isn’t caused by an expansion in the money supply. And we’re not just talking about geniuses like AOC and Bernie Sanders.

The main objection the Correspondent has heard over “money” in particular comes from the likes of, for example, investment manager and former Dallas Fed economist Lacy Hunt who is far smarter than AOC.

Hunt compares a long-term chart of M2 against inflation and points out that yes, there are cases where inflation was accompanied by monetary growth, but there were also many cases where M2 rose very rapidly but inflation didn’t take off at all.

The examples are too many to provide here, but a good one is the mid 1980’s where during both 1983 and 1986 M2 rose quite rapidly yet inflation was subdued (see URL chart).

https://fred.stlouisfed.org/graph/fredgraph.png?g=1ErDy

While Hunt’s a very good economist and his observations aren’t incorrect, the problem in this case is his assertion disproves nothing that Milton Friedman said.

To go back to his famous quote, Friedman was very careful and deliberate with his use of words. He never said:

”Monetary phenomena always and everywhere cause inflation.”

Friedman proclaimed the reverse:

”Inflation is always and everywhere a monetary phenomenon.”

Again, Friedman was very precise with his wording. And Hunt is basically destroying a completely different argument, one that cites a reverse cause and effect.

Yes, sometimes when the central bank creates new money inflation remains subdued, usually because of lower monetary velocity—the 2020 lockdowns being a good example. But Friedman never said that every single time you see the money supply grow you’ll also see high inflation. He said that everywhere you see inflation you’ll also see money growing, which is a very different thing.

So kudos to Hunt for noticing sometimes money goes up and inflation doesn’t, but that doesn’t have anything to do with Friedman’s famous dictum.

In the concluding column we’ll address those who object to Friedman’s inflation thesis based on other (alleged) causes: output and velocity.

Biden racked up more nominal debt than Trump and without a Covid crisis

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5 MIN READ - Trump critic: “Donald Trump racked up more debt than any president in history.”

Math: “Nope, Biden racked up $8.5 trillion in four years compared to Trump’s $7.8 trillion. And Biden didn’t have a worldwide pandemic, an economy locked down by state governments, and tons of pork added to rescue packages held hostage by Nancy Pelosi.”

Read on for the more nuanced version of these wonkish numbers from the Cautious Optimism Correspondent for Economic Affairs who accounts for inflation, GDP, and even a few comparisons to Barack Obama and Ronald Reagan’s national debts.

During Joe Biden’s four years as president the Economics Correspondent saw this claim repeated more times than he can remember: 

“Donald Trump racked up more debt than any president in history.”

If any of you should see or hear that comment again, you can confidently reply that no, Joe Biden has since racked up more.

1. National debt at Obama’s inauguration: $10.627 trillion
    National debt at Trump’s first inauguration: $19.947 trillion
    =Increase in debt (Obama): $9.32 trillion

2. National debt at Trump’s first inauguration: $19.947 trillion
    National debt at Biden’s inauguration: $27.752 trillion
    =Increase in debt (Trump): $7.805 trillion

3. National debt at Biden’s inauguration: $27.752 trillion
    National debt at Trump’s second inauguration: $36.218 trillion
    =Increase in debt (Biden): $8.466 trillion

(Source: U.S. Treasury Department)

There are a few nuances with Trump debt and Biden debt criticisms which we’ll review in a moment.

But first of all it’s clear under Barack Obama’s administration the Treasury racked up more debt than either Trump or Biden. But it’s also obvious Obama served two terms so it’s not really fair to accuse him of “racking up more debt than any other president," at least in nominal terms.

So we’re really comparing two presidents who served one term each, with Trump of course just starting his second, non consecutive term in January.

Simply comparing Trump’s first term and Biden’s, it’s pretty clear that on a nominal basis Biden increased the debt by $8.466 trillion vs. Trump’s $7.805 trillion. So there goes the simple accusation that “Trump racked up the most.”

DEBT, INFLATION, AND PANDEMIC

Now here’s where the nuance comes into play.

When adjusted for inflation Biden’s increase in debt becomes slightly smaller in real terms than Trump’s, about 3% less.

But Trump’s typically deranged critics don’t really address any nuance whatsoever when they throw out bombs like “Trump racked up more debt than any president in history.” 

So it's going to be hard for them to complain when you throw a bomb back that “No, Biden racked up more than Trump: $8.5 trillion vs $7.8 trillion.”

Now if we, or any Trump critic, decide to stop throwing bombs, be more analytical and start digging into additional factors like inflation then sure, Biden’s expansion of government debt is 3% smaller when calculating in inflation-adjusted terms.

But then nuance also demands we look at other specific circumstances surrounding the two presidents’ fiscal performances, not just pick and choose the most convenient one. After all, we don't conduct ourselves like CNN reporters.

As we all know, most of Trump’s debt was accumulated during the Covid pandemic in his last year, or more accurately state governments locking down the nation’s economy. 

With the U.S. economy forcibly placed in a coma, unemployment shot up to 14%, tax revenues dried up, unemployment claims ballooned, and the Trump administration also moved to direct immediate relief funds to American citizens and businesses thrown out of work due to government lockdowns.

CO Nation might also recall back when that “immediate” relief was delayed by Nancy Pelosi and the Democratic House of Representatives who held the CARES package hostage, demanding (and ultimately getting) hundreds of billions of borrowed dollars in pork added on for targeted constituencies, government bureaucracies, diversity programs, and near-bankrupt state and local governments.

Another CARES package was also held up by the Pelosi House demanding hundreds of billions more in pork right before Trump departed the White House.

Joe Biden, by contrast, had no public health or fiscal crisis to deal with. When he took office the Covid vaccine was already being dispensed and the economy, by then free from state lockdowns, was rapidly recovering. The unemployment rate had already fallen by 8.4 percentage points during Trump’s last eight months in office, the fastest decline in history. And rebounding GDP growth in Trump's last three quarters rose at annualized rates of +35.2%, +4.4%, and 5.64% respectively.

Yet without any of the massive headwinds Donald Trump faced, the Biden administration still managed to rack up even more debt nominally, and nearly as much in real terms.

DEBT, REAL GDP, AND OBAMA

The contrast is even clearer if we compare just the first three years of each president’s term, thereby excluding the unusual crisis year of 2020.

1. National debt at Trump’s first inauguration: $19.947 trillion
    National debt after three years: $23.210 trillion
    =Increase in debt (Trump): $3.26 trillion

2. National debt at Biden’s inauguration: $27.752 trillion
    National debt after three years: $34.077 trillion
    =Increase in debt (Biden): $6.325 trillion

Source: St. Louis Federal Reserve

Excluding Trump’s final year in office, when Covid was raging across the globe and state governments placed the U.S. economy in a coma, Trump racked up far less debt than Biden—measured both nominally and inflation-adjusted.

In fact, if we use the most important metric to economists—debt as a % of GDP—and adjust it for inflation (debt as a % of real GDP), we see real national debt under Trump rose much more slowly during his first three years.

1. National debt as % of real GDP at Trump’s inauguration: 102.31%
    National debt as % of real GDP after three years: 112.23%
    =Change (Trump): +9.92 percentage points

2. National debt as % of real GDP at Biden’s inauguration: 133.38%
    National debt as % of real GDP after three years: 150.03% 
    =Change (Biden): +16.65 percentage points

(Source: St. Louis Federal Reserve)

Incidentally, even if we account for Barack Obama's two terms he increased the national debt as a share of real GDP nearly as fast as Biden.

3. National debt as % of real GDP at Obama’s inauguration: 68.27%
    National debt as % of real GDP at Trump’s inauguration: 102.31%
    =Change (Obama): +34.04 percentage points

(Source: St. Louis Federal Reserve)

Unlike Biden though, Obama had a legitimate excuse. He came into power right at the tail end of the Great Financial Crisis and had a major recession hangover, high unemployment and lower tax revenues to deal with.

However Obama also chose to make matters worse—a lot worse—with massive Keynesian economic stimulus policies, meaning he opted to borrow trillions of dollars to blow on politically-connected “stimulus” in the belief that government spending would accelerate economic recovery.

Did it? In the end the 2008-2016 period was the slowest GDP recovery, by far, after any financial crisis in American history (all seventeen of them). It was also the second slowest return to full employment after a financial crisis, and only three months faster than the Great Depression’s return to full employment from 1933 to 1941 (see link to more details on that).

https://www.cautiouseconomics.com/2018/09/macroeconomics-01.html

So Obama shares some of the blame for pushing the national debt as a % of real GDP up faster than any peacetime president in history. Yes, faster than Ronald Reagan whose increase was only 15.11 percentage points in eight years compared to Obama’s 34.04 (St. Louis Federal Reserve).

So yes, the few TDS-afflicted who pivot to “nuance” to exonerate Biden’s massive debt pileup will discover that it works both ways.

And the next time you hear someone say… 

“Trump racked up more debt than any president ever,” 

…you can tell them…

“Nope, Biden racked up $8.5 trillion in four years compared to Trump’s $7.8 trillion. And Biden didn’t have a worldwide pandemic, an economy locked down by state governments, and tons of pork added to rescue packages held hostage by Nancy Pelosi.”Comment: More details on Obama’s post-2008 recovery, the worst GDP recovery in American history and the second worst employment recovery.

A Political and Economic History of China, Part 31: The Xi’an Incident Ends The First Nationalist-Communist Civil War (1936)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs continues his China history series, reaching a key event of long personal interest: Chiang Kai-shek’s kidnapping at the hands of his own deputy, a crisis that ended the first Nationalist-Communist civil war and dramatically altered the course of Chinese history.

Photo: Commander and mutineer—China President Chiang Kai-shek (L) and the “Young Marshal” General Zhang Xueliang (R) at Xi’an.

After a yearlong retreat from pursuing Nationalist troops, Mao’s communists settled in remote Shaanxi province and once again enjoyed a brief reprieve in the marginally warlord-controlled countryside. A new headquarters was founded in the loess caves of Yan’an. However Chiang Kai-shek negotiated with the local warlord to allow his armies to enter Shaanxi and was soon making preparations for another annihilation campaign.

A WARLORD PLANS THE XI’AN INCIDENT

By late 1936 Chiang was poised to encircle and attack the Communists again, but his plans would be thwarted by the duplicity of one of his generals—Zhang Xueliang.

CO readers may recall from an earlier article that Zhang Xueliang was the son of the powerful Manchurian warlord Zhang Zuolin. Zuolin was dubbed “The Old Marshal” and Xueliang “The Young Marshal.”

The Japanese assassinated the elder Zhang in 1928 with plans to install his son as puppet warlord. At the time the young Zhang was an opium addict which the Japanese believed would render him malleable and easier to control than his now-dead father. However Zhang shook off his drug habit, found a new resolve and proved a more formidable adversary than the Japanese anticipated. 

They responded by launching an all-out military invasion of Manchuria in 1931. Zhang’s warlord army put up some resistance but was soon defeated and Zhang fled to mainland China. After a few ineffective attempts to retake Manchuria Zhang joined Chiang Kai-shek’s Nationalist government as an army general.

Which brings us back to 1936.

Ever since joining the Nationalists, Zhang had urged Chiang Kai-shek to focus on countering Japanese aggression in Manchuria, but Chiang insisted on eliminating the communist rebels first so that a united China could better resist the outside invaders later. His famous adage was “The Japanese are a disease of the skin. The Communists are a disease of the heart.”

Chiang’s policy of “First internal pacification, then external resistance” didn’t go over well with Zhang, and it was also growing deeply unpopular with the Chinese public at large.

So in late 1936 Zhang took matters into his own hands.

Nationalist soldiers in Shaanxi, many of whom had served under Zhang in Manchuria, were awaiting their chance to move northeast and attack the Japanese army. Instead they received orders from the capital to annihilate the nearby Communists.

Zhang complained that his troops were refusing to fight fellow Chinese and requested Chiang Kai-shek fly to the ancient capital of Xi’an to galvanize them, but in fact Zhang and another general, Yang Hucheng—whose wife had come under communist influence—were secretly plotting with the Communists. If Chiang would not attack the Japanese voluntarily he must be coerced. If he still would not attack the Japanese under coercion, he must be removed.

Chiang flew to Xi’an unaware of the trap that awaited him. Mao Zedong, who reviewed and approved the subversive plan beforehand, described it as pure genius.

Throughout several days of meetings Chiang argued with Zhang and his staff about the wisdom of prioritizing attacks on Chinese communists over the Japanese, but Chiang overrode them all and ordered the offensive to proceed. Then he retired to his temporary headquarters at the Huaqing Hot Springs.

CHIANG’S ARREST AND NEGOTIATION

Early the next morning Zhang’s troops broke into the resort, killing or arresting Chiang’s aides. They entered his bedroom to find it empty. Chiang had escaped through the window but inured himself and was quickly captured in the hillside forest.

Brought before Zhang, Chiang’s own subordinate pleaded (paraphrasing) “I am still your loyal officer. I will release you if you agree to unite with the Communists and fight the Japanese.”

To which Chiang replied: “If you are still my loyal subordinate, you will obey and release me immediately,” but to no avail. For Zhang there was no turning back. He was now fully committed to his mutiny and Chiang refused to speak any further. He was now held hostage by one of his own generals, his fate uncertain.

This crisis, known as “The Xi’an Incident,” effectively saved the Communists.

Chiang’s wife Soong Mei-ling, fearing for her husband’s life, flew to Xi’an to mediate a resolution. She had good reason to worry. The CCP was thrilled at the news of Chiang’s arrest and Mao Zedong was openly calling for his show trial and execution.

However Zhang Xueliang didn’t want Chiang dead, only to change policy. Furthermore Zhang believed Chiang was the only man strong enough to lead a united China against the Japanese, so killing him would be counterproductive.

And far more frustrating to Mao’s plans was Soviet leader Joseph Stalin who interceded on Chiang’s behalf, one of many times that Stalin would side with Chiang over the ostensibly preferable fellow communist Mao Zedong.

Why? Stalin’s first concern was the Soviet eastern border’s vulnerability to Japan, a rising empire that defeated Russia and snatched away Manchurian territory in 1905. Stalin believed Chiang and a united Nationalist-Communist front would be far more effective at resisting Japanese aggression than Mao and his ragtag force of a few thousand soldiers.

Stalin chose the USSR’s security over ideology and for many years cooperated regularly with Chiang Kai-shek, usually to Mao Zedong’s chagrin.

Deferring to Stalin’s position of strength Mao acquiesced and sent his diplomatically inclined deputy Zhou Enlai to partake in a two-week negotiation with Chiang, Zhang, Soong Mei-ling, Nationalist officials, and Australian arbitrator William Henry Donald.

In the end Chiang was forced to accept the new United Front, to end his attacks on the Communists, and to allow the Communists to keep and independently operate their own army, all in the name of the new anti-Japanese alliance. He was released on Christmas Day 1936 and resumed his duties as president of China.

AFTERMATH

One small boost Chiang received from the ordeal was his kidnapping instantly gained him sympathy from the Chinese public and the world. The nation sat on edge as negotiations were conducted, and when Chiang was released he became a national hero—in part because he finally agreed to confront the Japanese, in part because Zhang’s actions were viewed as disloyal and treasonous. 

For now Chiang had the full support of the Chinese people, but his communist foes were still alive and worse yet also enjoying a public relations boost of their own. The Communists could claim a magnanimous stay of execution for their mortal enemy Chiang, all done for the greater good of saving China from the Japanese invaders. And the Communists were now free to operate their own armies, shielded from Nationalist onslaughts.

After the Xi’an Incident Chiang Kai-shek, Soong Mel-ling, and Zhang Xueliang flew to the capital in Nanjing where Zhang was promptly arrested along with his co-conspirator General Yang Hucheng.

Zhang Xueliang wrote apologetic letters to Chiang Kai-shek from his jail cell, explaining he had reluctantly acted for the preservation of China. Chiang eventually reduced his sentence to indefinite house arrest.

Zhang spent the next half century jailed in his own home. When the Nationalist government retreated to Taiwan Yang Hucheng was executed along with his family. Zhang was transferred to Taiwan and his house arrest continued from Taipei. It was only when Chiang’s son, Taiwan president Chiang Ching-kuo, died in 1988 that Zhang was finally freed at age 86.

He moved to Hawaii where he died in 2001 at age 100.

Today the CCP hails Zhang Xueliang as a “Hero of History” for forcing Chiang Kai-shek to unite with the Communists and resist Japanese invasion. Their praise is unsurprising considering Zhang rescued the Communists from a military campaign that may have annihilated them completely.

And Zhang himself was hardly motivated solely by selfless patriotism. Since his eviction at the hands of the Japanese he had urged Chiang Kai-shek to launch an offensive to retake Manchuria, largely so that he could resume warlord status over his old domains. It was only after Chiang repeatedly refused that Zhang decided to mutiny and kidnap his own commander and president in 1936.

The Xi’an Incident saved the CCP… yet again. The Communists, originally an irrelevant fringe party with only 200 members, had been elevated to contender status in 1923 by outside intervention. That is, when the Lenin USSR insisted Sun Yat-sen accept the CCP into the KMT as a condition for Soviet support.

The CCP was then at risk of annihilation in 1934 and saved at the last minute by intelligence stolen by communist spies working within KMT army headquarters.

The CCP was again saved from destruction by the circumstance of Japanese invasion and Chiang’s kidnapping in the 1936 Xi’an Incident.

Intervention had repeatedly rescued the floundering CCP from either irrelevance or annihilation, and it wouldn’t be the last time.

As conservative China writer Leo Timm summarizes: “Had it not been for Zhang and Yang’s coup at Xi’an, the Communist Party would likely have been wiped out, rewriting modern Chinese history. While Zhang Xueliang and Yang Hucheng, the direct initiators of the coup, can thus be regarded as responsible for the rise of the Communist Party in China.”

Meanwhile in Tokyo the Imperial Japanese Army (IJA) had long scheduled a full scale invasion of mainland China at the end of the decade. Upon hearing the KMT and Communists had formed the United Front to resist Japanese aggression, the IJA immediately accelerated their invasion timetable to begin in 1937, another repercussion of the Xi’an Incident that changed the course of history.