A Study Of The Currency Issuing In China From 1912 To 1949 Based On Reputation Theory And Seigniorage Theory

This paper is based on reputation theory and seigniorage theory to research the currency issuing situation and currency issuers’ behaviors in China from 1912 to 1949. In the first part, this paper introduces the currency issuing institution and its changing process during that period. In the second part, this paper counts the currency issuing quantity and analyzes the price level and inflation situation in that period. In the third part, this paper studies the currency issuers’ optimal strategies and real behaviors based on reputation theory and seigniorage theory.When studying the changing process of currency issuing institution in that period, this paper focuses on the currency issuing laws’ transformation to reveal the evolution of the institution. From the changing process, we can see that Chinese governments pursue currency issuing monopoly all the time. When the government is weak, it has to share currency issuing right with other currency issuers. As soon as the government becomes strong enough, it would monopolize the currency issuing right immediately.When studying the changing process of currency issuing quantity and price level in that period, this paper divides the period into two periods, the free banking period which is from 1912 to 1935 and the central banking period which is from 1935 to 1949, and analyzes each period respectively. The result shows that the price level is stable from start to finish in the free banking period while hyperinflation lasts long time in the central banking period.When studying the currency issuers’ behaviors in the free banking period, this paper uses KMRW reputation model to solve currency issuer’s optimal strategy in an incomplete information and repeating limited game. The solution shows that currency issuer’s optimal strategy is to obey its promise and maintain high cash reserve ratio in order to protect its reputation. The reputation mechanism could restrict the currency issuer’s behavior effectively. After that, this paper analyzes the real cash reserve ratios of the main issuing banks in that period, and gets the conclusion that the main issuing banks keeps high cash reserve ratio all the time, which means their real behaviors are the same with the optimal strategy in KMRW reputation model.When studying the currency issuer’s behaviors in the central banking period, this paper uses monetary financing model to solve the first order condition in one period when maximizing seigniorage income, and uses intertemporal budget model to solve the first order conditions in intertemporal analysis. The solutions show that in one period, there is an optimal inflation rate which matches the maximal seigniorage income, and in intertemporal analysis, the currency issuer’s behavior should meet tax smoothing conditions. After that, this paper calculates the government’s real seigniorage income from 1936 to 1947, and gets the conclusion that the reason why the government increases money supply with high growth rates is to offset its fiscal deficits, but the government does not obtain more real seigniorage income in that period. The government’s currency issuing behaviors lead to hyperinflation directly.The research result of this paper is a good reference for those who study the monetary and fiscal policies in China in that period, and a good reference for those who study and formulate present monetary policies in China, too.