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The History of Wartime Monopoly Regulations

In the 1940s during the Sino-Japanese War, the National Government of the Republic of China responded to the emergency by declaring wartime monopoly regulations on the sales of salt, sugar, tobacco, and matches to increase revenue. However, due to the cost of maintaining the control, the benefit of revenue from these sales was not  profitable and decreasing every year so that eventually the ordinance of monopoly was gradually renounced, for which the whole practice only lasted for roughly two-and-half to three years.

The National Government in Taiwan had long implemented a strict state-run system for tobacco and alcohol so that it was a familiar concept of monopoly to the general public. The system was an adopted continuation of the Japanese monopoly regulations during their occupation. The primary objective was to stimulate government finance through these sales, since the government would monopolize both the manufacturing and sales, which differed greatly from the government-supervised business model in the early years of the Republic of China.

The National Government in its early days followed the Qing Dynasty without imposing any federal system of monopoly on commerce of tobacco and alcohol. Thus, the rules of taxation on tobacco and alcohol required merchants to pay for product manufacturing, passage of commerce, sales venue, cooked goods, raw materials, market admittance, franchise, surtax, etc., varying from province to province, not to mention that these taxes changed by standards of levy or could be imposed by the level of quality, the type of container, or the volume of business, without a unified guideline.

In 1914, the Ministry of Finance of the Beiyang Government announced the “Regulations on the License Tax for Franchise and Sales of Tobacco and Alcohol,” followed by the “Interim Provisions for the Tobacco and Wine Monopoly Bureau” in 1915. In 1916, the administration changed its name to “National Tobacco and Wine Affairs Agency,” with offices established and operated by businessmen for the public sales of tobacco and alcohol in provinces.

This concept of a government-supervised business system stemmed from the salt industry in the Qing Dynasty, where the government authorized specific merchants or businesses to monopolize some commodities, which the government would then collect one-tenth to one-half of the profit as tax for the exclusive right of public sales. This system was susceptible to corruption by bribery between the authority and the contractor; hence, it drastically reduced the true financial contribution to the national treasury. 

In 1927, the National Government promulgated the “Interim Regulations on the Public Sales of Tobacco and Alcohol” and then revised it to include 15 articles in 1929. Among them, Article 1 stipulated, “To rectify the account of income from the sales of tobacco and alcohol, the Ministry of Finance now announces the new interim provisions, with the purpose of implementing a government-supervised system of public sales.” Article 3 stipulated that each province should establish a bureau in charge of handling all public transactions of tobacco and alcohol, with districts and offices set up in accordance with the condition of local production and sales. 

Under the “Interim Provisions on the Public Sales of Tobacco and Alcohol,” merchants had to apply for registration to manufacture or sell their commodities. Monthly reports of production and sales had to be submitted. For any homemade brews of alcohol, the quantity thereof was limited to 50kg per household per year and subject to a monopoly fee. 

The fee was set at 20% of the pricing by the Ministry of Finance and was subject to one adjustment every year. Tobacco and alcohol without stamps of public sales were not allowed to be sold or marketed. Rules of Inspection and Penal Provisions for the public sales of tobacco and alcohol by the Ministry of Finance would clarify the proceeding of handling relevant affairs, where any violations would be subject to a fine of not less than two times and not greater than five times the commodity price. 

However, the provinces carried out the regulations differently in 1933. The Ministry of Finance convened the directors of taxation bureaus for stamp, tobacco, and alcohol in seven provinces, namely Jiangsu, Zhejiang, Anhui, Henan, Hubei, Jiangxi, and Fujian, which are areas in the mid and lower reach of the Yangtze River that were under the control of the National Government, in which they agreed to tax tobacco as franchise and alcohol in lump-sum. Moreover, the meeting decided the tax on alcohol to be based on the condition of production and sales, and not to be re-levied in the same province.

The decision on the tax regulations met with a considerable backlash from various trade associations. For example, the Susong Tobacco Guild Association in Anhui province called to complain that it would be difficult to comply if the tax rate were 4 yuan and 15 cents for every 100 yuans net weight. Also, the tax rate on alcohol varied from province to province. As an example, for every 50kg of Chinese liquor, it was two yuans in Zhejiang and seven in Fujian, for which the difference infuriated the Minhou Winery Guild Association to protest with a telegram to rally its peers to “strike and close their businesses as martyr against the federal tax and send representative to Beijing for remedy.” 

In 1936, the deputy director of the Central Bank, Shou Chingwei, visited Japan to explore their banking system, as well as their state monopoly of commerce at the request of the Ministry of Finance. In the following year, based on his report, the Ministry of Finance submitted the information collected to the Counselor's Office, the Taxation Department, the Salt Administration, and the Customs Administration for review, since they all concurred that the system of state monopoly could provide ample financial resources and control prices during wartime. 

Before the war, the government primarily collected revenue from tariffs, salt tax, and excise taxes. After the war’s outbreak, however, the coastal area of these tax sources fell into the enemy’s hands, while the military expenditure continued to increase substantially, so that by 1941, the fiscal deficit accounted for 81% of the total budget, and without any strong foreign aid in the early days of the war, the government could only resort to printing more currency, which led the retail prices to inflate by 15 times more than before the war. 

Facing such financial difficulties, the government, in April of 1941 appointed the Ministry of Finance to establish a committee to design a system of state monopoly, which would adjust the supply and demand, and level the market prices of consumption goods such as salt, sugar, tobacco, alcohol, tea, matches, etc., that preliminarily designated the state in charge of planning, manufacturing, wholesale, and distribution. Although retail was still operated through existing stores, they finalized monopolizing four commodities, including salt, sugar, tobacco, and matches. 

The government started sugar monopolies in Sichuan and Xikang in February 1942. As stipulated by the “Interim Regulations on Sugar Monopoly in Wartime,” the right of sugar sales belonged to the state, and none other should import it without authorization, including the sales of sugar and its processed raw materials, on which the government imposed a tax rate of 30% on the procurement price, of which 15% was the collected excise tax. All public tobacco product sales had to be stamped with a permit, and the government was entitled to collect 50% of the procurement price. Merchants were required to register their inventory of tobacco. As for matches, in addition to the permit stamp, the state would also control the distribution of raw materials. In the salt monopoly, which started with production in the private sector, the government partook in the procurement, transportation, and implementation of monopolizing the industry. 

In July of 1944, the sugar monopoly was the first to be abolished and replaced with levying a tax on the actual product. Then, in February of the following year, the system of monopoly on salt, tobacco, and matches was changed to proportional taxation. According to the statistics, the annual monopoly profits between 1942 and 1945 were 1.36 billion yuans, 3.16 billion, 3.5 billion and 2.27 billion, respectively. However, the overall fiscal revenue did not increase because the government did not control the production of various monopoly products so that the profit was ultimately limited by the lack of efficiency by private manufacturers. To make matters worse, the increase in tax rate placed even more burden on these businesses, which further reduced production. Such a drag on the economy eventually led to the decline in fiscal revenue. 

After the implementation of the monopoly system, all costs were re-directed to the consumers such that their purchasing power actually diminished. Further, without technical support, the high cost of human and physical resources devoted to the control of the monopoly system simply ate up the margin of profit. 

The initiative to launch wartime monopolies on commodities by the National Government reflected a trend of increasing fiscal crisis during the War. In 1945, the government’s spending was 5.8 times more than its revenue. The price index was 2,167 times higher than before the war. The entire country was thrown into an almost irreparable state of hyperinflation, especially for government employees so that their life became evermore unsustainable. Before and after the end of the war, hoarding peculiar commodities to earn more profit from differential pricing replaced normal business conduct, disrupted the economy, and brought the fiscal order to a collapse. Although the monopoly system became one of the main sources of government tax revenue, it was apparent that it still could not alter or reverse the fate of fiscal crisis at that time.