When the Communist Party of China announced a new government on October 1, 1949, the economy that government inherited was in shambles. China had been at war for over twelve years and much of the infrastructure of the country had been destroyed or badly damaged and prices were rising at 51 percent per month or 13,000 percent per year. The Guomindang government fleeing to Taiwan took much of the country’s foreign-exchange and gold reserves with them, along with many of the managers of the banks and industrial firms. Inflation and war left many of the businesses that stayed barely able to function even when their managers and technicians did not flee.

The integrity and durability of the Chinese empire over two millennia rested on the strength of its fiscal capacity. From antiquity, sovereignty was linked to the ruler’s duty to provide for the economic as well as moral welfare of his subjects. Rulers of the Bronze Age manifested and reproduced their authority through distribution of wealth among their kinsmen and noble allies. The autocratic monarchs who rose to dominance after 500 bce amassed wealth to buttress their military prowess, but they also strove to protect the independence and livelihood of the smallholder family farmers who undergirded their economic prosperity. The institutional apparatus of the fiscal state – centralized planning of taxation and expenditure to satisfy the state’s commitments to good governance – became a defining feature of the first empires, beginning with the Qin dynasty (221–206 bce). Yet at the same time the rise of a market economy also shaped the relationship between the state and its subjects. Even the command economy instituted by the Qin Empire made accommodations to markets, merchants, and money.

In the nineteenth century, the Chinese Empire – the longest-lasting empire in human history – was the largest economy on earth with a decent per capita GDP level. But it shrank rapidly after its collapse. Since the founding of the PRC in 1949, China had been one of the poorest economies in the world until the post-Mao reform, which has enjoyed high growth for three decades. But a sustained slowing down since 2009 reminds us of the trend of the Soviet economy since the mid-1970s.

At the turn of the nineteenth century, the Qing dynasty entered a phase of social and economic decline. By 1850, mounting crises had exploded in a devastating series of rebellions (best known for the Taiping Rebellion, 1850–1864). Until 1880, up to a quarter of the population had perished, although the numbers are debated. The civil wars revealed the bankruptcy of the dogma of fixed tax quotas that had governed China’s fiscal thought since the Ming dynasty (see the chapter by von Glahn and Lamouroux in Volume 1). New commercial taxes, most prominently foreign customs and lijin 釐金 (literally “one-thousandth”) trade tariffs, soon exceeded agricultural taxes and increased state revenue. Fiscal recovery was short-lived, however, as the double defeat in the First Sino-Japanese War (1894–1895) and the Boxer Rebellion (1900–1901) once again threw Qing finances into turmoil. Servicing the war loans and indemnities while simultaneously promoting costly “New Policy” (xinzheng 新政) reforms (1901–1911), the imperial government gradually lost control of the provinces and was unable to check the nationalist awakening of its citizenry. This led to the 1911 Revolution and, eventually, national disintegration during the warlord era.

An understanding of how the money market developed is vital because money serves as the blood of an economy. From 1800 to 1937, the Chinese money market transitioned from a highly fragmented bimetallic system to a gradually integrated silver yuan system in tandem with a silver-backed fiduciary paper-money system until a fiat money system was established. As a consequence, the economy became increasingly monetized as the growth rate of the money supply gradually surpassed the overall economic growth rate without evident inflation pressure on general price trends. This development resulted both from the efforts of governments and private institutions in response to various types of shock separately and from the outcomes of competition and co-operation between the two stakeholders over time.

December 1978 was a political, economic and social turning point for China. As the balance of power within the top leadership shifted, a search for new policies began that deepened into what came to be called “reform and opening” and culminated decades later in a multistranded transition to a market-based economy. This new policy orientation was accompanied by a shift in development strategy that permitted China to take advantage of its factor endowments and structural conditions and dramatically accelerate economic growth. Thus 1978 marks not only the beginning of “reform,” but also the start of the Chinese “economic miracle,” a remarkable thirty-two-year period, through 2010, during which GDP grew at an annual rate of 10 percent. Chinese economic structure and Chinese society were utterly transformed. An extraordinary distance separates the vibrant upper-middle-income, predominantly market-based, economy that is China today from the troubled, isolated low-income country that was China at the end of the Cultural Revolution. This chapter builds its narrative around the systemic and structural changes that transformed China, especially in the thirty years between 1978 and 2008.

China’s rise as the world’s second-largest economy surely is the most dramatic development in the global economy since the year 2000. But China’s prominence in the global economy is hardly new. Since 500 BCE, a burgeoning market economy and the establishment of an enduring imperial state fostered precocious economic growth. Moreover, contrary to the view that China’s economy withered under the dual constraints of Western colonialism and Chinese tradition after 1800, recent scholarship has identified the onset of modern economic growth in response to new incentive structures, investment opportunities, ideas, and technology, laying the foundation for the post-1978 economic miracle. China’s combination of market-led growth under the firm hand of the state has produced a model of economic development that challenges conventional theories of capitalism and economic growth. The spectacular growth of the contemporary Chinese economy also spurred deeper investigation into the Chinese economy – long a neglected field of study, at least in the Western academy. Scholarship on Chinese economic history has now developed to the stage where a Cambridge History devoted to the subject is appropriate and feasible.

The years of prosperity after World War II are known as Les Trente Glorieuses. But while they were glorious for white Americans, African Americans were left out of the economic expansion. The Great Migration continued as Blacks tried to improve their lot, but good jobs were getting more scarce as the economy was experiencing technical change that destroyed factory work. Blacks were cut out of the GI bill because it was administered by states. Blacks therefore could not get good education for the new technology, mortgages for houses in the new suburbs, and were often denied membership in unions. Brown v. Board of Education was designed to create integrated classrooms, but whites moved to private schools and suburbs to avoid integration. Lyndon Johnson’s 1965 Voting Act provided wars to outlaw Jim Crow laws, but it was severely limited in its effect by the Supreme Court. Some Blacks were able to get a good education and graduate from college. They became a Black Elite.

Let me start at the end of this story. The end of monetary history was supposed to be an independent central bank pursuing implicitly or explicitly an inflation target under the guise of operational independence. Other aspects of financial policy and even fiscal policy could be partitioned off into a box that said: Do Not Open. The central bank could pursue its target in a rule-based manner and get agents to bind their behaviour with the central bank’s objectives. This alloy of jointly determined beliefs and targets would tend to ensure stability in the face of shocks. It became not so much a matter of getting people to do what you want but getting people to do your job for you: if people always expected stability following any sequence of shocks, they would not need so much proof from recessions and painful interest rate hikes that central bankers really meant business. Belief, even in a cynical age, can still be a powerful weapon.

Maintaining a credible form of money is central to the organisation of society. Money can take many forms and can be an actual precious metal, and hence a commodity, or a paper version that may or may not be linked to the value of a commodity and increasingly just an electronic chit. In this chapter I shall discuss the development of money, the fascination with gold and the reasons why we still need money to perform its roles in providing operational units of account, means of exchange and a store of value. What we shall see is that sorting out money is one of the most important things any government, dictator or, even builder of a nation state ought to fix. In this sense money might be thought to be the ultimate public good that provides critical social capital and enables the exchange of ideas, goods and transfers of resources.2

Since the late nineteenth century, some scholars have emphasized the free character of the traditional Chinese economy, while others have regarded it as a feudal or Asiatic one that prevented the development of a market economy. The question of property rights and factor markets, which are the themes of this chapter, is closely related to this subject. The first section of this chapter will give a brief survey of the institutions governing the markets for land, labor, and capital from the perspective of law and policy. In the second section, several concrete illustrations will be presented to describe the functioning of factor markets in the Song–Qing economy. In the last section, an outline of the short-, middle-, and long-term changes that occurred in factor markets will be described.

The Chinese economy demonstrated significant vigor from the eleventh century to the nineteenth. This period of nine centuries achieved remarkable progress in implementing the imperial examination system, improving literacy, establishing private landownership, developing market institutions, adopting new crops and improved farming technology, strengthening the lineage order, and lifting ordinary people’s capacity to deal with risks. According to the optimistic view, this is also the period during which two economic revolutions, the Tang–Song and Ming–Qing transitions, took place, marked by continuous economic growth and improvement in living standards for the population.1 To other scholars, however, this long period of quantitative growth was largely achieved through population increase, preventing China from escaping the “Malthusian trap.” That is, while the total size of the Chinese economy may have grown due to the rising population, per capita living standards failed to rise above historical norms and might have even declined during the long period. This period’s achievement and impact were nothing comparable to that of the Industrial Revolution which started in eighteenth-century Britain.

The book opens with a chapter on slavery, starting with the absence of Blacks from “we the people” in the Declaration of Independence and the United States Constitution. The American Revolution led to the Constitution, and Hamilton’s reports were vital to the new country. They set the basis for the Louisiana Purchase and the Missouri Compromise. Cotton agriculture in the South and manufacture in the North contributed to economic growth. The 1837 banking crisis interrupted this progress and further compromises over slavery in new states set the stage for the Civil War. Time on the Cross is examined to illustrate the role of Blacks and how hard it is to write about it.

This chapter focuses on the so-called Self-Strengthening era during the second half of the nineteenth century when the Qing empire was expanding state involvement in industry and technology from its traditional ideology. The origin and motivation of state involvement in the private market during this era is different from that in the early twentieth century, which began to take lessons from Meiji Japan and the ideology of modernization (see Bian’s chapter in this volume). There were some elements of continuity here – in remnants of “Self-Strengthening” through the state efforts both to build up modern enterprises and develop to science and technology. This chapter explains the impact of the state sector’s emergence that was manifested in the development and expansion of state arsenals and modern enterprises.