The state monopoly on grain procurement and sale is an important institution arrangement in Chinese history and has profound effect on urban-rural income gap. Based on the two-sector model of price scissors constructed by Knight in 1995, this paper analyzes the effect of the state monopoly on grain procurement and sale on urban-rural income gap in China and makes an empirical test by using the provincial panel data from 1953 to 1989. It finds that, whether grain purchase rate and inter-provincial grain allocation or grain overbought rate are used to measure state monopoly on grain procurement and sale, state monopoly on grain procurement and sale enlarges the urban-rural income gap; the effect is the most significant in the planning period before 1978, gradually weakens as a whole after the reform of 1978, and becomes insignificant at the early stage of the reform from 1979 to 1984. The mechanism analysis shows that state monopoly on grain procurement and sale raises the consumption of urban residents and then reduces the consumption of rural residents, thereby enlarging the urban-rural income gap. Therefore, the essence of state monopoly on grain procurement and sale lies in that governments subsidy the development of urban areas and industry sectors through the absorption of agricultural surplus, which is the important reason for the enlarging urban-rural income gap in China in the planning period.