How Japan Was Saved From the Gold Standard … and the Great Depression

A Professor in Economics and Director of the Centre of Full Employment and Equity, at the University of Newcastle, NSW, Australia, Bill Mitchell has just posted on his blog – Billy Blog: Modern Monetary Theory … macroeconomic reality – an extremely interesting analysis of the Japanese monetary policy in the early 1930s.

His post of Tuesday, November 17, reminds us that Takahashi Korekiyo, a Finance Minister and then 20th Prime Minister of Japan in 1932, was a Keynesian of sort even before Keynes published his General Theory, and that he saved Japan from the Great Depression.

Takahashi Korekiyo is famous for abandoning the Gold Standard on December 13, 1931 and introducing a major fiscal stimulus with central bank credit that rescued Japan from the Great Depression in the 1930s.

His policy introduced three notable sources of stimulus at the time:

1. The exchange rate was devalued by 60 per cent against the US dollar and 44 per cent against the British pound after Japan came off the Gold Standard in December 1931. The devaluation occurred between December 1931 and November 1932. The Bank of Japan then stabilized the parity after April 1933.

2. He introduced an enlarged fiscal stimulus. In March 1932, he suggested a policy where the Bank of Japan would underwrite the government bonds (that is, credit relevant bank accounts to facilitate government spending).

On June 18, 1932 the Diet adopted the government’s fiscal policy strategy for the next 12 months with a rising fiscal deficit, 100 per cent funded by credit from the Bank of Japan.

Bank of Japan historian Masato Shizume wrote in his Bank of Japan Review article (May 2009) – “The Japanese Economy during the Interwar Period: Instability in the Financial System and the Impact of the World Depression” – that:

“Japan recorded much larger fiscal deficits than the other countries throughout Takahashi’s term as Finance Minister in the 1930s”.

3. The Bank of Japan eased interest rates several times in 1932 (March, June and August) and again in early 1933. This easing followed the cuts by the Bank of England and the Federal Reserve Bank in the US. Monetary policy cuts were thus common to each but the size of the fiscal policy stimulus was unique to Japan.

As noted by Bill Mitchell, “a number of observers who focused on the macroeconomic aspects of the Takahashi economic policy praise his achievements as a successful pioneer of Keynesian economics. Kindleberger points out that Takahashi conducted quintessential Keynesian policies, stating that: “his writing of the period showed that he already understood the mechanism of the Keynesian multiplier, without any indication of contact with the R.F. Kahn 1931 Economic Journal article”

As noted by Bill Mitchell, “a number of observers who focus on the macroeconomic aspects of the Takahashi economic policy praise his achievements as a successful pioneer of Keynesian economics. Kindleberger points out that Takahashi conducted quintessential Keynesian policies, stating that: ‘his writing of the period showed that he already understood the mechanism of the Keynesian multiplier, without any indication of contact with the R. F. Kahn 1931 Economic Journal article’.”

The complete post is well worth reading here. 

Thanks to Kamil Kaminsky for mentioning this blog and post.

Real Effects of the Euro: A Comparative Analysis

Matthew C. Klein has written an excellent paper showing how the euro has failed to bring about the benefits for all that it was supposed to confer to the eurozone members, in 'The Euro as Pointless" in the Financial Times of November 11.

“It’s easy to forget now, but the single currency wasn’t created purely as a political project.

Many economists in the 1980s and 1990s thought monetary union would encourage cross-border investment and trade by eliminating the risk premiums associated with the supposedly destabilising devaluations of the past. The net effect would be converging living standards, dampened business cycles, slower inflation, and faster productivity growth for everyone — the benign Germanisation of Europe.

This was a laudable goal, but unfortunately it’s not how things worked out.”

This is precisely what I showed in my 2002 paper “l’euro, tout était faux”, an early analysis of that failure here.

Excerpt from Klein’s conclusion:

“In retrospect, it’s clear the euro simply shifted risk from exchange rate fluctuations to defaults (for foreign creditors) and nominal income (for domestic workers and businesses). This wasn’t sufficiently obvious at the time, however, or we wouldn’t have seen such massive growth in cross-border banking and portfolio flows within the currency bloc before 2008.

Contrary to what the euro’s founders believed, it now appears the absence of monetary union is what’s needed to channel capital flows most productively across borders. That’s the real tragedy of the single currency: it was pointless from the start.”

Highly recommended.