Japan’s Finance Minister during the early 1930s, Korekiyo Takahashi, is talked about by modern-day economists in hushed, reverent tones. His economic policies are widely credited with having saved Japan from the worst effects of the Great Depression. In fact, Korekiyo Takahashi is sometimes called the Japanese Keynes, after John Maynard Keynes, the British economist whose radical theories gained widespread credibility in the wake of the Great Depression.
Before we continue, let’s review some historical background. In the late 1920s most nations were on the gold standard. The gold standard allowed citizens to exchange their national currency for a predetermined amount of gold on demand, usually in the form of gold coins. It was very effective at controlling inflation and imposed significant fiscal discipline on both governments and the banking industry. It also established de facto fixed exchange rates between all nations that followed the gold standard. This allowed entrepreneurs and businesses to more accurately project the long-term viability of international commercial ventures.
However, the Great Depression shattered the prevailing economic and monetary assumptions of the era. Although it started with Wall Street’s infamous October 1929 crash, the Great Depression did not stay isolated in the U.S. financial sector for long. After steadily increasing in severity for many months, the Great Depression entered its most virulent phase with the collapse of the venerable Austrian bank Credit-Anstalt in May 1931.
After this coup de grâce, the pre-existing global economic order rapidly disintegrated. Between 1929 and 1932 the value of global trade fell by a stunning 50% or more. Unemployment also rose to dizzying heights, reaching 25% in the U.S. in early 1933. Foreign nations experienced similar, although generally not quite as severe, spikes in unemployment.
This was the dreadful scenario in which Japan’s finance minister, Korekiyo Takahashi, found himself. He reacted to the crisis both decisively and in a way that would forever endear him to modern economists. First he abruptly took Japan off the gold standard in December 1931, causing the yen to depreciate by 60% against the U.S. dollar and 44% against the British pound. The resulting weaker yen stimulated Japanese exports.
Next, Korekiyo Takahashi slashed interest rates several times in the 1932-33 period. The Bank of Japan’s discount rate fell from more than 6% in early 1932 to well under 4% by mid 1933. This helped ease the economic pressure on Japanese companies and financial institutions.
Finally, the Bank of Japan also engaged in large-scale, direct monetization of government debt. In effect, Korekiyo Takahashi, in his capacity as the Japanese Minister of Finance, encouraged the national government to run extremely large budget deficits. This was done with the explicit understanding that the Japanese central bank would buy all government bonds issued to finance this deficit spending, thus resulting in no impact on interest rates. In other words, the Japanese central bank, at the behest of Korekiyo Takahashi, printed oodles of money and gave it to the government to spend.
These radical new economic policies appeared to be entirely successful. After experiencing double-digit deflation in both 1930 and 1931, Japan’s wholesale price index went positive for the rest of the 1930s, only briefly flat-lining in 1934. Industrial production followed a very similar, upward path to wholesale prices. Although the Great Depression tore into the Japanese economy in the very early 1930s, Korekiyo Takahashi’s quick action seemed to save the day.
Modern economists, at least, fully embrace this orthodox view of history. They both admire and celebrate Korekiyo Takahashi’s economic achievements, while seeking to emulate many of his policies. Unsurprisingly, many modern central bank policies are incredibly similar to Japan’s 1930s economic experiment. That isn’t an accident, either. Korekiyo Takahashi effectively engaged in Keynesian economic policies before Keynes even fully developed his theories in the mid 1930s!
In fact, Japan’s current economic policies are specifically modeled after the policies Korekiyo Takahashi pioneered during the Great Depression. Referred to as Abenomics after their chief advocate, Japanese Prime Minister Shinzo Abe, these economic policies are intended to extricate Japan from its 25 year long (and counting), soft depression. Abenomics relies on monetary easing, fiscal stimulus and economic reforms to jump start the Japanese economy, a combination that intentionally echoes Japanese economic policies of the 1930s.
What they don’t tell you in the history books, though, is that the aggressive monetary policies pursued by Korekiyo Takahashi were actually inflationism. And while they appeared to be an unmitigated success in the case of Japan’s Great Depression, looks can be deceiving.
For example, the primary mechanism by which the weaker yen contributed to Japanese economic recovery was via stimulating exports. But this was a zero sum game. Japan’s benefit only came at the expense of trade partners who refused to devalue their currency as quickly or as steeply as the yen. This had serious political side effects later on, as it made the European colonial powers in the region less willing to negotiate with a Japanese nation that had exported its way to prosperity on their backs.
Inflationism also creates special interest groups who benefit disproportionately from loose monetary policies. Whichever group is closest to the central bank money spigot quickly becomes unimaginably wealthy. These special interest groups are usually dominated by large corporations and politically-connected individuals. They are able to mobilize significant resources with their newfound wealth in order to influence local or national policy. They can hire more lawyers, employees and lobbyists than the other groups in society who aren’t direct beneficiaries of central bank largess.
One of the first things these inflation-driven special interest groups attempt to do is ensure that loose central bank monetary policies continue without interruption. Unfortunately for Korekiyo Takahashi and the Japanese people, one of the special interest groups who benefited most from his money-printing spree was Japan’s military establishment. Much of the deficit spending that the Bank of Japan monetized in the 1930s went directly into the national military budget. In fact, Japanese defense spending nearly doubled between 1931 and 1935, rising from ¥563 million to ¥1,134 million.
Takahashi later attempted to “do the right thing” by reducing Japanese military expenditures once it became apparent his policies had succeeded in jump-starting the economy. But the Japanese military, especially its ultra-nationalist hardliners, were in no mood to see their budgets cut. On February 26, 1936 a group of ultra-nationalist army officers, along with approximately 1500 troops under their command, staged a coup in Tokyo in the hopes of wresting the government from civilian control.
As part of this plot, they assassinated Korekiyo Takahashi as he slept at home in his bed. Although the ultra-nationalist coup was ultimately put down by the military, the damage done to the civilian government was fatal. Korekiyo Takahashi had been an influential voice of moderation in a period of rising Japanese nationalism. Despite the coup failing, his death effectively ushered in military domination over the civilian Japanese government. Once this happened, a war in the Pacific against Anglo-American power was inevitable.
Yes, it is possible that the Japanese military would have seized control of the civilian government anyway, but the Bank of Japan’s loose monetary policies made this outcome inescapable. In effect, Korekiyo Takahashi was indirectly responsible for World War II in the Pacific by enabling the rapid expansion of Japan’s military machine via freshly printed money. His policies may have shortened Japan’s Great Depression, but only at the expense of the nation’s near total destruction a mere 10 years later. Only modern-day central bankers could be foolhardy enough to think that recreating Korekiyo Takahashi’s failed policies are a good idea!
Of course, these revelations have major parallels to our own time. Central banks around the world have been pursing bubble-centric economic policies for a decade at this point. This has given inflationism, and its associated special interest groups, ample time to entrench themselves in national economies around the world.
The United States is a prime example of this trend, with monopolistic technology companies, merciless healthcare conglomerates and manipulative financial corporations the primary beneficiaries. I believe that 1930s Japan is a cautionary tale for today’s central banks. They would do well to keep in mind that sometimes even seemingly perfect policies can have unintended consequences.
