To finish off 2021, I decided to complete the 1930s economics trilogy I set out for myself with Hall of Mirrors. The two exceptional examples of politicians who dealt with the Great Depression cited in that book were America’s FDR and Japanese finance minister Takahashi Korekiyo. Richard J. Smethurst’s book, a passion project 20 years in the making, was the only modern English language text I found on the subject of Takahashi. It was cited as a reference in Hall of Mirrors for the “Takahashi’s Revenge” chapter. I thought it would provide an accessible account of one of the 20th century’s great financial minds. As Smethurst points out at the beginning, the book is more than just an economics tome in that it explores the life of an interesting man in an interesting time. Although referred to as Japan’s Keynes, Takahashi implemented his Keynesian policies four years before Keynes published his theories and as a result Japan exited the depression faster than any other economy at the time.
The start of the book gives a breakdown of Takahashi’s family history and his childhood. As the adopted son of an 足軽 or footsoldier family who had recently fallen in status, Takahashi found himself climbing life’s ladder early in his life. At this time Japan was emerging from the Meiji Restoration and making the transition from the samurai era to being a more modern democratically governed and outward looking country. Under his grandmother Kiyoko’s influence, he found work as a temple page which led to a trip to the USA at 14 years of age. He found himself in indentured servitude in America but was able to use the experience to learn English which would be a critical skill throughout his life. The books focuses on his early work in patent laws which put him at the forefront of a more international and open facing Japan that wanted to gain access to Western markets. His attempts to set up an English school in Karatsu put him in contact with similar minded individuals, and leading a Peru mining expedition gave him experience in business dealing with foreigners. Like FDR, he tried his hand at many different opportunities with mixed success. His early days were met with as many disappointments as triumphs but he would bounce back repeatedly because of the connections he had built and his widely recognized skills. During the Russo-Japanese War Takahashi proved an adept negotiator capable of managing relationships to the benefit of his country. To finance the war, Takahashi had to secure funding from overseas with 47% of the war costs being financially backed by investors in the US and the UK.
The Russo-Japanese war shows how Takahashi was a pragmatic nationalist. His main goal throughout his adult life was to better his country and escalate the living standards of his countrymen. Rather than tax the poorer classes of society to balance the budget, Takahashi’s goal was to grow the overall economy through investment and deficit spending. Similar to FDR’s mantra years later of the government having to “spend money when no one else had money left to spend”. He knew that to compete with international heavyweights America and the UK, Japan would have to cooperate with them on their terms. He saw the gold standard was not an end to itself but merely a tool to be used to connect with foreign markets. He definitely did not take slights from these countries lightly – the ban on Japanese immigrants to the USA or the demands that no wartime reparations be sought from Russia – but realized the need to grin and bear it to establish Japan on the world stage. He frequently and publicly denounced the military for their demands for extravagant budgets to fund belligerent behaviour in Manchuria. Takahashi saw a strong potential economic partner in China – and attempts at empire would only cost Japan scarce resources, produce backlash from an increasingly nationalistic China, and unnecessarily antagonize Western powers. In response Takahashi made attempts to curtail military autonomy by removing the army and navy general staffs which reported only to the Emperor – in practice, they didn’t report to anyone. Although by most standards a pacifist Takahashi, as Prime Minister and one of the main proponents of universal suffrage at this time, also believed in free speech and did not ban radical ideologue groups despite pressure from his own administration. At the time, three of five prime ministers in Japan had been assassinated by these groups and such opposition must have proved unpopular.
Takahashi served as Prime Minister of Japan for seven months in 1922 (a short term by even today’s standards). During his term he sought devolution of land taxes and business taxes to local governments who he claimed would be better capable of managing their own distinct and local “sicknesses”, civilian control of the army and their withdrawal of military from Siberia. Interestingly, he criticized businesses for demanding wage cuts for their workers and for blaming low efficiency of their workers which he responded was due to their own lack of imagination when it came to their own capital. He advocated both a graduated income tax to reduce income inequality and universal suffrage. Although he is not seen as a successful Prime Minister, he is renowned as Japan’s 7-term finance minister. His fifth term was in 1931 when he steered Japan out of the world depression. His policies saw radical increases in government spending to stimulate consumer demand, removal of the gold standard, and lowering of interest rates. In 4 years, Japan returned to full employment, 5 years before the US, and recovered more dramatically than any other country over the next ten years except Germany. His frequent attempts to curtail army and navy budgets resulted in his assassination in 1936. The book makes the argument that Takahashi was the last line of defence against Japan’s increasingly prewar militarising government.
Despite some heavy material in a few sections, I really did like this book. Stories about normal people ascending to success are always inspiring and Takahashi himself comes across as quite likable. As someone who has lived in Japan myself there are many reverse parallels that I could see in Takahashi’s early life when it comes to learning the language and making connections with foreigners. I’m very much interested in history also and some of the landmarks I’ve seen in Japan are put into context in this book such as Japan’s huge silk industry in the 1930s. This is also the first time I’ve read about history from Japan’s perspective. I like to understand the strengths of the people I read about and the book makes the case that Takahashi was successful due to his English ability, his autodidact prowess, his internationalist approach, and outsider rationalism. Takahashi did not receive a mainstream education which led to a very different mindset and outspoken personality compared to his peers. The prevailing Confucian thinking at the time was that Japan was suffering from overconsumption which was morally bad – therefore reductions in spending, increases in interest rates, and individual frugality and saving was good. Takahashi embraced a new line of thinking – although a household is often better off saving money, a country’s economy is better if many households spend money.
My goal with reading about economic history in 2021 was to try and get a broad understanding of how financial markets work and to be able to have an informed opinion of how a country can effectively manage an economic crisis. Right now, I feel that policies of austerity simply have no rational justification. Budget balancing as enforced by European governments through austerity budgets in 2008 and advocated more generally by Ron and Rand Paul and the Tea Party in the USA doesn’t make sense. With regard to the latter, Joe Biden’s autobiography noted an interesting shift in American Republican Party messaging in the 1970s towards cuts in taxes in alignment with their desire to cut funding for social programs. As Joe’s Republican colleague put it, “I’ll be the party of deficits and you can be the party of fiscal responsibility”, a message that resonated with their voters who saw it as both fiscally prudent and fiscally advantageous. So maybe this is something that individual voters find difficult to understand. As Takahashi would point out though, what’s good for a government and what’s good for an individual in terms of budgeting is very different. If you cut off the flow of money, that money doesn’t go somewhere else – it simply ceases to exist and leads to less money in the economy. I recognize there is an argument to be made about where this money can be distributed but that doesn’t seem to be the argument that is being made – at least publicly. It’s more that one side are spenders and the other side are savers.
I realize that I’ve only really looked at the 1930s for examples of economic crises and in 2022, I hope to read more about inflation during the 1970s (happy with any recommendations anyone might have on the subject). I also want to look a bit more at the advocates of Austrian style economics (anti-Keynesian theories) to see what their rationale is and if it extends beyond “messaging that resonates with voters”. At the time of Takahashi and Keynes, most policy makers viewed strict balanced budgeting as a moral necessity. I do wonder if modern Austrian economists and austerity advocates are simply adhering to the same moral reveries of the early 20th century rather than pursuing rational and proven practices.