From Foot Soldier to Finance Minister: Takahashi Korekiyo, Japan’s Keynes

Published by EH.NET (February 2008)

Richard J. Smethurst, From Foot Soldier to Finance Minister: Takahashi Korekiyo, Japan’s Keynes. Cambridge MA: Harvard University Press, 2007. xiv + 377 pp. $45 (hardcover), ISBN: 978-0-674-02601-8.

Reviewed for EH.NET by Michael Schiltz, Department of Oriental and Slavonic Studies, University of Leuven.

Contrary to what could be expected from the biography of a prewar Japanese statesman, From Foot Soldier to Finance Minister is an intimate and entertaining portrait of a man who is arguably Japan’s most important financier of the early twentieth century. Takahashi Korekiyo duly deserves the attention Harvard East Asian monographs chose to give him. Not only did he save his country from the Great Depression; he also played a role in almost every event of importance to Japan’s macroeconomic choices and performance at the time. From raising war loans abroad for the Russo-Japanese War in 1904-05 until the managing (accommodation?) of the outrageous demands for increased military spending in the late thirties, Takahashi played the part of fixer, leader, negotiator, and much more. And who could be more qualified to write this biography than Richard Smethurst? As longstanding scholar of Japan’s prewar economic history, he is the author of multiple articles about both Takahashi’s educational formation and his policies ? and people in the Bank of Japan close to him (such as Fukai Eigo). It is also fully to Smethurst’s credit that this book is an enticing read: in a lucid and fluent style, he sheds light on many of the lesser known aspects of Takahashi’s education, always with attention to the latter’s interest in self-documentation and irony ? think for instance of Takahashi’s relating of his indulgence in drinking alcohol as a youngster (p. 22) or his naive signing into indentured servitude while being in America (p. 26-29).

The book is conveniently separated into four parts, which can further be grouped into two. Part I, roughly comprising chapters 1 through 7, deals with Takahashi’s early experiences and education, in the broadest sense of the word. Smethurst points out Takahashi’s personal relationship with the Scottish banker Allan Shand and the missionary Guido Verbeck. Of particular importance is the relationship with Maeda Masana, one of Takahashi’s mentors but mostly famous for his political struggle with the elder statesman Matsukata Masayoshi about the nature of Japanese economic development in the late nineteenth century (the choice between agricultural and industrial development). It is indeed surprising that Takahashi, as the true champion of modern Japanese capitalism, sided with the proponents of Japan’s agricultural development, but Smethurst finds an explanation in Takahashi’s pragmatism: Japan was, so it is argued, hardly able to embark on “top-down” industrialization, but should have embraced a program of decentralized development fit to its character as a still largely agricultural economy.

One may ? justifiably ? object that Smethurst has devoted too much attention to Takahashi’s early years, and dwelled too long on events and happenings that border on the anecdotal or trivial detail. But then again, this is not a book on the Great Depression alone, as Smethurst warns us in the acknowledgments (p. vii): “As I investigated [the Japanese economy of the early 1930s], the name Takahashi Korekiyo, often with the epithet “Japan’s Keynes,” appeared repeatedly. So I bought several biographies of him and began working backward, from the Sh?wa depression to Takahashi’s childhood. The more I read about him, the more fascinated I became by the man ? until at last I decided to abandon the economic downturn for Takahashi.”

Still, it will be the later chapters about the Great Depression (chapters 12 and 13) that will invite the most scrutiny from economic and financial historians. These chapters are very well structured, and Smethurst is aware of the problems he has to tackle. This is the “Holy Grail” of the financial history, as Ben Bernanke once argued, and people like Bernanke, Charles Kindleberger and Robert Skidelsky (the biographer of John Maynard Keynes) have stressed Takahashi’s uniqueness. What needs explanation is the fact that the Great Depression hardly seems to have affected Japan, whereas in other countries, most notably the United States, its effects were so protracted. “In real terms, the Great Depression scarcely occurred in Japan. From 1926 through the 1930’s, real gross national product (GNP) in each succeeding year never declined from its previous level. The economy did experience some stagnation in the 1929-31 period; real GNP rose by only 0.5 percent in 1929, 1.1 percent in 1930, and 0.4 percent in 1931. For the remainder of the 1930’s, however, real GNP grew at an average annual rate of 5.8 percent” (Nanto and Takagi 1985, pp. 369-74).

So, who and what kept the Japanese economy on course? Both Japanese and Western observers have pointed to Takahashi’s surprisingly Keynesian policies: 1) removing Japan from the gold standard, 2) devaluing the yen vis-a-vis the dollar and pound, 3) reducing the Bank of Japan’s prime rate, 4) introducing legislation to raise the limit of the Bank of Japan’s issuance of bank notes, 5) increasing government spending, and 6) making up for the difference between government expenditures and income not by raising taxes but by pioneering a very specific agreement with the Bank of Japan.

Although avoiding the difficult (and sometimes highly technical) debate about policy behavior during the Great Depression, Smethurst systematically reiterates several assessments of Takahashi’s reflationary policies (p. 239):

… was this not a case of social dumping or “beggaring thy neighbor,” that is, saving your own trade ship at the expense of others? Was Takahashi guilty of a “reckless fiscal policy” because his introduction of the sale of treasury bonds to the central bank rather than directly on the open market would lead to dangerous inflation after his assassination in 1936? Was not the policy of selling treasury bonds to the Bank of Japan rather than to the public dangerous because it gave finance ministry bureaucrats and central bankers the power to expand the money supply free from market constraints? Did not Takahashi’s spending, which went primarily to rural relief and the military, play a vital rule in the rise of militarism and the road to Japan’s aggressive war against China, the United States and their allies?

Smethurst chooses not to confine his analysis to the mere number crunching of many cliometric studies but instead includes references to the writings of Takahashi and his aides, effectively erasing several of the above suspicions. I am sympathetic to Smethurst’s conclusions about Takahashi’s doubtlessly limited room for political maneuvering, including where it concerns the question regarding his alleged role in furthering excessive military spending. I believe he has presented a strong case for the latter’s appreciation of existing problems and their solution. From Foot Soldier to Finance Minister is furthermore helpful in explaining financial technologies as the time, as example the aforementioned hikiuke system of selling government bonds at low interest directly to the Bank of Japan.

What does puzzle me, therefore, is not Smethurst’s assessment of Takahashi’s policies. I am less convinced by the way Smethurst pictures the motives of Inoue Junnosuke, Takahashi’s antipode and, as in the proverbial opposite, the proponent of a deflationary monetary policy. As demonstrated by Mark Metzler (2002), foreign pressure to have Japan move onto the gold standard was substantial; hence, Inoue’s defense of a deflationary policy, however disastrous, was not necessarily a mere expression of political ambition ? it was, however mistaken, the orthodoxy of the time. I furthermore sense that methodology similar to Smethurst’s reading of Takahashi would reveal the sincerity of Inoue’s motives (again, however ill-inspired they may have been) ? an idea to which again Metzler (2006, pp. 159 ff.) lends plausibility.

This is, however, a minor criticism of a work that splendidly and entertainingly facilitates our understanding of difficult yet formative moments in prewar Japanese political and economic history. This book deserves to be read not only by students of Japanese economic history, but should be in the hands of every serious student of modern Japanese history, as well.

References: Mark Metzler, “American Pressure for Financial Internationalization in Japan on the Eve of the Great Depression,” Journal of Japanese Studies, Vol. 28, No. 2 (Summer 2002): 277-300.

Mark Metzler, Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan, University of California Press, 2006.

Dick Nanto and Shinji Takagi, “Korekiyo Takahashi and Japan’s Recovery from the Great Depression,” American Economic Review Papers and Proceedings, Vol. 75, No. 2 (May, 1985): 369-74.

Michael Schiltz (postdoctoral fellow, University of Leuven) specializes in the financial history of Japan. He is the author of, among others, “An ‘Ideal Bank of Issue’: The Banque Nationale de Belgique as a Model for the Bank of Japan,” for which he received the Financial History Review 2007 Prize for Young Scholars. He is currently finishing a book manuscript entitled The Money Doctors from Japan, which covers the activities of government-appointed Japanese financial advisers in the (semi-)colonies of the Japanese empire before 1937.