An old Japanese recipe for thwarting economic recessions – Public Money Creation! (A History of Public Money Creation, Part 5)

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Throughout history Public Money Creation has been the norm, rather than the exception. Here’s why Japan was able to kick-start growth in the middle of a global recession.


Throughout history, governments have used their ability to create money to fund public spending. While none of these policies were called, “People’s QE”, “Strategic QE”, “Sovereign “Money Creation”, or “Helicopter Money” (what Positive Money collectively refers to as Public Money Creation), they shared the common trait of using newly created state money to finance government spending, rather than relying on commercial banks to create new money through lending.

Significantly, the times when Public Money Creation has resulted in high inflation or even hyperinflation (inflation of over 50% a year) have been well documented. However, the times when governments have created money in a careful and responsible manner to grow the economy are usually ignored or overlooked.

In our previous posts on this topic, we showed that theory and analysis have been dispensed with at the expense of this widespread misconception. We showed that misleading conclusions have been drawn from the case studies of Public Money Creation in Zimbabwe and the Weimar Republic and we highlighted some lessons from Public Money Creation under the Roman and Chinese empires. In our most recent post, we showed that Public Money Creation has happened in the places you would least expect it, the former British colony of Pennsylvania and the island of Guernsey. In today’s post, we will consider the case study of Japan in the 1930s.


Japan (1932-1935)

Between 1919-1929 Japan had endured a difficult decade, with output growing at less than 1% per year. Numerous bank runs and financial panics continuously hampered economic activity. The state of the economy was only worsened when Japan returned to the gold standard in 1930. The Yen was significantly over-valued, prompting trade deficits and an external drain of gold.

In 1931, when Finance Minister Korekiyo Takahashi took office, one of his first actions was to take Japan off the gold standard. Indeed, many countries had taken the same action (i.e. Britain). Yet, the policy decision made to take Japan off the gold standard was unique in so much as it allowed Takahashi to jump-start the economy by allowing the central bank to create money to fund public works.

Indeed, in March 1932, the Japanese Minister of Finance put forward a policy proposal that would allow the Bank of Japan to buy freshly issued public sector bonds with newly created central bank reserves. While the Finance Minister did have the legal mandate to instruct the central bank to purchase government bonds; there was more support than resistance from within the central bank.

Three months later, Takahashi put forward a supplementary budget for increased public spending (primarily for agriculture and military expenses). This was to be financed by issuing new bonds, which the central bank would purchase outright. All the existing regulations that limited the Bank of Japan’s ability to buy public sector bonds outright were virtually eradicated. Originally, legislation only permitted the Bank of Japan to have 120 million Yen of un-backed currency in circulation. With this measure, the Bank of Japan was able to circulate 1 billion un-backed Yen.

As Eichengreen (2015) explains, “The expectation, clear in light of Takahashi’s actions and statements, was that the Bank of Japan would do its part to help finance deficits. The government and central bank would be working in harness to actively bring deflation and depression to an end.”

Accordingly, the results of the Takahashi endeavour were impressive. In a small space of time, the rates offered on short-term lending declined from 15% to 1%. The value of the Yen depreciated versus the price of other currencies (as intended); by approximately 40% and 60% against the pound and dollar respectively. Prices increased as expected, but industrial production expanded at a greater rate. Most importantly, real GDP grew by 7% in 1932 and 8% in 1933. By 1935, Japan was believed to be back at full employment.

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Frank Van Lerven

Frank is our Research and Policy Analyst, and is responsible for our research on current events. Frank also leads our research in Public Money Creation and Quantitative Easing. Prior to working on the availability of credit under a Sovereign Money system, Frank also researched issues related to the 1844 Bank Charter Act and its implications for contemporary monetary policy. With a Research Master’s in Advanced Political Economy (cum laude) and a BA in African Development Studies, Frank is especially interested in how Western financial systems (and models) influence developing economies.
  • RJ

    I think we will need a lot more of this in the not too distant future. An often overlooked point is we need credit to generate collective profits (as well as for increased yearly savings) otherwise one company will make a profit at the expense of another making a loss. This is a recipe for financial collapse.

    These profits can come from capitalized expenses (asset increases) but the majority of credit comes from debt increases. One area of big expenditure was alternatives to oil esp in the US. These have now been put on hold and has as a result wiped out huge potential collective profits. It hasn’t been replaced with anything. We need a replacement. Like massive house building in the UK. Or clean energy. But something. This will only happen if governments step forward and deficit spend spend spend. And spend even more without taxing more.

    • jamesmurraylaw

      More nonsense RJ?

      “We will need a lot more of”…. what?

      “We need credit to generate collective profits” ….We need more money in the economy – not credit.
      And what is “collective profits”?

      “We need credit to generate …increased yearly savings” What the hell does that mean?

      “These profits can come from capitalised….asset increases” Are you really in favour of profits from unearned, unproductive property price inflation?

      And do it goes on – a string of seemingly understandable but unconnected assertions that is designed to put off readers to the these blog pages.

      Get a life Troll…

  • Vince Richardson

    Another good article in the series and more ammunition to throw at the inflation hawks who faint at the idea if the state creating money.I checked out that Japanese finance minister Korekiyo Takahashi,poor soul was shot dead in a failed military coup in 1936.So much for gratitude,I know opposition to such ideas does run strong,but hopefully not that strong.

  • solutrean

    What were all those un-backed yen not backed with Frank? Are we talking debt free money here?

    • RJ

      No afraid not. Money is a financial asset. Financial assets are without exception always backed by debt. Some companies fraudulently hide this debt liability to overstate their profits or financial position but the debt does still exist. In fact a debt asset is completely worthless without another entity standing behind it. This is rightly recorded as a debt liability.

      Monetary sovereign governments are in the fortunate position of being able to legally take money from people and companies (called taxes). They can also enforce using force if necessary (throwing people out of their homes etc) the payment of both debt and taxes. This power gives them the ability to spend without limit. The holders of either new money or new bonds (resulting from deficit spending) can offset this asset against future tax payments. The Govt rightly records this obligation arising from deficit spending as a debt liability.

      It’s time to stop believing in untruths. Interest free money is possible. Bond free money likewise. But not debt free. The real world though offers scope right now as the system currently operates. People just need to get over their irrational fear of Govt debt. Promoted by bought neo-liberal economists and the brain-washed who just believe what they are told.

      • James Murray

        “It’s time to stop believing in untruths. Interest free money is possible. Bond free money likewise. But not debt free. The real world though offers scope right now as the system currently operates. People just need to get over their irrational fear of Govt debt.”

        So, RJ, your ‘answer’ is just to keep on increasing the National Debt?
        Sovereign Money Creation, where there is slack in the economy, is pain-free, and debt-free.

        But again. You know this. So, why do you keep on posting your garbage?

      • solutrean

        When the British government deficit spends, new money is NOT created RJ. Deficit spending (in Britain) merely recycles existing bank money either through bond issuance or taxation from those who purchase the bonds or pay the tax to those who receive the government payments. This is why the B of E have stated in their quarterly bulletin Q1 2014 that 97 % of broad money is created by the private banking system. The remaining 3% is created by the B of E itself by note issuance. Clearly this represents 100% of the money supply so government spending creates no NEW money at all.

        If you cannot get this basic fact right, it is difficult to accept the credibility of the rest of your post.

      • Marco Saba

        The debt of the issuer of the money is versus the sovereign (the people), not the other way around…

    • Vince Richardson

      It is a kind of debt free money in that the state created some to boost the economy.Only the way they spend that debt free money is the problem.They spend it on purchasing government debt mainly,though I think they have dabbled with corporate debt too to try and help the economy a bit more directly.This is of limited help as the corporations tend to sit on the cash and are relucantant to spend it into the economy(them being in recession),as has happened here too.They still haven’t gievn the ordinary Japanese citizen any boost though(as is usual for central banks).It is where you put your debt free money that counts.

      • RJ

        They have. The ordinary citizen get a boost whenever a Govt deficit spends. Some of which Greeks desperately need right now but the Govt can not do it as they have sold out to the Euro elite. And are now consequently owned by them.

        So Greece is unable to do what the UK still can do. But Govt’s by the austerity lie want to stop.

        • Vince Richardson

          Fiscal spending would help yes,if that is what they have done ,I (and this article)was talking about state created QE through the normal channels.Though fiscal spending does come with a cost and can take interest rates which consume quite a bit of national wealth.I would much prefer a more effective state issued currency,cuts out the middle men.

          • RJ

            A bigger Govt deficit could be achieved by say a tax cut, VAT tax cut or increased pensions. It would have an immediate impact.

            Unsure what you mean by a state issued currency. If you mean the PM proposal of eliminating bank credit etc. This would take a minimal of 10 years. I would say longer. More like 50 years as it would require a massive public education and convincing / converting process. They whole banking and treasury system would be turned on it’s head after using various forms of the current system for 100’s of years. And worldwide.

            While I don’t disagree with the change if starting completely from scratch (two levels – bank credit and reserves – really are unnecessary today). A much easier way would be or the Govt to nationalize the banks. This would achieve more effectively what I think PM are trying to achieve and a lot more quickly. Third level privately owned funds could be set up to do what banks currently do.

          • Vince Richardson

            Well the Japanese are currently in a similar mess and yet have not cut taxes ,they put VAT up recently.Depsite also launching huge QE,so pulling and pushing at the same time…crazy.


            This is the problem,governments do contradictory things.They are pray to the usual handbag economics alot of politicians fall into.Yes we do need Positivemoney style proposals for sure.

          • James Murray

            But again, dear RJ, your supposed ‘new’ money would be funded by a Govt deficit, and therefore by issuing loan bonds which are bought by the financial markets.
            On these the Govt would perforce have to pay interest, and eventually have to find the money to buy them back on their day of redemption.
            By issuing sovereign money the Govt does not pay annual interest and there are no redemption costs.
            But you know this and ignore it in your so-called ‘explanations’.

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