Japan's 1930 Cross of Gold, Takahashi Korekiyo, and the Economics of War and Depression

Dear Reader,

Japan started the 1930s vulnerable to foreign economic crises. A growing population and limited natural resources, Japan depended on trade and its colonial interests in Korea and Taiwan. And then the Great Depression hit, and America's financial tsunami nearly swamped Japan. When Japan faced the abyss of the Great Depression, the man who pulled it back was not was not a general or an admiral. He was a Protestant samurai with a foreign education and a mind for markets. His name was Takahashi Korekiyo, the unintentional architect of the Japanese Empire. Takahashi was born in July 1854, the fateful year of American Commodore Matthew Perry's second trip to Japan when he opened the country to the world for the first time in two centuries. Two weeks before he was born, the Japanese Shogunate signed the deal demanded by the Americans. Born illegitimate, he was adopted into a samurai family from the Sendai domain. Perhaps fortuitously was educated at a school run by the Presbyterian James Curtis Hepburn.

His journey from those humble roots to the upper echelons of power is a testament to the new Japan of the Meiji Restoration, when reformers who feared Western domination and conquest after the humiliation of mighty China at the hands of the British in the Opium Wars, overthrew the Samurai government of the Shogun and restored power to the imperial family. It was a time for young Japanese men with grit, smarts, and ambition. As a teenager, he traveled to the USA, and after returning to Japan, he worked as a teacher before moving to government service. But it was in banking that he made his mark, rising swiftly. By the time the Great Depression hit, he had already rescued Japan from financial catastrophe once before during the fury of the Russo-Japanese War of 1904-05. Back then, he organized American and European loans to finance the Japanese victory over the Tsarist government of Nicholas II. Over the rest of his career, he served as the head of the Bank of Japan and then as Prime Minister (1921–1922), along with several stints in the national cabinet.

Before the 1930s, Japan was a functioning but young democracy experiencing growing pains, the only great power in Asia that could stand up to the Europeans. Men of talent could rise through the ranks, and Takahashi did so even though Christians were a tiny minority of the Japanese. After a distinguished career, he was called back to service in 1931 at the age of 77 and made finance minister for the fourth time. The Great Depression that began in America was global and steadily getting worse. As I wrote previously, January 1930 was a critical month in the USA, but for Japan, too. Takahashi was out of power when his country decided to return to the Gold Standard. According to the gold standard theory of the Great Depression, the severity and duration of the Great Depression were directly linked to how long countries remained on the gold standard. Nations committed to the gold standard were stuck in a deflationary spiral where they couldn’t print money freely or run large budget deficits without risking gold outflows and financial panic. They could not stimulate their economy as we would say today.

In the grand story of the Great Depression, Japan often fades from view, overshadowed by the Dust Bowl, American bank failures, and the German debt debates. But given all that was happening, how did Japan’s army have the financing to maintain its aggression in Asia after 1932? Takahashi. He was recalled as Minister of Finance in late 1931, and he took Japan off the gold standard. Takahashi boldly reversed course. By taking Japan off the gold standard in December 1931, he allowed the yen to depreciate, which helped boost exports. More significantly, he launched a sustained fiscal expansion program, public spending funded by direct borrowing from the central bank.

Now this was a risk, and his deficit spending turned what had been a small budget surplus in 1931 into a substantial deficit by 1933, amounting to over 6% of Japan’s gross national product. Takahashi’s strategy stands out precisely because it was executed at a time when other industrial nations remained cautious or constrained. The United States would not embrace large-scale government spending until years later. Britain and France were stuck. In contrast, Takahashi, old but experienced, insight gained by his long tenure as a major player and a pragmatic reading of the moment, acted decisively. Public investments matched with improvements in trade boosted Japan beyond its competitors. Takahashi saw the way out.

However, the downside was the Depression, and the earlier adherence to the gold standard turned many against the politicians. They would not long reap the rewards of the innovative economic strategy. Democracy was undermined, and the army maneuvered to break free of civilian restraints using the economic decision before Takahashi’s return as an excuse. As Japan’s democracy was being subverted, its economy was recovering faster than Germany, faster than America. But it is a sad retrospective. It was to be the end of Taishō Democracy, a cautionary story that should be better known in the West. At the moment when Japan seemed on the verge of pluralism and reform, the Depression cut it short, and the country bent catastrophically toward authoritarianism. It was never inevitable, but it reminds us that democratic openings, if not defended and deepened, can be brief indeed.

Before Japan’s descent into militarism in the 1930s, the country experienced a significant experiment in representative government, the previously mentioned Taishō Democracy, named after the Taishō Emperor (1912–1926), father of the more famous Hirohito, now known as the Showa Emperor. This period marked Japan’s earliest engagement with liberal democratic ideals—an effort to blend a constitutional monarchy with party politics in a rapidly modernizing society, with the United Kingdom as the model. It was working; it was this system that allowed a Christian like Takahashi to become prime minister. During this era, political parties gained real traction, with cabinets increasingly formed by party leaders, freely chosen. When universal male suffrage was passed in 1925, it nearly quadrupled the number of voters at the 1928 elections. Newspapers, labor unions, and advocacy groups multiplied, engaging in debates over industrial policy, internationalism, and the direction of Japan’s development. The Depression and gold standard controversy killed it. Takahashi saved the economy, but what he did not foresee was that the benefits would not accrue to the democracy he served.