What Did North America Take with It?

In 1925, then Chancellor of the Exchequer Winston Churchill, despite being heavily criticized by a certain economist, returned Britain to the gold standard. What about now in 1942?

Churchill said, "What on earth are you talking about? The situation has changed!"

- ほうこうおんち

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"Let's talk about the gold standard."

It was a topic that seemed out of place on this isolated island in the Arctic Ocean.

"Mr. Matsuoka, let me introduce you. This is John Maynard Keynes. Have you heard of him?"

"Nice to meet you. It's an honor. I've read your papers."

Keynes was a scholar known only to a select few at the time, compared to later generations. However, bureaucrats like Matsuoka, who were involved in economics and distribution, sometimes reviewed academic papers published in various countries. By 1935, Keynes' A Treatise on Money had been translated into Japanese and published.

Matsuoka had also read A Treatise on Money, so he was surprised to see its author all the way in the Arctic Ocean. He had heard that Keynes had just returned to the Treasury after recovering from an illness. Matsuoka couldn't fathom how serious Britain was about this, to even bring someone like Keynes here.

Keynes was opposed to the gold standard and advocated for a managed currency system. Having read his works, Matsuoka was aware of the issues with the gold standard. The amount of currency was limited by the amount of gold held, making it impossible to implement inflationary policies, which were crucial during the recent economic crisis. Thus, in 1931, Britain was the first to abandon the gold standard, and by 1937, with France being the last, all countries had done the same.

However, Matsuoka's question was: "If Britain prints too many pounds, wouldn't the loss of confidence lead to a revival of the gold standard?"

To this, the professional economist replied: "The world may want to return, but it cannot go back to the gold standard."

"Take a look at this data on how much gold exists in the world right now," Keynes said, showing the gold reserves in tons held by various central banks.

The gold holdings of various countries in 1939 were as follows:

- Britain: 1.777 tons

- France: 2.666 tons

- Germany: 133 tons (plus 500 tons obtained illegally)

- Japan: 608 tons

- United States: 19.543 tons

As a bonus, there were 191 tons in Canada.

"........."

Matsuoka was aghast. Although the Soviet Union was somewhat of an unknown and thus excluded from consideration, the fact remained that nearly 80% of the world's gold had vanished and was not returning. Indeed, trying to return to the gold standard would be impossible due to the sheer lack of gold. There was too little gold to guarantee a reasonable amount of paper currency.

"There's a reason why Germany has so little gold," Keynes explained.

Germany had 810 tons of gold immediately after losing World War I. But at that time, Germany was facing a severe food crisis. It was said that people were "holding gold coins in their mouths as they starved to death." Burdened with massive reparations by the Treaty of Versailles, Germany had nothing else to pay with and thus used its gold.

"This reduced Germany's gold reserves, but as you know, Germany isn't particularly struggling now."

During the Weimar Republic, Germany returned to the gold standard but suffered under the block economy implemented to solve the subsequent financial panic. Hitler abandoned the gold standard and managed the currency supply domestically. Prior to this, he also halted the excessive reparation payments and prevented the outflow of the national currency.

"The abandonment of the gold standard and the transition to a managed currency system, along with the inflation that arises from issuing large amounts of currency—I understand all of that. If a government mistakes itself for an alchemist and endlessly prints currency, that would be the government's responsibility. However, there are other reasons for a government to issue large amounts of currency, such as payments to foreign countries. Germany's massive reparations are one example. There are also other reasons for money games. The Nazi Party banned money games. That was necessary. And the players of those money games have also vanished, along with North American."

Financial firms like Goldman Sachs, Morgan Guaranty Trust, Graham-Newman Partnership, and Capital International disappeared along with the physical Wall Street. Investment firms vanished. While this meant that large capital could no longer be obtained, it also meant that dividends no longer flowed out to America.

"But don't such companies exist in Britain as well?" Matsuoka asked.

Britain had financial powerhouses like the Rothschild family (London branch) and Man Group.

"It's complicated..." Keynes explained.

The United States had vanished along with its massive gold reserves and the capital based on them. Currently, there is a global shortage of capital. To increase capital without causing currency inflation, value had to be assigned to the currency. Until now, the value of currency had been guaranteed by gold. Breaking away from that and guaranteeing value based on national credit was the essence of Keynes' monetary theory. To enhance value, some level of speculation might be necessary.

"Futures trading (derivatives) and margin trading have existed for a long time. It's not possible to outright ban them now. However, if they remain within the country and do not allow wealth to flow out to foreign currency zones, they can be controlled. Excessive speculative gambling (money games) must be regulated."

That much was understandable. But what about Britain's proposal?

"Therefore, the Japanese yen should align with the British pound, fix the exchange rate, and coordinate the issuance volume."

Britain's argument was as follows: Japan had already suspended the gold standard during World War I and stopped currency exchange. This was a measure in anticipation of returning to the gold standard after the war, but post-war economic turmoil, including the Great Kantō Earthquake, caused the value of the yen to plummet. Efforts were made to raise the exchange rate of the devalued yen, but the currency's volatile value made it a target for speculative games. There were movements to return to the gold standard by devaluing the yen and stabilizing its value, but...

"Devaluing the yen would signify a decline in national strength and be a national disgrace."

This emotional argument, stemming from a lack of understanding of finance and exchange rates, had prevented such actions in the past. Furthermore, returning to the gold standard would mean reducing the currency supply to match the nation's gold reserves.

Neither the Army nor the Navy wanted this. For military operations, they desired an active fiscal policy—massive military spending—which required loans from speculators and others. This led to an excessive currency supply, an inflationary state, and triggered the Shōwa Financial Crisis.

At that time, Finance Minister Kataoka had declared: "Today, around noon, Watanabe Bank finally collapsed. This is truly regrettable..."

He announced the collapse of a bank that was still operating, causing widespread panic. This led to a rush of withdrawals. The amount of currency circulating in the budget and financial world far exceeded the actual cash in circulation for citizens' daily lives. In other words, currency circulated in the form of savings, government bonds, and financial products on a scale far beyond the cash needed for citizens' livelihoods.

'This is true in any world.'

To quell the bank run, an urgent supply of cash was needed, and even 200-yen notes printed on one side with a blank back were issued. This was purely due to Japan's small economic scale relative to its excessive currency supply, making it prone to widespread instability from minor incidents.

Then Britain proposed: "Why not join under Britain's umbrella and integrate economically?"

One solution to the problem was to return to the gold standard to stabilize currency value and supply, but 80% of the gold needed for that no longer existed anywhere in the world.

Keynes said, "Your country's financial policies are immature. The economic scale is small, and the nation lacks credit. The only commendable thing is the large number of public works projects undertaken by the state. How about it? Join the United Kingdom. With my guidance, Japan can become a much stronger country."

Indeed, if Japan were integrated into the British economy and aligned its fiscal policies with Britain's monetary and financial policies, Japan's economy would likely stabilize. The yen would be pegged to the pound, eliminating its volatility. However, this was essentially a demand for Japan to become a vassal state of Britain. Many emotional Japanese would not accept this.

Moreover, Matsuoka thought, 'Who can guarantee that Britain won't fail? Hasn't Britain itself caused financial panics multiple times?'

Matsuoka was not a plenipotentiary representative. He was merely a messenger. All he could do was listen to what was said and bring it back to his country. This wasn't a bureaucratic delay; he simply didn't have the authority to make decisions. His trip to the Arctic Ocean was for climate change research, and he was chosen as the government's liaison for data exchange. From the beginning of the talks, it was made clear that this was merely a casual discussion.

Neither Lord Halifax nor Keynes pressed for an immediate conclusion.

"No, no, we're grateful you've indulged an old man's ramblings," they said, concluding the meeting with Matsuoka.

The survey ship Chikushi would remain in the Arctic Ocean to continue its research. The scientists led by Uda would stay behind. Meanwhile, the icebreaker Sōya Maru would return to Japan for resupply. It would be replaced by the icebreaker Aniwa Maru, loaded with supplies, in a rotation.

Matsuoka would also return to Japan aboard the Sōya Maru, carrying a heavy burden of information...

As the bureaucrat in charge of data exchange and liaison, there was no further need for him to remain among the scientists. Supplies were limited, and unnecessary personnel were being sent home.

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"How was that Japanese fellow?"

Upon their return, Lord Halifax and Keynes reported to Churchill, who held entirely opposite views on Germany. Their perspectives on imperialism and the gold standard were completely at odds with Churchill's.

Churchill had never heeded Keynes' economic policy proposals. Yet, despite their differences, they were cooperating for the time being. It was Churchill who had orchestrated their mission to the Arctic Ocean.

"He was competent, but he had no decision-making authority. It remains to be seen how much of what we conveyed to him will take shape," Lord Halifax and Keynes assessed Matsuoka.

In response, Churchill laughed and said, "A person's value is determined by what happens afterward. The information we gave him will make him an important figure in Japan. By meeting with you, he will now be closer to Japan's decision-making processes. Let's skillfully manipulate from afar and bring Japan under control."

'To say a person's value is determined afterward—how rich coming from a man like you, a racist! Besides, that man didn't seem to swallow our arguments whole or lean pro-British. He won't be easy to handle. But doing nothing isn't an option either. We'll have to keep an eye on the future.'

Britain decided to watch Matsuoka's movements with a long-term perspective. The seeds had been sown, after all.

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Extra:

What about the silver standard?

Silver had been depreciating due to overproduction.

The "Niagara of Silver," a massive influx of silver from North America, caused chaos in the global market. In 1933, Britain's Pittman brokered the Silver Agreement, imposing restrictions on silver exports. Currently, while domestic silver movements are restricted and silver coins are circulated, it is unlikely that the world will return to a silver standard as it was in the medieval or early modern periods.

Incidentally, Mexico, often dismissed with remarks like "We don't need anything but the Gulf Stream," was also a significant silver producer. The Mexican silver dollar, once a prominent trade currency, is also a thing of the past and will not return.