The following is my answer to a Quora question: “What
effect did Japan’s switch from the silver standard to the gold standard have on
the yen’s value against other currencies?”
We need to look at history to understand the parallel. Japan switched from silver to gold on 1st
October 1897. The move ended three
decades of yen instability against Britain, America, and every other major
trading partner already on gold.
Silver fell roughly 20 per cent against gold between 1873 and the
end of that decade alone, then kept sliding through the 1880s and into the
1890s as country after country abandoned it: Germany in 1873, most of Europe by
the late 1870s, Hungary in 1892, Russia in 1897. The yen, tied to silver throughout this
period, depreciated against the pound, the dollar, and every other
gold-standard currency in step with that decline. A Japanese importer paying for British
machinery, or the Japanese government borrowing from London, paid steadily more
yen for the same gold-priced good or loan, year after year, for over two
decades.
China’s 1895 defeat in the First Sino-Japanese War funded the
fix. The Treaty of Shimonoseki forced
China to pay Japan 230 million silver kuping taels, roughly £38 million,
or ¥356 million. Japan used that
indemnity to build the gold reserve backing its new standard. The gold yen was fixed at half the weight of
the US gold dollar, worth roughly 50 US cents, nearly identical to the silver
yen’s market value of 51 cents at the moment of transition. The switch cost nothing in relative value at
the point of conversion. It existed to
stop future losses.
It worked immediately. The
rate held close to two yen per dollar for the following three decades, until
Japan left gold again in 1931.
Exchange-rate risk against Japan’s major trading partners, Britain, the
United States, and the rest of gold-standard Europe, effectively disappeared
overnight. Finance officials such as
Korekiyo Takahashi pushed the move specifically to remove that risk, expecting
lower borrowing costs and stronger foreign investment as a direct result. Baron Eiichi Shibusawa, the leading
industrialist of the era, opposed the switch, arguing exporters had profited
for a decade from the weak silver yen.
The reformers won the argument, and the following three decades of
currency stability proved them right.
The Regional Story Matters More Than the Global One
China stayed on silver. It
remained the last major economy still using it, all the way through the First
World War and into the 1930s. That
single fact split Japan and its largest regional neighbour onto two different
currency paths from 1897 onward. The yen
stabilised against gold. China’s
silver-based currency kept depreciating alongside global silver for decades
longer. Japanese exporters and lenders
dealing with the gold-standard world gained a stability advantage over Chinese
counterparts operating in the same regional trade network, a structural edge
Japan converted into cheaper foreign borrowing and stronger foreign investment
inflows in the years that followed.
Slower Movement Costs More Now Than It Did in 1897
Japan’s population has been shrinking for over a decade, with
births falling to record lows and the workforce contracting every year that
follows. A demographic collapse this
severe needs monetary and fiscal policy willing to move as decisively as the
1897 government moved, not a central bank still debating quarter-point
increments while a currency crisis forces a joint intervention with Washington.
Japan proved in 1897 it could fix a
currency problem in a single legislative session when the political will
existed. It has spent the past three
decades proving the opposite: that caution, extended long enough, becomes its
own kind of failure, one a shrinking population has considerably less time to
recover from than a nineteenth-century economy still building its industrial
base.
Terence
Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The
Billionaire Cheat Code
