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A fine exemplar for the new Fed Chairman

January 11, 2006

In a speech given two years ago, Chairman-elect Bernanke enthused that:

"Finance Minister Korekiyo Takahashi brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930s, while President Franklin D. Roosevelt's reflationary monetary and banking policies did the same for the United States in 1933 and subsequent years. In both cases, the turnaround was amazingly rapid."

We know all too well about FDR's malign influence, but Takahashi is also well chosen as a role model for "Blackhawk" Ben.

Known as the "Japanese Keynes" (though perhaps Keynes was the English Takahashi!), he was once heard to muse that:-

"...the state was not something separate from the self. The state and the self were the same thing."

Once in office, he abandoned gold; dramatically expanded fiat issuance; closed off capital flows; encouraged the central bank to monetize government debt directly and hence financed Japan's growing militarism — an act only partly redeemed by his belated resistance to the latter which resulted in his 1936 assassination.

All of this may have brought a temporary reflationary boom — thus earning Bernanke's breathless encomia — but it assuredly paved the way not only for Japan's crushing defeat in war, but also for the disastrous hyperinflation of the 40s. 

In late 1929, well before the 'paradox of thrift' became the inflationists' watch-word in the West, he wrote:-

"If someone goes to a geisha house and calls a geisha, eats luxurious food, and spends 2,000 yen, we disapprove morally. But if we analyze how that money is used, we find that the part that paid for food helps support the chef's salary, and is used to pay for fish, meat, vegetables, and seasoning, or the costs of transporting it. The farmers, fishermen, and merchants who receive the money then buy clothes, food, and shelter. And the geisha uses the money she receives to buy food, clothes, cosmetics, and to pay taxes."
"If this hypothetical man does not go to a geisha house and saves his 2,000 yen, bank deposits will grow, but the efficacy of his money will be lessened. But he goes to a geisha house and his money is transferred to the hands of farmers, artisans, and fishermen. It goes in turn to various other producers and works twenty or thirty times over. "
"From the individual's point of view, it would be good to save his 2,000 yen, but when seen from the vantage point of the national economy, because the money works twenty or thirty times over, spending is better."

Not just a pre-emption of Keynes (and here we recall Hazlitt's devastating verdict on the truth and originality of the "General Theory") but it also sounds exactly like a fore-runner of Bernanke's ludicrous "savings glut" hypothesis!

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