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Why did Countries Adopt the Gold Standard? Lessons from Japan

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  • Kris James Mitchener
  • Masato Shizume
  • Marc D. Weidenmier

Abstract

Why did policymakers adopt the gold standard? Although previous research has identified ex post effects of gold standard adoption on trade and bond yields, few studies have sought to understand whether these were the actual outcomes of interest to policymakers at the time of adoption. We examine the political economy of Japan’s adoption of the gold standard in 1897 by exploring the ex ante motives of policymakers as well as how the legislative decision to adopt gold won approval. We then link the beliefs of contemporaneous policymakers to data so that we can test the economic effects of adoption. In contrast to previous studies examining bond yields, we find little evidence that joining the gold standard reduced Japan’s country risk or investors anticipated a dramatic decline in borrowing rates for the government. Moreover, we find no evidence of a domestic investment boom or that investors anticipated one and bid it into stock prices. However, as some policymakers suggested, we find that membership in the gold standard increased Japan’s exports by lowering transactions costs and because the price of gold fell relative to silver, making exports to silver standard countries more competitive. While Japan also received a boost in exports to its regional trading partners when it switched from paper to silver, going onto gold allowed Japan to tap into the growing share of global trade that was centered on the gold standard: by the late 1890s nearly 60 percent of Japanese exports and total trade were with members of the gold club.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15195.

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Date of creation: Jul 2009
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Publication status: published as Mitchener, Kris James & Shizume, Masato & Weidenmier, Marc D., 2010. "Why did Countries Adopt the Gold Standard? Lessons from Japan," The Journal of Economic History, Cambridge University Press, vol. 70(01), pages 27-56, March.
Handle: RePEc:nbr:nberwo:15195

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  1. Ferguson, Niall & Schularick, Moritz, 2006. "The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880 1913," The Journal of Economic History, Cambridge University Press, vol. 66(02), pages 283-312, June.
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  3. J. Laurence Laughlin, 1897. "The Gold Standard in Japan," Journal of Political Economy, University of Chicago Press, vol. 5, pages 378.
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  7. Maurice Obstfeld & Alan M. Taylor, 2003. "Sovereign risk, credibility and the gold standard: 1870-1913 versus 1925-31," Economic Journal, Royal Economic Society, vol. 113(487), pages 241-275, 04.
  8. Moritz Schularick & Niall Ferguson, 2005. "“The Thin Film Of Gold”: The Limits Of Monetary Commitments," Macroeconomics 0509009, EconWPA.
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  11. Sussman, Nathan & Yafeh, Yishay, 2000. "Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 442-467, June.
  12. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
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Cited by:
  1. Grossman, Richard S. & Imai, Masami, 2009. "Japan's return to gold: Turning points in the value of the yen during the 1920s," Explorations in Economic History, Elsevier, vol. 46(3), pages 314-323, July.
  2. Daniela Bragoli & Camilla Ferretti & Piero Ganugi & Giancarlo Ianulardo, 2013. "Monetary regimes and statistical regularity: the Classical Gold Standard (1880-1913) through the lenses of Markov models," Discussion Papers 1301, Exeter University, Department of Economics.

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