Shimomuran Economics: The No-Debt Investment Credit Creation Path to More Rapid Economic Growth

May 17, 2013 12:00 am Published by Leave your thoughts

1. Definition

An Investment Credit Economy is a nation in which the government practises high-growth Keynesian-Rooseveltian-Shimomuran economics by creating vast flows of credit at the central bank and canalising these through the banking system as low-repayment long-term low-interest-rate loans to private industry in all parts of the country, in order to enable a very high level of investment to meet an over-riding national government objective.

That better Keynesian-based (and initially FDR-practised) and Shimomuran-explained economic understanding and the political action based on that knowledge lies at the root of the very high growth in several modern economies because competent governments (that is, governments that understand investment credit economics) can act to increase the private investment level, economic growth rate and prosperity of their people through actions based upon that deeper knowledge of economic forces.

2. The three historically important investment credit economies

To date, there have been three historically important investment credit economies: the USA from 1938-44, Japan from 1946-75, and China from the mid-1970s to the present day. Franklin Delano Roosevelt’s USA invented investment credit creation to ensure the allies would win the Second World War, the Japanese copied that procedure from 1946 to restore Japan’s prosperity and ensure its emergence as a major industrial nation, and the Chinese from the mid-1970s copied Japan’s growth-accelerating procedures to bring about China’s modernisation and its long-term economic ascendency as the largest world economy.

The first investment credit creation (ICC) economy was the USA from 1938-44, when the FDR administration created credit through the Federal Reserve Bank to fund the industries that were producing the goods to enable the successful waging of the Second World War.

The USA during that period experienced miraculous growth, doubling the real size of its economy, growing at an average rate of 12.2% per annum within these brief six years (See ). The consequent great growth of munitions turned the US into the arsenal of the democracies and made the decisive contribution to winning the Second World War, as well as establishing the USA as the only post-war economic and military superpower in the second half of the 20th century.

The second IC economy was Japan, where the American wartime procedure of investment credit creation was researched by Mr (later Dr) Osamu Shimomura and copied by Japanese governments from 1946. (The then Mr Osamu Shimomura successfully persuaded the Japanese Emperor and Government, through the intermediation of Mitsubishi, that IC economics was the rapid route to recovery for the Japanese economy).

The “overloan support” from the Bank of Japan (BoJ) to the Japanese banks in order to fund private investment was estimated as 42% in 1946 – and Japan’s industrial recovery from devastation and Tokyo’s reconstruction from wartime bombing was so spectacular that some post-war visiting Western observers in Japan concluded that the war damage had been much less than had been previously estimated. The usual level of overloan support – that is, the percentage of loans and rediscounts from the BoJ to the banking system – ran at about 8% to 10% of GDP from 1950 to 1970, which increased the average Japanese private investment level by about 15% and increased Japanese economic growth by about 6.5% per annum and Japan grew rapidly to become a major industrial power.

The third historically important IC economy was and is China, which sent economists and businessmen to Tokyo after the Japanese-Chinese rapprochement of 29 September 1972 to discover how Japan had grown so rapidly.

These Chinese visitors begged their hosts to share with them the secrets of high economic growth, as the Economist at that time commented but never followed up. It is not clear whether the Japanese did advise the Chinese about the IC route to rapid growth or if the Chinese delegations worked it out for themselves. What is indisputable is that Deng Xiao-P’ing’s China learned the lessons of Japanese growth so well that the Japanese Foreign Ministry on 31 August 1980 was moved to comment that ” China will emerge as a tremendous economic and military power in the 21stcentury”.

3. The Two Keynesian Keys to Understanding Investment Credit Creation

Keynes made two towering observations about investment credit creation. The first is in what is usually called the General Theory.

“While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (Book 6, Chapter 24, Section 2, p. 376).

The second great insight was his statement that savings can be created to fund investment prior to the returns which justify them.

These Keynesian observations have been applied in turn in all of the three historically important economies: in the USA from 1938-44 in order to ensure that American industry could supply everything required by the war effort; in post-war Japan in order to recover from wartime devastation and to establish Japan as a leading industrial and mercantile nation; and in China to ensure Deng Xiao-P’ing’s objective of making China the pre-eminent industrial and military world power.

Franklin Delano Roosevelt did not think in slogans, but the guiding principle of his wartime administration after 1937 was that no investment required by the war effort was to be held up by lack of funds. He, through his administrators, during 1938-44 created investment monies for the war effort on a much greater scale than the war bonds and other wartime savings allowed, as the FED data clearly shows. The massive created credit was produced in the name of the people – and the ownership of these created funds was ascribed to the “savings of the people” – created in the name of the people of the USA although the people had no direct input into the process. That American tradition, of writing a counterpart entry against created investment credit as “the savings of the people” (although the people had nothing to do with the scale of the investment credit created) has been continued by Japan and China up to the present day. That tradition usefully misleads some simple-minded Western economists into believing that the Japanese had a truly amazing saving rate and that the Chinese people save over 50% of their income. Not the case – much of the funds responsible for miraculous growth in 1938-44 USA, in the Japan of 1946-75 and in China from 1975 to the present day are investment credits created by the central bank.

4 Investment Credit Creation in Post-war Japan

As Kenneth Bieda has said:

“The Japanese monetary policy, in fact, applied one of the Keynesian principles: saving does not have to precede investment in conditions where there is unemployment, but investment acts financed by bank-created money can precede savings.”

Kenneth Beida, The Structure and Operation of the Japanese Economy, John Wiley and Sons Australasia Pty Ltd, Sydney, 1970.

The calculations about the extent of the investment credit seem oddly based (and perhaps are intended to understate these loan volumes) because these percentage calculations are made as a percentage of the total year-end loans advanced by the banks. Growth or decline in an index is usually calculated by dividing the year-end position by the start of the year.

Calculating the credit created as a percentage of the year-end total significantly understates these numbers, as illustrated below.

As Kenneth Bieda calculates on p 143 of the above-mentioned book, in his Table 6.4 Credit Creation by the Japanese Banks, the extent of the overloan (or the Bank of Japan loan and discounts to the Banking System) was 42% in 1946, 32% in 1947, 22% in 1948, and 16% in 1949. The overloan as a percentage of the original start-of-year net loanable bank funds (assuming no credit creation in the banking system) would have been 42/(100-42) or 42/58 or 72.4%. That is, the BoJ loans to the banking system during the year were 72.4% of the original funds, and 42% of the total funds in the system at the year-end. No nation has ever saved 72.4% of the loanable funds in its banking system in any year – the only possible source of these funds is created credit at the BoJ. As soon as things are put this way, the scales fall from the eyes of even the most blinkered Western economists, who can see that in the devastated war-damaged economy of 1946 Japan, the “people” could not possibly save 72.4% of the loanable bank funds during the first post-war year. And even if by some miracle they had, could they possibly “save” 47% of these expanded funds in previous year bank deposits in the following year of 1947, 28% in 1948 and 19% in 1949? The compound growth rate in total Japanese bank loans was 39.6% per annual from the beginning of 1945 until the end of 1951, when total bank loan funds were 5.29 times the original funds. The only source of that great financial asset growth was BoJ credit creation.

Investment credit loans look exactly like any other source of finance for business – once these credits are created, they exist in the financial system on an equal basis with any other source of funds. After these loans move from the BoJ into the secondary banks they are quite indistinguishable from other money. The important issue about created credit is not its origin but its effects, and the likelihood of its repayment as required. Bank loans, however originated, have a real value if they are repaid as required by their repayment schedule and have no value if they are defaulted. The vital issue about any loan is the likelihood of its repayment schedule being fully honoured, as required by the lender and as agreed by the borrower. Paper wealth and economic wealth is created if the loans result in investments that produce real wealth and are repaid out of genuine growth. Nothing else matters as much.

5 The Major Purpose of the Financial System

The most productive bank loans are business loans made to provide investments to enable increased output, because only these investments are being repaid out of a real growth in output. Most bank lending to households acts to increase demand, except in the Keynesian special case of a depressed economy. The lending to households requires that these homeowners can repay these loans out of the income from employment, and if the economy does not provide adequate employment, then many loans to households may be (and have been) defaulted upon. Mortgage borrowing is not “as safe as houses” if the householder, or many householders, loses his or her job or their jobs because the economy is contracting. Houses may lose part of their value when that happens. Government borrowing is usually used for revenue purposes and if the economy does not blossom then government revenue spending just increases economic demand. Even governments discover the limits of their loans because sovereign debt may be defaulted upon if the repayments become unaffordable, often because tax receipts are too low. The direct or indirect speculation by bankers on temporary trends – on rises in property prices, commodity prices or stock or bond market values or derivatives – does not increase national output at all, although it may increase the bankers’ share of national output, at least until the trend turns. Recent experience teaches that bankers lending to one another to speculate upon economic trends are obviously the most dangerous loans of all.

Only enterprises (whether private or public) can expand production by higher investments in productive plant and machinery and thus only they can repay investment credit bank loans out of an increase in real output. Only increases in activity in industry and commerce add to the real wealth of a country. All the rest is gambling, and that gamble is at best an indirect bet on long term national economic stability at worst or economic growth at best, with loan repayments made in future out of a share of existing incomes or future wealth creation.

In developed economies where the education level is adequate, investment credit creation works better than any other growth-accelerating procedure because industrial and commercial investment increases the economic production capacity and the real wealth of a country. The entire debt pyramid of household and government debt is almost entirely supported by the economic activity of businesses, which provides employment income to households and taxes for government in the form of income tax and purchase taxes (eg in the USA) or VAT (in Europe).

If the wealth-creating foundation of the nation falters due to inadequate funding for investment in production, the entire debt pyramid is at risk of collapse. This is not a theory but an observation based on the recent experience of the Western economies. Loans are only safe where the repayment of the interest on the loan is very likely. In that light, businesses loans, funding commercial and industrial company investment, are the most productive loans of all.

It used to be difficult to explain the government policy of investment credit creation to British economists because in general they did not understand it, but the credit crunch and its aftermath of quantitative easing have made such explanations much easier.

As I have advised the Governor of the Bank of England, the current British Prime Minister for several years, and his predecessors since 1979, the secret of high economic growth is investment credit creation at the central bank – quantitative easing with a direction to the domestic banks that the additional credit provided will be used solely as long-term loans to private companies for investment purposes.

Investment credit creation enables private commercial and industrial firms to have

1 The high levels of liquidity (typically about 30% of GDP) that act as a foundation to business confidence

2 The necessary funding to afford both high levels of plant and equipment investment and the high stockholding that finances lengthy supply chains to foreign consumers and avoids the over-trading route to bankruptcy

3 The funding of production, product and market research that constantly re-informs business activity and adds dynamism to product changes and development

4 The continual updating of productive plant and equipment in the factories and service areas to produce either high-quality goods embodying technological progress both in the production process and in the final finished goods, or an excellent service based upon better equipment providing a continually updated service, infrastructure and consumer information.

5 The basis of trust between government, major banks, and production and service industries that acts as the essential foundation for long-term economic development in the interests of all the people, because everyone is acting in the national interest.

Or, to put it another way,

1 Businesses are confident when they have lots of money in the bank, because they can see a long-term future for their company, and they plan for that;

2 Plant and equipment investment can roar ahead, and high stockholding without much risk can be introduced, because these are both affordable;

3 Companies and the economy both exhibit much greater dynamism because there is higher market, product and production facility research because more rapid change (shorter product cycles, more frequent product innovation) becomes the order of the day;

4 Product and service excellence is thereby encouraged; and

5 A fruitful co-operation between government, banks and businesses provides a stable platform for rapid economic progress.

6 Supply and demand management

Furthermore, in an investment credit economy it is possible to selectively increase the income of companies without increasing the income of consumers by the same percentage. This occurs for several reasons: first, because businessmen have a high liquidity preference, and keep large amounts of money in the bank for prudential reasons; second, businesses only incur expenditure on major capital projects as quickly as that extra capacity can be put into place, and for large-scale projects this is usually a lengthy process; third, because capital investment involves a firm-to-firm payment and only a fraction of that payment is paid to workers as consumers. In an investment credit economy the Keynesian multiplier is much less than its theoretical value. It is an observable fact that during the rapid expansion of the Japanese economy from 1946 to 1971 Japanese living standards were only increasing at about 60% to 70% of the national growth rate (in other words, economic growth of about 10% per annum was usually associated with a growth in living standards of about 6% to 7% a year). Another reason for this result is that continually high investment is associated with much higher levels of capital withdrawal – machines that are only a few years old, much younger than the age of productive equipment still in use in less fortunate economies, is frequently written off and scrapped, because its replacement is justified by the much higher quality of the more modern computer-linked machine tools with embedded technological progress producing considerably better finished goods.

7 The costs and benefits of Investment Credit Creation (ICC)

ICC costs only a bit of reflection and appropriate political action based on a thorough Keynesian-based economic understanding.

A few sums can illustrate the enormity of the benefits.

In the UK, £200bn of ICC might result in a revenue return to the British Government of the average tax take on expenditure of about 42% of the cost of the investments made, plus the tax take on the extra output produced. That £84bn of revenue would solve the so-called £80bn “fiscal crisis” and the need for the misery-creating cuts in government expenditure would disappear.

So the costs are close to zero in the scheme of things, and the returns to entrepreneurs, to the people, to the government and the country are immense. It has often seemed as if Japan and China have an unlimited source of investment funds. They have, because they understand the wealth creation procedures inherent in Keynesian-Rooseveltian-Shimomuran investment credit economics.

It is an enormous tragedy for Britain and for all of its businesses and people that the British Government don’t appear to have a clue about how to run an investment credit economy. I have spent over four decades trying to tell British Governments and their advisors how to achieve much better economic development, but they do not seem to feel the need for their actions to become better advised. All of their economic advisors should do as Adam Smith did – learn from observing the high growth economies to discover what works – but British politicians and their advisors seem as a group to be too smug and too self-satisfied to do that.

8 The maximisation of warranted capital investments

Furthermore, if the interest rate on business loans is set equal to the best estimate of the lagged inflation rate, then the borrowed money becomes a counterpart of real resources, and the condition for the maximisation of long-run economic growth is met. This occurs because the real value of the original loan is being maintained, with the extra amount due to be repaid each year is set equal to the fall in the value of money in that year. The amount eventually due to be repaid is therefore equal to the real initial amount of the monies initially borrowed, and the consequent signal to businesses is that more real wealth must be created than the real value of the initial amount borrowed.

That policy maximises warranted capital investment and long-run wealth creation – nothing else does, so there is no better economic policy.

9 The national costs of economic stupidity

With the curious exception of the United States of America, no nation has ever understood and adopted investment credit creation and then abandoned it.

Developing nations grow at the high rate of up to 10% a year, growing through imitation, by the introduction of the well-proven and widely used technologies of the developed West. Western countries, by contrast, have to develop through innovation, which is a much more risky and expensive process. ICC can add about 1% to 2% per annum to the economic growth of developed nations due to the faster introduction of recent innovations and improvements in the long run rate of innovation engendered by ICC.

The entire relative economic decline of the United Kingdom from 1945 was unnecessary. If the post war UK government had paid attention to the emergence of the Keynesian-Rooseveltian economics in the USA 1938-44 experience and had copied it, as Japan did, then the UK would now be the largest economy in Europe and the ex-colonies of the British Empire, including the USA and India, would have a commanding presence on the world stage.

If Thatcher had adopted the modest proposals of the Grylls Group in 1980, UK economic growth would have ran at about 1% to 2% a year higher from 1982-2012, and the UK economy would be about 30% to 60% larger than it is – richer by between about half a trillion and a trillion pounds per annum – with a 2012 UK GDP of between two trillion and two and a half trillion pounds. The cost of the Thatcher government’s blindsiding of investment credit economics is clearly astronomical.

The economic stupidity of the Blair government reduced the economic possibilities of the UK for 11 years by about 1% to 2% of GDP- say 12 % to 25% of £1.5 tr, or a reduction of current UK GDP of between £180 billion per annum and £375 bn per annum.

The probably short-lived premiership of Cameron and the five years of economic misery inherent in the current Coalition government programme will be responsible for an economic decline of about 5% to 10% of GDP plus the 1.4% calculated by the OBR – a reduction of at least somewhere between £100bn to £150bn a year lower than the ICC alternative.

10 An ICC View about Cameron’s Request for Chinese Funding of UK Atomic Power Stations

In the light of the above economic understanding, consider the appalling stupidity of David Cameron’s request to the Chinese leadership that China should consider funding Britain’s next wave of nuclear power stations. What he was actually saying to the Chinese leadership was “Look I don’t understand economics, but you do. I wonder if you could possibly get the People’s Bank of China to create credit for Chinese businessmen so that they could build atomic power stations in the UK, using our knowledge and local labour? Our consumers (who are already suffering from Thatcher’s sale of our utilities to foreign companies) could pay you for that out of future earnings, and of course we could share the nuclear technology with you and give you every assistance. Could you do that for me?”

Not wise.

11 Conclusions

11.1 The never-ending boom

The Americans need to relearn what they should never have forgotten – that Keynesian-Rooseveltian-Shimomuran investment credit creation economics can produce a continuing boom, as Keynes recommended should occur:

“The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

Book 6, Keynes’ “General Theory….” Chapter 22, Section 3, p. 322

This is precisely what only investment credit creation can do, and investment credit economics holds out the possibility of this remedy coming to pass.

That result happens through the employment of the talents and skills of the people, through the flowering of private enterprise to produce the limitless growth inherent in technological progress embodied in entrepreneurial knowledge about the need for more up-to-date machinery in the factories and services of the country based upon the ever-increasing skills of the people, and producing the ever-increasing rise in living standards inherent in human ingenuity.

10.2 The Acceleration of New Investment through Investment Credit (IC)

The presence of IC enables new investments to be made earlier, not out the higher savings due to higher prices paid by the consumer, but out of the credit created by government policy for the benefit of the people and the government. Prices are therefore lower in an IC economy, because investment capital does not need to be saved in advance of the investment being made. Nor do past profits have to fund higher levels of stockholding, so the over-trading route to bankruptcy is solved for companies in an IC economy because investment credits do not simply fund capital investment and productivity growth but IC also improves business confidence by funding high levels of liquidity and high volumes of stockholding of finished goods.

ICC enables the continual modernisation of the buildings, plant and equipment in the factories and service industries of the economy. A continual upskilling of the people is require to produce, install, operate and maintain the more up to date plant and machinery in an economy which is continually at the moving frontier of technological progress.

Not least in that process is the required upskilling of the existing and future economists about the nature and ramifications of this freshly considered investment credit economics.

10.3 The Legacies to the Future

Borrowing-to-spend governments have a continual rise in government debt which may ultimately become unaffordable and produce a legacy of debt to the future. Investment credit creating governments leave a legacy of government assets to their descendant populations.

The CIA’s table on government public debt at the World Factbook confuses these two situations, by treating government credit creation at the central bank as if it was borrowing when it is not. To do that is to confuse the zero-real-debt rich credit-creating-to-invest nations (such as China and Japan) with the poor indebted borrowing-to-spend governments (such as Greece and Italy). (See ). I have written to the CIA, pleading for them to adopt a better system of recording government debts and assets, without success so far.

10.4 Make it New

The founder of the Chinese Shang Dynasty Tching Tang, who reigned 1766-1753 BC, was a

“‘model king who subordinated every passion and feeling to the good of his people. In time of drought he coined money so the people could buy grain, but there was no grain to buy ,,,until rain fell.”

Perhaps the earliest example of Keynesian practice. According to Ezra Pound, Tching wrote on the mountain, but perhaps more realistically is reported as having written on his washbasin, the eternal admonition to all progressives and innovators:


In an investment credit economy, everything can continually be remade more new. To all these who have read this article and understood its implications so far, let us work together to make it be so.


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This post was written by George Tait Edwards

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