The Origin and Spread of Investment Credit Economics

1 The origins of Investment Credit Economics in the USA

1938: The USA under Franklin Delano Roosevelt (FDR) creates investment credit at the Federal Deposit Bank and canalises it through the US banking system to industry to help fund the goods and services required to win the Second World War.

1938-1944: The US economy doubled in size (from about one trillion dollars to about two trillion dollars (2005 prices) http://en.wikipedia.org/wiki/File:US_GDP_10-60.jpg thus growing at an average rate exceeding 12% a year between 1938 and 1944 and becoming the first economic miracle economy.

1945: FDR died on April 12. Harry S. Truman became the 33rd US President and halted the process of investment credit funding for industry.

2 The transfer of Investment Credit Economics to Japan

Late 1945: Mr (later Doctor) Osamu Shimomura visited the USA on the Japanese- American businessman Exchange Programme and studied how the USA achieved spectacular growth during wartime.

Early 1946: Osamu Shimomura persuaded Mitsubishi that Japan can grow rapidly to equal the West by adopting Rooseveltian Investment Credit Economics.

Late 1946: The Japanese Emperor granted an audience to Mitsubishi and Shimomura, who does not speak and spends all of the audience time with his nose pressed to the Tatami mat. Mitsubishi persuaded the Emperor about the validity of Rooseveltian-Shimomuran economics.

1946-1960: The Bank of Japan created investment credit through the Japanese banking system to rebuild Japan’s infrastructure and industries at the rate of over 15% of GDP pa.

1946-1960: Japan became an economic miracle, growing consistently at an average rate of about 10% pa.

3 Japanese Economists and the Theory of Investment Credit Economics

1961: Dr Shimomura presented his Model of the Japanese Economy and its equations to the joint meeting of the Japanese Economic Association and the Japanese Econometric Society. His presentation was then published under the title “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy) in Riron Keizaigaku, March 1961.

1961: Dr Shinohara published “The Secret of Accelerated Growth,” Tokyo, 1961.

1961: Professor S. Tsuru, writing in the American Economic Review in May 1961, on Growth and Stability in the Post War Japanese Economy, referred to the long-term credit granted by Japanese Banks by mentioning the Japanese government’s “gigantic industry-funding program ‘ aimed at specific industries and investment programs (sic)”. [See K. K. Kurihara, The Growth Potential of the Japanese Economy, p137.]

4 The spread of Investment Credit Economics to Taiwan and South Korea

1960s: Taiwan and South Korea, learning from their study of the Japanese example, adopted investment credit creation policies and their economies grew rapidly

5 A Key Interpreter Of The Japanese Economic Miracle

1971: Kenneth K Kurihara published The Growth Potential of the Japanese Economy [The John Hopkins Press, Baltimore, 1971] in which he explains and comments upon the Shimomura model of the Japanese economy as replacing the Keynesian saving-investment equilibrium condition with the equation

S+D = Is+Id

That is, Saving (S) plus Debt (D, equal to investment credit creation at the Bank of Japan) equals Is (Investment financed by saving) plus Id (Investment financed by debt). In plain words, the investment level of Japan is increased by credit creation at the Central Bank of Japan.

This equation replaces the classic Keynesian Savings-Investment equality with a more useful formula because the government of a country can increase the nation’s investment level (and hence its future growth and prosperity) through government policy to produce investment credit creation at the Central Bank. This produces a genuine supply side economics, but there are too many implications in that formula to pursue them all here.

6 The Rise of Chinese Economic Understanding

September 29, 1972: Normal diplomatic arrangements established between China and Japan.

1972-75: Chinese delegation visits Japan to study how Japan has developed so rapidly. Some Chinese economists plead with their Japanese counterparts to share with them the secrets of rapid economic development.

1976: China adopts investment Credit Economics.

February 1978: Chinese-Japanese Long-Term Private Trade Agreement concluded.

1979: Thatcher comes to power in Britain on the promise her government would reverse the UK’s relative economic decline.

1980: The Japanese foreign ministry on 31 August 1980 releases a press statement that “China will emerge as a tremendous economic and military power in the 21st century.”

1980: Chinese economic growth, accelerating from the mid 1970s, rose to an average rate of about 10% pa from 1980 to 2010.

7 Further developments

1982: The UK Chancellor (then Sir Geoffrey Howe) rejects the possibility of long term funding for British industry on Budget Day.

1982-1997: UK Conservative governments, while wiling to sell UK industries, continue to have no industrial policy.

1980-1988: Investment Credit Creation at the bank of Japan causes a runaway price spiral in Japanese property prices. At the peak of the rise in property prices, Japanese land and buildings appear to be worth more than all the property assets in the USA at Exchange Rate Values (ERV) and the land on which the Imperial Palace stands appears to be worth more at ERV than California.

1988: Japanese property prices collapse, starting the 1990s recession in Japan.

1998-2009: The Blair administrations continue Thatcherite policies that favour financial institutions without any industrial policy

2007: The credit crunch begins in August 2007.

2008-09: The credit crunch collapses parts of the US and UK banking systems, and both governments act to support the financial sector without taking any steps to ensure industrial recovery.

October 2008: The US Motor Industry appeals for government aid and eventually gets $75bn.

2009: Barack Obama became 44th President of the United States. He promises policies for “Main street not Wall Street” but fails to deliver these, probably because his advisors do not know how to do that.

2010: All British political parties offered deep cuts in government expenditure after the election without any consideration whatsoever of the merits of an investment credit policy to accelerate economic growth.

2010: China’s declared economic policy, in the light of the credit crunch, is to refocus on the growth of domestic markets. China’s economic growth rates before and after the credit crunch are, for the years ending March – 2007,12.1%; 2008, 9.1%; 2009, 9.2%; 2010, 10.5%; 2011, 9.2%.

2010-13: UK and US economists continued to exhibit their unwarranted complacency and utterly fail to understand the procedures that are producing the rise of several nations in Asia and the decline of Anglo-Saxon manufacturing industries. The collapse of the Anglo-Saxon economies and their economic decline and the takeover of most of their manufacturing base will continue for as long as economic stupidity prevails, or (as Lord Harold Lever of Manchester once put it) “as long as Anglo-Saxon economists continue to think within the wrong frame of reference”.

© George Tait Edwards 2013

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This post was written by George Tait Edwards