Central Banks and Gold: How Tokyo, London, and New York Shaped the Modern World

Abstract

Japan's victory over China in the 1895 Sino-Japanese War paved the way for Japan to play a major role in international finance. Japan made China pay an indemnity (7.5 million kilograms of silver) in London in pounds sterling, directly convertible to gold. The Chinese deposits in the Bank of England allowed Japan to adopt a gold standard and gain access to international capital markets. After the establishment of the Federal Reserve System in 1914, central bankers in London and New York City cooperated with their Japanese counterparts to maintain Japan's role in the international economy. Moreover, the authors argue, the cooperation of the central banks of Japan, the United States, and the United Kingdom continues to this day to manage the distribution of the world's monetary gold reserves; they overlook the International Monetary Fund and China. They base their argument on Bank of England accounts of Japanese deposits, the largest of any country until 1914. During World War I, the importance of Japan's accounts led the bank's officials to pay close personal attention to Japanese officials, creating collaborations that continued. The correspondence of the Federal Reserve Bank of New York governor Benjamin Strong Jr. and his close friend, the Bank of England governor Montagu Norman, throughout the interwar period shows that Japan's finance ministers were also key figures in the central bank cooperation nurtured by Norman until World War II. As evidence that Japan's gold reserves played a central role in the global finance of this period, the author's show that each of the major international crises—in 1907, 1920, and 1929—appeared in Tokyo three to six months before appearing in New York City and London.