Abstract
Employing the Japanese case of large-scale black markets under extensive price controls during and immediately after World War II, we first explore how much income leaked out of the formal economy into the black markets. Then, we investigate the extent to which the circulation of Bank of Japan (BOJ) notes helped the leaked income to flow back into the formal economy when the notes were held as an instrument to conceal illicit income by the black marketeers. According to our estimates, 6–30% of national income leaked into the black markets in the above period, while more than 40% of the leaked income returned to the treasury as massive seigniorage revenues in the last years of the war. Inflation was not too high during the war because of the black marketeers’ strong money demand. After the war, however, the black marketeers shifted their portfolios from BOJ notes to physical assets and land, thereby reducing their money demand and accelerating inflation. We also demonstrate that the black markets helped to reserve scarce physical resources for the post-control economy starting in the late 1940s.
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Notes
- 1.
While many papers, including Rockoff (1984) for the US and Williams (1945) for non-US countries, point out that extensive price controls triggered the emergence of black markets, little research has been done in terms of economy-wide interactions between the formal economy and black markets.
- 2.
See Frey and Pommerehne (1982), Feige (1989), Schneider (2005), and Georgiou (2010) for a survey of this field.
- 3.
In the context of the Japanese national accounts, Mizoguchi and Nojima (1993) and Mizoguchi (1996) informally state that the presence of black markets was responsible for largely positive statistical discrepancies in the postwar EPA national accounts (EPA, 1964).
- 4.
In addition, econometric studies, including Gartaganis and Goldberger (1955) and Adams and de Janosi (1966), point out that statistical discrepancies in peacetime periods reflect various kinds of measurement errors.
- 5.
The description in this subsection is based mainly on Nakamura (1974, 1983).
- 6.
See column (1) in Table 5.
- 7.
Nakamura (1983) describes in detail the legislation process of economic controls for the years 1937–1945.
- 8.
Mizoguchi (1995) reports the black-to-official market price ratios of several consumption goods for the first quarter of 1944; for example, 7.45 for rice/wheat, 3.12 for vegetables, 4.73 for fish, 5.25 for meat, and 5.56 for seasonings.
- 9.
As Morita (1963) explains, the effective wholesale price index was computed as the nominal amount of transactions by drafts divided by the quantity of commodity transactions, while the effective retail price index was computed as the nominal amount of transactions by cash divided by the quantity of commodity transactions. While these effective price indexes (the Morita indexes) were recognized as far from perfect measures among experts including even Yuzo Morita, there was no alternative to the Morita index as a measure of wartime transaction prices.
- 10.
Before most final and intermediate goods were regulated heavily by the PCO in 1939, the BOJ official price indexes included not only regulated prices, but also unregulated ones. Thus, the BOJ’s official price indexes and the effective price indexes (the Morita indexes) were close to each other under price controls in the late 1930s.
- 11.
The BOJ provided funds to the private banks, which in turn used the public bonds as collateral at the BOJ. Because the lending rate charged by the BOJ was lower than the yield on the long-term public bonds, the private banks were willing to purchase the public bonds by receiving inexpensive credit from the BOJ.
- 12.
Japan suspended the gold standard in December 1931, but the outstanding BOJ notes had been constrained by the amount of specie reserves up to January 1942.
- 13.
When the PCO was enacted in 1939, house rents were heavily controlled, but the prices of housing and land were beyond the scope of the order. In 1939, newly built houses were targeted by the price controls, but secondhand homes were not. Consequently, the owners of secondhand homes had a strong incentive to sell their houses instead of renting them cheaply. According to Ono (2007), old houses were traded actively as a type of speculation in black housing markets during the years 1943 to 1944.
- 14.
Most of the public bonds were issued as uninscribed during and immediately after the war, but their coupons and principals needed to be cashed at financial institutions where identification of bond holders was required.
- 15.
More precisely, the government officially announced the EFM on the evening of Saturday, 16 February. The measure included the following provisions. First, old bills would cease being legal tender after 2 March. Second, the deposits at financial institutions using old bills could be made until 7 March (later revised to 9 March). Third, withdrawals from deposits using new bills were severely restricted; that is, deposits were effectively frozen.
- 16.
In December 1945, the government suggested that the BOJ might collect old bills in exchange for new bills. Surprised by the intention of the government and the BOJ, major illegal dealers rushed to trade any cash on hand for physical materials and food, and they in turn refused to sell their inventories for old bills. Consequently, a substantial portion of the black markets disappeared until the exchange for new bills was completed in March 1946.
- 17.
The EPA (1964) reports the accounts of 1946–1951 in terms of a fiscal year.
- 18.
Ohkawa et al. (1974) construct the Japanese national accounts for the years 1885–1940. Fukao et al. (2015) present a more comprehensive version of the Japanese national accounts for the period 1874–2008. Jean-Pascal et al. (2016) present a brief history of the Japanese national accounts.
- 19.
According to Yamamoto (2011), France, England, Finland, Germany, Norway, and Spain follow the same method used currently by the Japanese government. In Canada, the United States, and Australia, however, corporate income is aggregated from corporate accounting data together with corporate tax return data. Fujiwara and Ogawa (2016) compute recent aggregate corporate income from tax return data for the Japanese economy.
- 20.
Hattori and Oguro (2016) estimate the amount of seigniorage revenues generated from direct underwriting of Japanese public debts by both the central banks in the colonial territories and the reserve banks in the occupied territories. Chapter “On Large-Scale Monetary Operations in the Japanese Occupied Territories During the Pacific War” analyzes in detail how the war expenditures in the Japanese occupied territories were financed through the colonial central banks and the local reserve banks during the Pacific War.
- 21.
In an informal memo, Yasushi Iwamoto proposed the method by which the 1945 value of nominal GNE is computed.
- 22.
Miwa (2015) reports the cases of inefficient rationing, which was induced by the Material Mobilization Plans. According to the USSBS (1947), the Japanese government was never able to establish an efficient overall control of rationing and prices, and to crack down effectively on illegal transactions in comparison with the US Office of Price Administration.
- 23.
As described in Sect. 4.2, additional money demand from the black markets is equivalent to the minimum value of the statistical discrepancy by construction.
- 24.
As reported in Mizoguchi and Nojima (1993), real GDP peaked at 7.7 trillion yen (1955 constant prices) in 1942 during the war, while it exceeded 7 trillion yen in 1952 and reached 8.3 trillion yen in 1955.
- 25.
Kosai (1986) suggests that scarce physical resources, which had been retained in the formal and informal sectors during the war, and unexploited for the postwar reconstructions, contributed to economic growth starting in the late 1940s.
- 26.
Leff (1964) presents a case in which bureaucratic corruption, often involving illegal transactions, may make a military-oriented government more friendly to business, but create vested interests among those in a ruling class, whose elimination requires a new center of power outside the bureaucracy. Interpreting the Japanese experience along the lines of Leff (1964), the wartime and postwar black market transactions helped to reallocate at least partially scarce resources from military purposes to civilian purposes, whereas their adverse effects were eliminated, though not entirely, by the postwar democratization promoted by the new government and the occupation forces.
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Saito, M. (2021). Central Banknotes and Black Markets: The Case of the Japanese Economy During and Immediately After World War II. In: Strong Money Demand in Financing War and Peace. Advances in Japanese Business and Economics, vol 28. Springer, Singapore. https://doi.org/10.1007/978-981-16-2446-9_2
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