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Modern Japanese Financial History as Seen Through Its Currency

3-3 The Financial Panic of 1927

200enkin 50enkin

¥200 bill (front/back) ¥50 bill (front/back)

The financial panic of 1927 sparked widespread runs on banks as people hurried to withdraw their deposits. The consequent shortage of Bank of Japan notes led to the emergency printing of "white-back bills," which were Bank of Japan notes that were not printed on their back sides. The "white-back bills" were issued under a Ministry of Finance Proclamation of April 24th allowing "bills without printing on the back" and prescribing the formal requirements of the currency. A total of ¥1,022 million in ¥200 bills was printed, and at the peak more than ¥160 million of this was in circulation. The Bank of Japan began to collect these bills as soon as the panic had quieted, and by the end of the year only about ¥100,000 remained in circulation. A further ¥2.4 million in ¥50 bills was also printed, but never issued.

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      The 1920's saw several financial panics, including a post-World War I backlash sparked by worsening corporate results and, as a consequence, increasing rigidity in bank lending. The Bank of Japan responded to each of these panics with "special loan programs" (emergency loans to banks). The panic of 1927 sparked runs on a large number of banks, many of which were forced to suspend operations. The direct cause of the panic was a dispute in the Diet over how to settle the "emergency bill measures" that had been implemented after the Great Kanto Earthquake of 1923.
      The earthquake inflicted economic damage on large numbers of merchants and businesses, many of whom had issued bills prior to the quake that they were unable to settle afterwards. This in turn created cash flow problems for the banks holding the bills. The government therefore developed a program under which the Bank of Japan would re-discount bills listing the disaster area as place of payment or a merchant with offices in the disaster area as the debtor ("earthquake bills") and provide a two-year grace period for collection on those bills (this was given two subsequent extensions, adding a total of two more years to the grace period). The government promised compensation to the Bank of Japan for any losses sustained because of the program. At the end of 1926, there was a total of more than ¥200 million in unsettled "earthquake bills," of which ¥160 million had been re-discounted by the Bank of Japan.
      In January 1927, the government submitted an "Earthquake Bill Loss Compensation Bond Bill" and "Bill Regarding Settlement of Earthquake Bills after Normalization" seeking to issue government bonds to raise the money to compensate the Bank of Japan and other banks for losses on earthquake bills, thereby moving forward with final settlement. The proposed legislation sparked an uproar in the Diet because most of the "earthquake bills" were issued by a firm called Suzuki Shoten and were held by the Bank of Taiwan, and it was alleged that the government funds would be used to rescue specific corporations. During the course of the debate on March 14, Finance Minister Naoharu Kataoka casually remarked "The Tokyo Watanabe Bank has gone bust," inciting a run on the Akaji Savings Bank, which was closely affiliated with Tokyo Watanabe. Akaji was forced to suspend its operations, and the run spread to other banks as well.
      The panic was temporarily quelled by the passage of the "earthquake bill" laws and emergency lending from the Bank of Japan, but the next month, April, saw another series of runs, this time on the Bank of Taiwan and other institutions when it was learned that Suzuki Shoten and the Bank of Taiwan, which had close ties, were in serious trouble. The government recommended to the Privy Council an emergency proclamation that would cause the Bank of Japan to make emergency loans to the Bank of Taiwan, with the government compensating the Bank of Japan for any losses. The proposal was rejected, however, and the Bank of Japan did not make the loans. The Bank of Taiwan saw its cash flow worsen, and on April 18th suspended operations. The resulting bank run spread around the country, eventually causing 36 banks, including such majors as the Omi Bank and Jugo Bank to temporarily close their doors.
      To bring the situation under control, the government declared a two-day bank holiday beginning April 22, and a three-week moratorium on payments. During this time, the Bank of Japan made emergency loans to banks, including "special loans" that did not go through normal procedures. The Bank of Japan's lending balance surged from ¥200 million at the end of March to ¥2,100 million at the peak on April 25. Bank note issuing approximately doubled because of this, going from ¥1,360 million at the end of March to ¥2,660 million on April 25. Large volumes of bank notes had to be issued in a very short period of time so that banks could pay out deposits as requested by their depositors. Printing could not keep pace with this, and the Bank was forced to issue "white-back bills" as a stop-gap. The measure finally quieted the financial panic, and by May Bank of Japan notes in circulation had declined to ¥1,430 million.

Mari Ohnuki, Research Division 3, Institute for Monetary and Economic Studies, Bank of Japan
Monetary and Economic Studies 19(3), Bank of Japan, 2001

References
Akashi, Teruo and Suzuki, Norihisa, Nihon Kin’yu-shi (Monetary History of Japan), Vol. 1, Toyo Keizai Shimposha, 1958 (in Japanese).
Asakura, Kokichi, Nihon Kin’yu Tsu-shi (1) Meiji Taishohen (Financial History of Japan (1) Meiji and Taisho Periods), Nihon Keizai Hyoronsha, 1978 (in Japanese).
----, Shimpen: Nihon Kin’yu-shi (Revised Monetary History of Japan), Nihon Keizai Hyoronsha, 1988 (in Japanese).
Bank of Japan Research Department, ed. Zuroku Nihon no Kahei (Japanese Money), Vol. 8, Toyo Keizai Shimposha, 1975 (in Japanese).
Bank of Japan Centennial History Editing Board, Nihon Ginko Hyakunen-shi (The Bank of Japan: The First Hundred Years), Vol. 3, 1983 (in Japanese).
Tamaki, Norio, Nihon Kin’yu-shi (Monetary History of Japan), Yuhikaku Sensho, 1994 (in Japanese).
Yoshino, Toshihiko, Nihon Ginko Seido Kaikaku-shi (History of Institutional Reform at the Bank of Japan), University of Tokyo Press, 1962 (in Japanese).

Modern Japanese Financial History as Seen Through Its Currency
3-3 The Financial Panic of 1927

¥200 bill (front/back)	¥50 bill (front/back)
The financial panic of 1927 sparked widespread runs on banks as people hurried to withdraw their deposits. The consequent shortage of Bank of Japan notes led to the emergency printing of "white-back bills," which were Bank of Japan notes that were not printed on their back sides. The "white-back bills" were issued under a Ministry of Finance Proclamation of April 24th allowing "bills without printing on the back" and prescribing the formal requirements of the currency. A total of ¥1,022 million in ¥200 bills was printed, and at the peak more than ¥160 million of this was in circulation. The Bank of Japan began to collect these bills as soon as the panic had quieted, and by the end of the year only about ¥100,000 remained in circulation. A further ¥2.4 million in ¥50 bills was also printed, but never issued.
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The 1920's saw several financial panics, including a post-World War I backlash sparked by worsening corporate results and, as a consequence, increasing rigidity in bank lending. The Bank of Japan responded to each of these panics with "special loan programs" (emergency loans to banks). The panic of 1927 sparked runs on a large number of banks, many of which were forced to suspend operations. The direct cause of the panic was a dispute in the Diet over how to settle the "emergency bill measures" that had been implemented after the Great Kanto Earthquake of 1923. The earthquake inflicted economic damage on large numbers of merchants and businesses, many of whom had issued bills prior to the quake that they were unable to settle afterwards. This in turn created cash flow problems for the banks holding the bills. The government therefore developed a program under which the Bank of Japan would re-discount bills listing the disaster area as place of payment or a merchant with offices in the disaster area as the debtor ("earthquake bills") and provide a two-year grace period for collection on those bills (this was given two subsequent extensions, adding a total of two more years to the grace period). The government promised compensation to the Bank of Japan for any losses sustained because of the program. At the end of 1926, there was a total of more than ¥200 million in unsettled "earthquake bills," of which ¥160 million had been re-discounted by the Bank of Japan. In January 1927, the government submitted an "Earthquake Bill Loss Compensation Bond Bill" and "Bill Regarding Settlement of Earthquake Bills after Normalization" seeking to issue government bonds to raise the money to compensate the Bank of Japan and other banks for losses on earthquake bills, thereby moving forward with final settlement. The proposed legislation sparked an uproar in the Diet because most of the "earthquake bills" were issued by a firm called Suzuki Shoten and were held by the Bank of Taiwan, and it was alleged that the government funds would be used to rescue specific corporations. During the course of the debate on March 14, Finance Minister Naoharu Kataoka casually remarked "The Tokyo Watanabe Bank has gone bust," inciting a run on the Akaji Savings Bank, which was closely affiliated with Tokyo Watanabe. Akaji was forced to suspend its operations, and the run spread to other banks as well. The panic was temporarily quelled by the passage of the "earthquake bill" laws and emergency lending from the Bank of Japan, but the next month, April, saw another series of runs, this time on the Bank of Taiwan and other institutions when it was learned that Suzuki Shoten and the Bank of Taiwan, which had close ties, were in serious trouble. The government recommended to the Privy Council an emergency proclamation that would cause the Bank of Japan to make emergency loans to the Bank of Taiwan, with the government compensating the Bank of Japan for any losses. The proposal was rejected, however, and the Bank of Japan did not make the loans. The Bank of Taiwan saw its cash flow worsen, and on April 18th suspended operations. The resulting bank run spread around the country, eventually causing 36 banks, including such majors as the Omi Bank and Jugo Bank to temporarily close their doors. To bring the situation under control, the government declared a two-day bank holiday beginning April 22, and a three-week moratorium on payments. During this time, the Bank of Japan made emergency loans to banks, including "special loans" that did not go through normal procedures. The Bank of Japan's lending balance surged from ¥200 million at the end of March to ¥2,100 million at the peak on April 25. Bank note issuing approximately doubled because of this, going from ¥1,360 million at the end of March to ¥2,660 million on April 25. Large volumes of bank notes had to be issued in a very short period of time so that banks could pay out deposits as requested by their depositors. Printing could not keep pace with this, and the Bank was forced to issue "white-back bills" as a stop-gap. The measure finally quieted the financial panic, and by May Bank of Japan notes in circulation had declined to ¥1,430 million.
Mari Ohnuki, Research Division 3, Institute for Monetary and Economic Studies, Bank of Japan Monetary and Economic Studies 19(3), Bank of Japan, 2001
References Akashi, Teruo and Suzuki, Norihisa, Nihon Kin’yu-shi (Monetary History of Japan), Vol. 1, Toyo Keizai Shimposha, 1958 (in Japanese). Asakura, Kokichi, Nihon Kin’yu Tsu-shi (1) Meiji Taishohen (Financial History of Japan (1) Meiji and Taisho Periods), Nihon Keizai Hyoronsha, 1978 (in Japanese). ----, Shimpen: Nihon Kin’yu-shi (Revised Monetary History of Japan), Nihon Keizai Hyoronsha, 1988 (in Japanese). Bank of Japan Research Department, ed. Zuroku Nihon no Kahei (Japanese Money), Vol. 8, Toyo Keizai Shimposha, 1975 (in Japanese). Bank of Japan Centennial History Editing Board, Nihon Ginko Hyakunen-shi (The Bank of Japan: The First Hundred Years), Vol. 3, 1983 (in Japanese). Tamaki, Norio, Nihon Kin’yu-shi (Monetary History of Japan), Yuhikaku Sensho, 1994 (in Japanese). Yoshino, Toshihiko, Nihon Ginko Seido Kaikaku-shi (History of Institutional Reform at the Bank of Japan), University of Tokyo Press, 1962 (in Japanese).