This book investigates the financial fountainhead of modern capitalist development: inflationary credit creation. For empirical material, it uses the experience of Japan in the fifteen years after World War II, from the period of postwar recovery to the onset of “High-Speed Growth” in the second half of the 1950s. Japan’s High-Speed Growth itself was a hypercapitalist type of industrial development of tremendous intensity. This epoch-making innovation opened the current, Asian age of world industrialization.¹ The inflationary creation of credit by banks funded this industrial expansion, set its directions, and forced its pace. Credit-leveraged growth also has built-in insustainabilities, as reflected...

The twentieth century was the most inflationary century in history. This distinctive aspect becomes clearer as we leave the century further behind. Partly this had to do with the financing of great wars. Partly it had to do with the nature of modern capital creation. This book is mainly about the second question, but it is important to consider the first one as well. Major wars, in whichever country, are typically funded by major inflations. More precisely, newly created credit supplies the financial capital for war, as it supplies the capital for other forms of enterprise. This was true of...

After World War II, the thought leaders of the generation who directed economic reconstruction and stabilization looked back reflexively to the problems that had followed World War I, which they had witnessed in their youth. In Japan, several influential members of this generation had absorbed these lessons in postwar Germany itself. The experience of the defeated countries of central Europe thus has multiple levels of relevance to Japan’s postwar circumstances a quarter-century later.

Joseph Schumpeter’s Japanese students and translators were Nakayama Ichirō (1898–1981) and Tōbata Seiichi (1899–1983). They were part of a larger wave of young Japanese intellectuals...

The ideas advanced by Joseph Schumpeter are now enjoying boom times. His conceptions of entrepreneurship and innovation have had more influence in thinking about those subjects than those of any other scholar. Schumpeter pioneered the study of economic development and of technological “paradigm shifts,” and he is widely credited as a forerunner of the emerging field of evolutionary economics. But he is not thought of as a theorist of credit-supercharged high-speed growth. This is what he became in postwar Japan, for reasons described in the following chapters. At the heart of this understanding is Schumpeter’s conception of capital.

Capital in...

Schumpeter’s theory of capital focuses attention on the “two flows” of the economy: on the one hand flows of materials and energy and on the other flows of financial claims. Economic activity is “a combination of two unavoidable circulations,” Schumpeter wrote, “which express two irreducible forms of activity,” industry and finance.¹ Frederick Soddy also commenced from the starting point of flow, seeking to ground economic understanding in a physical conception of energetic flow. This view of human economy as energetic process leads in a still more heterodox direction, connecting to a stream of ecological-economic thought that is only recently coming...

As a consequence of the war, energetic and material flows were constricted to famine levels. Sources of basic materials were cut off, and transportation and supply infrastructure was in a shambles. Essential foodstuffs and other materials that did continue to flow increasingly did so through illegal channels. At the same time, the circulation of money was amplified and speeded up, as if a great commercial boom needed to be financed. The contradictory movements of these two flows meant an immediate inflation of prices and set off a series of systemic transformations.

Japanese industry was already in crisis by the time...

Was the postwar inflation caused by shortages or by overspending? This is the way the question was often posed; and even after the fact, the production-oriented Ministry of International Trade and Industry (MITI) and the funding-oriented Ministry of Finance tended to come down on opposite sides of it. In a retrospective survey of Japan’s postwar economy written in 1956, the chief of MITI’s Research Section thus explained that after the war, “the acute shortage of food-stuffs, raw materials, fuel, and electric power soon brought on a vicious inflation.” His counterpart in the Ministry of Finance emphasized instead that it was...

Wartime planning, succeeded by recovery planning, went far beyond the hitherto normal operations of capitalist markets. In Japan, the wartime control system came much closer—in detail—to the Soviet model of centralized planning than is generally realized. At the same time, it was also true that “the war was financed as an enterprise through the purchase of goods and credit operations,” as Schumpeter had said of World War I.¹ But this “enterprise” did not repay the social investment by returning goods to the social stream. It only consumed resources, while creating immense financial debts. The great inflation followed, driven...

The relationship between the state and the banking system constitutes a defining feature of a national political-economic system, with implications for many other things. The previous chapter described how U.S. authorities reversed political course in Japan and enforced a policy of credit-capital restriction in 1948–49. This chapter explains how Japanese financial authorities simultaneously preserved and consolidated the core financial circuits of Japan’s capitalist economy. It contextualizes that process within the historical stream of the development of Japan’s state-bank complex.

From the early 1940s into the 1980s, the Japanese system of industrial finance relied mainly on direct financing by banks....

It was Schumpeter, in Business Cycles, who first clearly conceptualized economic development as a succession of industrial revolutions, each based on a set of core technologies, organizational forms, and ideologies. His idea of coherent waves of industrial reorganization continues to provide a starting point for thinking about the succession of technological and organizational paradigms, regulation regimes, and other similar constructions. Schumpeter himself died in January 1950, but those who later developed this line of thinking mainly agree in finding the late 1940s and early 1950s to be a “Schumpeterian” turning point, with the solution of a long systemic crisis and...

Even inside Japan, the novelty of High-Speed Growth was theoretically underregarded. It still is underregarded by most Western analysts. In fact, it was the beginning of a new epoch in world industrial history. In the prior history of world industrialization, rates of increase in national production had never reached the level of double-digit annual percentage increases for more than a few years, and then only in the extraordinary circumstances of recovery from a war or comparable catastrophe. Knowledgeable people therefore expected economic growth to slow down as the nation exited the postwar recovery phase. Instead, beginning around 1955, growth accelerated,...

In 1963, flush with the spectacular overfulfillment of the Income Doubling Plan, Prime Minister Ikeda’s economic adviser Shimomura Osamu declared that when he heard commentators persist in describing Japan as a “lesser-developed country,” with its “dual structure” (e.g., Arisawa) and its “low wages” and “income gaps” (e.g., Nakayama), it reminded him of Hans Christian Andersen’s story The Ugly Duckling. “These people may be mistaking themselves for ducks,” he said. But Japan’s new style and pace of development had its own dynamic balance and its own norms. In a longer retrospect, what was now being revealed was a new developmental norm,...

Schumpeterian capital—credit-capital as the counterpart of innovation—can be described as prescriptive or prefigurative capital. This description highlights both its virtuality—its socially imagined quality—and its aspect as the willful calling into existence of new forms and productions. Questions of credit (“belief,” in its Latin root) and debt (“obligation”) are also questions of social and political power. Credits created by banks and entrusted to entrepreneurs act as “orders” on the economic system—this was another of Schumpeter’s basic points. He further compared this decentralized (or semicentralized) indicative process to the mandatory indicative process in a state-socialist system. Both...