Foreign Debt and The Gold Standard: Comparing Russian and Japanese Experience in Late XIX Century Ivan Medovikov

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1 Foreign Det n The Gol Stnr: Compring Russin n Jpnese Experiene in Lte XIX Century Ivn Meovikov Astrt The following work will exmine risk premiums on government et issue y Russin n Jpnese governments in the lte XIX entury ( ) n will ttempt to provie omprehensive ount of ertin fetures, ynmis n unerlying uses of the premiums, s well s to ompre these ttriutes for oth seurities. The stuy will then fous on the introution of the gol stnr y oth ountries in 897 n on its effet on risk premiums on government et present in the mrket t tht time. Sine the effets on Russin n Jpnese et were rinlly ifferent, I will ttempt to hypothesize on the uses of this ifferene n will lim tht they were lrgely use y the ifferenes in reit rting of the et prior to the introution of the gol stnr, tht is, y ifferent liquiity n efult risk, s well s y symmetri informtion. Introution The perio of time ommonly referre to s the lssi er of the gol stnr (lte XIX to erly XX enturies), s well s the stnr itself, it s uses, n implitions, hve reeive muh ttention in emi literture n hve een the fous of onsierle mount of reserh in the pst. Most stuies whih el with introution of the gol stnr, ttempt to evlute this mesure s merely tool of monetry poliy: it s implitions on infltion n therefore on investment n interntionl tre. Mny im to reonile hin of events n ount for eonomi ftors whih le to its introution. Only few ress its effets on government et n foreign orrowing. This topi thus seems reltively uner reserhe n is therefore ppeling. In the lte XIX entury Russi n Jpn, oth rpily eveloping n inustrilizing ntions, frequently resorte to foreign orrowing in orer to finne numer of omesti expenitures suh s rilro onstrution, n other nees of omesti inustry. These lons were ple in numer of mrkets, lthough in this pper I will only onsier government ons tre in Lonon. This perio in eonomi history is hrterize y the lmost unpreeente integrtion of worl finnil mrkets n very little rriers to pitl moility; therefore it woul not e unresonle to ssume tht onitions uner whih these ons were tre in Lonon woul previl elsewhere. Russin et, for exmple, ws truly glol in nture n ws tre in Lonon, ris, Amsterm, Vienn, Berlin n New York. 2 Jpn shortly efore the gol stnr After 250 yers of isoltion from the outsie worl n Tokugw Shogun ittorship, Jpn ws fore open in n ws foun in urious stte of things : gol ws rte s 8 /2 : of silver, n the erly rrivls took prompt vntge of the lrge ifferentil whih existe etween this n the worl prie of metls, whih ultimtely resulte in Jpn eing strippe out of her For exmple, see N. Sussmn, Y. Yfeh Institutions, Reforms, n Country Risk: Lessons from Jpnese Government Det in the Meiji Er, Journl of Eonomi History, Vol. 60, No. 2 (June 2000). 2 See Finnil Innovtion n Russin Government Det y Anrey Ukhov, Yle Interntionl Centre for Finne, Working per 03-20,

2 gol oins n ullion in just few yers. 3 The existing oinge ws theoretilly imetlli, ut prtilly monometlli: in 87 gol 20-yen piee ontining grins of pure gol long with yen oin were opte, long with irulting silver. The issues of epreite pper, however, prevente gol from irulting. 4 One mjor prolem therefore fe y the ministry of finne t time ws the flutution of omesti silver urreny in reltion to gol urrenies of ountries, with whih Jpn rrie etween 70% n 80% of its tre (Lughlin (897)). Moreover, the nee for hep foreign lons require to stisfy omesti emn for pitl fter Jpnese militry triumph over Chin ws even more ruil. Russi shortly efore the gol stnr Russi s foreign ineteness n pper urreny regime h their eginnings uner the reign of Ctherine II, uring whih the ountry me its vent s gret power. To mintin this position onsierle strin ws impose on the Tresury. The lrgely nturl resoure se eonomy with wiespre poverty mong ommon people i not generte enough txtion, whih use hroni uget efiits n inue reourse to the printing press n even further foreign orrowing t tht time. It ws the urreny reform of uner Nihols I whih somewht took infltion uner ontrol y introuing reit rule freely onvertile into silver. Nevertheless the Turkish wr fore the government to the further proution of unonvertile urreny. Infltion for the ee of Quottions n silver/gol prie rtio tken from Report on the Aoption of Gol Stnr in Jpn y Count Mtsukt Msyoshi; Ernest Foxwell, The Eonomi Journl, Vol. 0, No. 38 (June 900), pges See The Gol Stnr in Jpn y Lurene Lughlin, The Journl of olitil Eonomy, Vol. 5, No. 3 (June 897). 888 is estimte to verge to out 38%, with evitions of /- 30%. 5 Unstle urreny therefore versely ffete foreign tre, investments n me otining foreign lons more expensive ue to infltion risk premium sought y foreign investors. The gol stnr Both ountries introue the gol stnr in 897 whih unrguly h signifint impt on Jpnese n Russin eonomies y reuing infltion, filitting interntionl tre n reting n influx of foreign investment s well s sustine inustril growth. 6 Its effet on government ons, however, ws not so strightforwr: oth governments et ws tre t ertin risk premi, whih is efine s the yiel ifferentil etween tht of seurity in question n ny other virtully risk-free sset. Sussmn n Yfeh (2000) provie inepth empiril nlysis of effets of institutionl reforms n risk on risk premi on Jpnese government ons versus British Consols etween 870 n 94 using their monthly t series ollete from the Lonon Times. Out of only few events whih pper to e sttistilly signifint t 5% level in Sussmn n Yfeh regression, 7 the introution of the gol stnr in Jpn h mjor effet on spres on government ons: interest rte ifferentils 8 hlve in very short time. 9 5 Summry of Russin history n pper money infltion estimtes re se on Russin Finnil oliy n the Gol Stnr t the En of the Nineteenth Century, Olg Crisp, The Eonomi History Review, New Series, Vol. 6, No.2 (953). 6 See Russin Monetry oliy n Inustriliztion y ul Gregory, Joel Silors, The Journl of Eonomi History, Vol. 36, No. 4 (De. 976), pp Refer to next setion for summry of Sussmn n Yfeh (2000) pper. 8 In Sussmn n Yfeh (2000) pper interest-rte ifferentil is yiel on Jpnese Government ons vs British Consols 9 Less thn one yer (897). 6

3 0,07 0,06 0,05 0,04 0,03 0,02 0, Figure Risk remium on Jpnese Government Det vs British Consoles, yer frequeny. (Dt from Sussmn n Yfeh(2000)) It is remrkle, tht lthough the 897 introution of the gol stnr in Jpn h suh tremenous effet on risk premi, the Russin gol stnr, introue the sme yer y Count Whitte, h virtully no effet on spres on Russin ons. 0 In susequent setions I will propose hypothesis n use moeling pproh to explin the striking ifferene. This is seen s the min ontriution of this pper. Mrgin of Reserh A numer of reserhes hve een relie upon in ompiltion of this pper. Sussmn n Yfeh (2000) present n invlule stuy of the effets of institutionl reforms on Jpnese government et tre in Lonon etween 870 n 94. The uthors onlue tht the only institutionl hnge whih positively ffete Jpn s reit rting ws the option of the gol 0 Tre in Lonon. As mentione erlier, this is ssume to e representtive of ll other mrkets. Also, for o-movement of Jpnese government et yiels n yiels on similr seurities of other ountries see Sussmn n Yfeh The Gol Stnr, the Cost of Foreign Det, n Cpitl Mrket Integrtion: historil Eviene from Jpnese Government Det (In Frenh), Eonomie Interntionle 78, no.2 (999), pges stnr. Their reserh lso suggests tht only gol stnr h long term sttistilly signifint effet on Jpnese risk premi n on volumes of foreign et. The t use y the uthors on pries n yiels of Jpnese government ons ws ollete from The Lonon Times with monthly frequeny using tul oupon rtes n losing pries reporte t the en of eh month. Dt on British Consols omes from NBER s Mroeonomi History tset. Yiels were lulte s rtio of interest pyments to mrket prie, n then regression ws speifie to test sttistil signifine of known historil events, suh s militry treties, institutionl hnges, grrin reforms n of ourse, introution of the gol stnr, on the risk premium ssoite with government foreign et. The regression ws speifie s follows: ln R β 3 5 t β β ln R EVENT 0 t2 long β 4 β ln R 6 t β TREND EVENT β ln R 2 short t Therefore tking into onsiertion lgging n tren effets of risk premi n introuing ummy vriles EVENT long, whih took the vlue of zero t ll times prior to the event n the vlue of one t ll times fter, n EVENT short, whih took the vlue of one t time of the event. This regression ws run for ll t in n eighteen month winow roun the month of the event stuie. In their finings, Sussmn n Yfeh report tht in the short run, only the grrin reform of 873, the introution of yen notes onvertile to silver (885), the gol stnr of 897, the British-Jpnese trety of 902 n the Russin surrener in port Arthur in 905 mnge to notiely impress British investors n therefore h sttistilly signifint effets on risk premi on government ons t the 5% level, with gol stnr hving the lrgest effet. The uthors lso provie time series on rtios of 7

4 pitl flows to government revenues n of foreign et to totl et. Remrkly, fter the introution of gol stnr in 897, the rtio of foreign et to totl government et hs lime steily n pproximtely triple y 90. This suggests tht fter Jpn eme golen ountry, otining foreign reit must hve eme heper n esier. The pper then ttempts to nlyze pereptions n overll wreness of Lonon investors in regr to institutionl hnge in Jpn n ompre it to other relte gens: nlysis n lssifition of lrge numer of rtiles on Jpn in the Lonon Times from 87 to 899 shows tht issues suh s internl instility n wrs were the most tlke out, followe y ommere n eonomis n foreign reltions. Institutions n reforms reeive y fr the lest overge, with t most seven rtiles on the sujet in one given yer (892) n more ommonly, nothing written t ll. This seems to support Sussmn n Yfeh empiril finings of the ft tht reforms n institutionl hnge h little effet on investors in Lonon, wheres gol stnr ertinly i. Another soure whih hs een onsiere in preprtion of this pper is the Report on the Aoption of Gol Stnr in Jpn pulishe in 900 y Count Mtsukt Msyoshi, then Jpnese minister of finne. The report egins with rief overview of politil tensions in the minineteenth entury in Jpn n reoniles the hin of events whih le to revolution. After the revolution there ws no entrlize ltertion of the ntionl urreny, n lol prines often resorte to privte minting n esements to stisfy the eonomy s emn for money n possily to ollet seniorge. At the sme time the prtie of printing out lol privte unonvertile pper money ws wie-spre, n use even more onfusion. In lte 869 eision to opt monometllism ws tken, n yer lter the Osk mint ws oining silver. The eision to introue imetllism y minting gol oin long with silver me in 87, ut inresing issues of pper money promptly rove gol out of irultion, leving Jpn monometlli gin. This is ehoe in Lurene Lughlin s The Gol Stnr in Jpn Journl of olitil Eonomy rtile in 897. The Mtsukt report stresses out sueeing filure of the Jpnese government to introue pper urreny into irultion ue to Jpnese people outing the legitimy of pper money. It seems tht only fter Mtsukt s ppointment s finne minister in 88, i speey reemption of unonvertile notes tke effet. Inste of issuing unonvertile pper when there ws efiit in revenue, Tresury Bills were sustitute, reeemle out of the revenue of the yer of issue. This poliy long with strit ttention to usiness resulte in Jpnese government running uget surplus, hlf of whih ws evote to the retirement of pper money, while the other hlf ws e to the reserve fun with the ojet of seuring speie from ro. Chrtering of Bnk of Jpn followe in 882. In mentime, y the en of 883 some 20 million yen of pper were reeeme n puli onfiene reviving, pper rose to pr with silver in 883. Therefore Jpnese puli finnes n ntionl urreny seeme to strt to reover. The resons for oin reform of 897 still existe, however, s outline in Chpter II of the ook, n inlue rpily epreiting silver, flututing exhnge rtes in regr to gol urrenies of other ountries n high prie of foreign orrowing. 2..Jpn eme efto silver ountry. This is resonle onsiering Greshm s lw whih lims tht inferior money will lwys rw goo one out of irultion. 2 All quotes from Lughlin 897, p.239 in The Eonomi Journl. 8

5 ul Gregory s The Russin Blne of yments, the Gol Stnr, n Monetry oliy: A Historil exmple of Foreign Cpitl Movements (979) 3 hs lso proven vlule in my reserh. Gregory presents lultions of foreign investment into Russi s mjor reipient of foreign pitl etween 88 n 93 n onlues tht following onvertiility [influx of foreign investment into Russi] ws muh more sustntil thn the erly estimtes suggeste n tht the Russin growth rte ws rise y out 0.5 perent nnully s onsequene of the gol stnr (Gregory, 979). He lso estimtes tht the ost of quiring gol reserves to estlish onvertiility mounte to one thir of Russi s orrowing ro. However, oring to the uthor, the enefits of inrese rtes of output growth ertinly outweighe the osts. The net foreign investment ws estimte iniretly y looking t the urrent ount lne, sine y efinition these must equte. His stuy of verges of nnul t roken own into pre- n post- gol stnr sets revel striking inreses in net foreign investments in Russi: for the perio 885 to 897 [investment] ws 43 million rules; for the perio 897 to 93 the orresponing figure ws 9 million (Gregory, 979). The min utiliztion of Gregory s work, however, will e use to support my lim tht ifferenes in effets of Jpnese n Russin gol stnr on oth ountries et were lrgely ue to ifferent wreness n expettions of foreign investments. In the next setion I will ress this topi in more etil. 3 Journl of Eonomi History, Vol. 39, No. 2, June 979, pges Cuses of iffering effets of the gol stnr on Russin n Jpnese government ons Before I ttempt to speulte upon uses of ifferene in effets of gol stnr on risk premiums ssoite with Russin n Jpnese government foreign et, it is importnt to exmine ftors whih use n mehnisms whih ontrol risk premiums in the mrket. reliminries It is generlly knowlege 4 tht sset emn is etermine y ftors suh s lifetime welth 5, expete return 6, risk 7 n liquiity 8. Therefore, inreses in lifetime welth, expete return or liquiity of seurity in question reltive to other ssets will inrese emn for tht sset, wheres n inrese in risk will e negtively orrelte with sset emn. These generl priniples of theory of sset emn hol s long s eteris prius ssumption is not violte. These results re summrize in Tle elow: 4 For exmple, refer to The Eonomis of Money, Bnking n Finnil Mrkets, 2 n Cnin eition, y Mishkin n Serletis, 2005, erson Eution Cn In. 5 In most moels of intertemporl hoie, for exmple in tht presente in Mroeonomis y Stephen D. Willimson, 2002, erson Eution In., mrginl utility of onsumption is ssume iminishing, therefore sving (investment) is n upwr-sloping funtion of inome. 6 Sine inrese interest rte (return) on n sset mkes urrent onsumption reltively more expnsive ompre to future onsumption. 7 Sine it lowers expete return of investment: ER (-risk of efult)*return if not efulte. 8 Sine eonomi gents re ssume to isount the future, time spent onverting sset into sh is ostly. 9

6 Vrile Chnge in Vrile Chnge in Investment Demn Welth Reltive expete return Reltive risk Reltive liquiity Tle The Moel The simplest wy to moel risk ifferentils propose in finnil eonomis literture is to exmine the etermintion of interest rtes in the mrket using investment emn, investment supply n mrket lering onition. In this moel I will onsier oneyer isount ons whih mke no oupon pyments, ut py the erer fixe mount, V, t the en of the perio. Omitting oupon pyments n multi-perio isounting will gretly simplify nlysis ut will still llow the moel to pture ll importnt spets of the prolem in question. The interest rte on suh ons equls the expete return n n e expresse s follows: V i () where i interest rte, V fe vlue of the on n prie. This formul therefore mthes eh vlue of interest rte to some prtiulr vlue of prie n vie vers. For exmple, on with fe vlue of $00 n urrent prie of $90 will hve n interest rte of i 0., or %. 90 Note tht keeping fe vlue n other ftors whih ffet sset emn onstnt, n inrese in prie ereses interest rte, whih is lso the expete return. But s mentione erlier, investment emn is positively orrelte with expete return on ssets; therefore emn for ons must e ownwr-sloping funtion of prie (n upwr-sloping funtion of interest rte). Similr logi n e use to erive the investment supply urve. Holing fe vlue n other ftors onstnt, n inrese in prie reues interest rte, whih mkes otining lons heper. Inome n sustitution effets work in the sme iretion on orrower n the supply of ons shoul inrese. A simple mrket lering onition pins own equilirium quntity, prie n interest rte on ons. Chnges in welth, reltive expete return of n sset ompre to other ssets, hnges in reltive risk n liquiity will shift the emn urve n use equilirium prie, quntity n interest rte to hnge. Figure 2 elow illustrtes this frmework: the x-xis represents the quntity of ons, the y-xis represents the prie n i (interest rte) xis represents orresponing interest rte. Note, however, sine interest rte n prie re inversely relte, the interest rte xis is inresing from top to ottom, B inites on 20

7 Figure 2 Bon mrket: etermintion of equilirium quntity, prie n interest rte. emn urve, Bs inites the on supply urve. *, i* n Q* re equilirium prie, interest n quntity respetively. Arrows show the iretion of the xis. From Figure 2 it is evient tht inrese in on emn ue to inrese in welth, for exmple, will shift the B urve to the right using Q equilirium quntity n equilirium prie of ons to rise, n i interest rte to fll. This n e extene to the two-seurity se to stuy the formtion of risk premi in the mrket: onsier otherwise equl Bon with non-zero risk of efult n Bon0, whih is virtully risk-free sset. If, initilly, Bon ws risk-free, Bon n Bon0 woul tre t the sme prie * n woul re sme interest rte i*. Suppose tht some eonomi event uses positive efult risk to e ssoite with Bon. Tht woul mke Bon reltively more risky ompre to Bon0, n Bon0 woul eome reltively less risky ompre to Bon. As outline in Tle, tht woul use erese in emn for Bon n inrese in emn for Bon0: emn urves for oth ons woul shift from B to B2. For Bon this will reue the quntity emne from Q* to Q*2, reue the prie from * to *2 n will inrese interest rte from i* to i*2. The opposite will hppen to Bon0: emn will inrese, prie will inrese n interest rte ssoite with it will rop. This motion is illustrte on Figure 3 elow: Figure 3. Formtion of Risk remium in the mrket. 2

8 As result, ifferentil etween return on Bon n Bon0 will form, lele R (for Risk remium) on the grph. 9 Applition to explining ifferent effets on risk premiums ssoite with government et I propose explining ifferenes in effets of gol stnr on risk premiums ssoite with Russin n Jpnese government et long similr lines. We nee to onsier severl importnt hrteristis of these ons shortly efore gol stnr ws nnoune. rior to 897, Russin et h onsierly higher reit rting thn Jpnese: the et ws muh more liqui n h lower risk of efult ssoite with it. Differene in liquiity As fr s liquiity of Russin et is onerne, firstly, Russin et ws truly glol, irulting in Lonon, ris, Amsterm, Vienn, Berlin n New York. These ities were historilly the hus of ommeril tivity in Europe n North Ameri, n therefore llowe holers of Russin ons to reltively esily onvert his ssets into sh in numer of populr ples. Seonly, the interest on Russin ons ws pi in ifferent urrenies of vrious ountries where it irulte. Tht too ontriute gretly to very high liquiity of Russin et sine it inrese the size n ntionl omposition of prospetive on holers. Thirly, the Imperil Bnk of Russi gve n option of interest to e pi in gol s oppose to urreny. This eqully ontriute to higher liquiity of Russin ons s well to lower risk, s it insure on holers from possile osts of infltion. Support for ove lims n e foun in nnounement poste in Lonon Times y Imperil Bnk of Russi in 883: 20 The Imperil Bnk nnounes the forthoming issue of the 2 th series of 4 per ent. Short-te Imperil Tresury Bons to the mount of twenty million rules pyle on 9 th My next. The interest on the Rente will e pi in Russi in gol or reit notes, t the urrent rte, in Berlin in Imperil mrks, in ris in frns, in Amsterm in Duth florins n in Lonon in sterling. Jpnese government et on the ontrry seeme to e minly issue n irulte in Lonon; enominte in sterling, with interest pyle only in British urreny. The following nnounement from Lonon Times 2 supports this: Imperil Government of Jpn. Customs Lon for,000,000. In ons erer for 00, 500 n,000 eh, ering interest t 9 per ent. per nnum from st of August, 870 (the instllments menwhile ering 6 per ent.), pyle hlf-yerly in Lonon. Differene in risk of efult Defult risk is the proility tht issuer of the on will not repy risk premium or priniple, or oth on his lon, or will restruture or ttempt to re-negotite the onitions of lon. In the eyes of British investors of tht time, events like militry suesses, for exmple oul hve h signifint impt on et pity of the ountry n reue efult risk. Gol reserves, however, were the most oservle, quntifile n therefore relile mesure of ountry s ility to repy lons t tht time. From mi-nineteenth to lte twentieth enturies Russi h one of wor s lrgest gol reserves in possession: its finnil ministrtors followe poliy of gol umultion for signifint perio 9 Numeril exmples n further extension of this moel n e foun in the ppenix. 20 Lonon Times, 3 r Deemer Lonon Times, 26 April 870, p.8 22

9 of time well efore the gol stnr ws introue. roution of gol ws lso on the inrese, n these two fts seem to hve een well known to interntionl puli. The Lonon Times 22 reports Russin gol proution to e 3 r highest in the worl in 883: roution of Gol An Silver - By fr the lrgest prouer ws Ameri viz., gol, $34,700,000; silver, $43,000,000; followe in esening sle y Austrli gol, $3,27,55, silver only $227,25. Russi gol, $28,55,028; silver $473,59 Astonishingly, Jpn is mentione it lower in the very sme rting of gol n silver prouers n oupies the lst ple in the worl. Bse on this I feel it is more thn resonle to ssume tht British investors ssoite onsierly greter risk of efult with Jpnese ons ompre to Russin, shortly efore the gol stnr ws introue. Deomposing effets Bse on the ove we n infer tht introution of the gol stnr in Russi y Count Whitte i not pss ny new messges to eonomi gents in Lonon whih woul ffet the eterminnts of sset emn outline in Tle. It i not mke Russin et more liqui s it ws lrey pyle in gol s lmost ny other mjor urreny t tht time, nor i it rilly signl tht Russin et eme lest risky, sine Russin vst gol reserves n leing proution ws well known eforehn. Introution of the gol stnr in Russi therefore i not ffet emn for Russin government ons. On the ontrry, when the gol stnr ws introue in Jpn it signle the possession of signifint gol reserves y Jpn, whih ws require to ensure onvertiility n herene to its new stnr. Tht immeitely signle lower risk of efult ssoite with 22 Lonon Times, 3 r Ferury 883, p. 0 Jpnese et thn previously ntiipte. Tht lone is suffiient to onlue tht emn for Jpnese ons must hve inrese overnight. However it is worth ing tht the gol stnr inrese the liquiity of Jpnese et. At the lest of these were ons, interest on whih ws lso pyle in yen, sine yen now ws freely onvertile into gol, one of the most liqui ssets of ll time. The ifferene in the effet of the gol stnr on risk premi on Russin n Jpnese government et is therefore expline y the immeite shift in emn for Jpnese ons fter the introution of the gol stnr n the sene of ny signifint effet on emn for Russin government ons fter the gol stnr. This is illustrte in Figures 4 n 5 elow. As mentione erlier, emn for reltively more liqui n less risky Jpnese ons inrese from B to B2, inresing quntity emne from Q* to Q*2, inresing prie from * to *2, n lowering interest rte from i* to i*2. Similrly, reltive to Jpnese government ons, British Consols eme reltively less liqui n reltively more risky, therefore their emn erese from B to B2, reuing equilirium prie n quntity n inresing equilirium interest rte. The motions together result in the reution of risk premi on Jpnese ons from R to R2. 23 Note tht the inrese in quntity emne of Jpnese ons is entirely onsistent with oservtions presente in the Sussmn n Yfeh (2000) pper: reltively shortly fter the introution of the gol stnr, shre of 23 Note tht even if emn for Consols in t erese, inrese in emn for Jpnese ons woul still reue risk premium. 23

10 Figure 4. Effet of introution of gol stnr on risk premiums on Jpnese government ons in 897. Figure 5 Effet of introution of gol stnr on risk premiums on Russin government ons in 897. foreign et in totl Jpnese government et triple. The erlier proposition tht the Russin gol stnr h no effet on emn for Russin ons n therefore on risk premi is illustrte in Figure 5 ove. Other ftors explining ifferent effets Another oservtion explins why upon nnounement of the gol stnr, risk premi on Jpnese government ons roppe rmtilly while similr news h lmost no effet on Russin government et, lies in expettions out the gol stnr t tht time. Aoring to the theory of rtionl expettions, if British investors re wre of or elieve the Jpnese governments intention to introue the gol stnr, the mrket will just efore the stnr is introue, n there will e no suen rop in risk premi ssoite with it. A stuy of British press from tht perio revels, however, tht news 24

11 of Jpnese eoming golen ountry ws not expete. One gin referring to Lonon Times: 24 The House of Representtives y vote of 5 to 96 hve just psse Bill proviing for the option of gol monometllism. It nnot e si tht the mesure ws preee y thorough isussion, or y ny generl onsent of populr intelligene n will. Four yers go, inee, ommission ws ppointe y the Jpnese Government to investigte the prolem of metls, n, fter eliertions extening over 22 months, mjority of ommissioners reore their opinion tht the option of the gol stnr woul e vntgeous, ut tht the time for suh step h not rrive. Srely ny ttention ws pi y the ntion t lrge to tht eision. Very few people notie even wht the eision h een. The vernulr press hrly llure to it, n the generl feeling h een tht the sujet elonge wholly to the fiel of emil isussion. Muh surprise ws felt, therefore, when some of the leing journls nnoune out month go tht the inet seriously ontemplte the introution of the gol stnr. Conlusion In this pper I ttempte to investigte uses of ifferenes of effets of gol stnr introue y Russi n Jpn in 897 on risk premiums ssoite with foreign et of oth ountries, whih seem to e minly ttriute to the following: inrese in reit rting of Jpnese government ons ue to gol stnr; no effet of gol stnr on reit rting of Russin government ons, s well s to unexpete pperne of news on Jpnese gol stnr. Experiments with the moel of sset prie n risk premium etermintion seem to strongly support these finings. 24 Lonon Times, 0 th of My 897, p.4 25

12 26 AENDIX To give numeril exmple of equilirium solution to the moel outline in this pper, onsier the following two-vrile emn n supply funtions: s Q Q or Q Q s. Using mrket lering onition (Q Q s ), writing these in mtrix nottion n row-reuing gives the following solutions: 0 0 ~ ~ 0 ~ 0 ~ ~ Tht is, in equilirium, Q Q s,. Therefore, from eqution () introue on pge 6: V V V i. Note tht using ext sme steps we n introue mrket for seon risk-free seurity n erive generl expression for interest rte ssoite with it. Sutrting first interest rte from seon will give generl expression for interest rte ifferentil. Using similr tehniques this moel n e extene to ount for other ftors whih influene investment emn n supply. For exmple, we n introue househols inome I, or risk of efult R into investment emn funtion: s Q R I Q or Q R I Q s. This gives the following oeffiient mtrix, whih n e row-reue to ientity to otin expressions for equilirium pries n quntities, now ounting for inome n risk of efult: R I.

13 Vrying I n/or R will use prllel shifts in investment emn urve n will hnge equilirium interest rte n therefore risk premium in two seurity se. Sine these lultions re trivil n will follow sme steps s ove, they re outsie of the sope of this pper. Biliogrphy Sussmn, Yfeh, Institutions, Reforms, n Country Risk: Lessons from Jpnese Government Det in the Meiji Er, Journl of Eonomi History, Vol. 60 (2000), No. 2, p. 442 Msyoshi, Mtsukt, Count, Foxwell, Ernest, Report on the Aoption of the Gol Stnr in Jpn, The Eonomi Journl, Vol. 0, No. 38 (Jun 900), p Crisp, Olg, Russin Finnil oliy n the Gol Stnr t the En of the Nineteenth Century, The Eonomi History Review, New Series, Vol. 6, No. 2 (953), p Lughlin, Lurene, The Gol Stnr in Jpn, The Journl of olitil Eonomy, Vol. 5, No. 3 (June 897). Gregory, ul, Silors, Joel, Russin Monetry oliy n Inustriliztion, The Journl of Eonomi History, Vol. 36, No. 4 (De. 976), pp Drummon, In, The Gol Stnr, , The Journl of Eonomi History, Vol. 36, No. 3 (976), p Gregory ul, The Russin Blne of yments, the Gol Stnr, n Monetry oliy: A Historil Exmple of Foreign Cpitl Movements, The Journl of Eonomi History, Vol. 39, No. 2 (June 979), p Droppers, Grret, Monetry Chnges in Jpn, The Qurterly Journl of Eonomis, Vol. 2, No. 2 (2 Jnury 898), p Muro olo, Sussmn Nthn, Yfeh Yishy, Emerging Mrket Spres: Then Versus Now, Septemer (2000). Mokyr, Joel, (eitor in hief), The Oxfor Enylopei of Eonomi History, Oxfor; Toronto: Oxfor University ress, 2003 Mishkin, Freeri, Serletis, Apostolos, The Eonomis of Money, Bnking, n Finnil Mrkets, 2 n Cnin Eition, Toronto, erson Eution Cn 27