Accounting for the Fall of Silver: Hedging Currency Risk in Long-Distance Trade with Asia, 1870-1913

Whereas the emergence of the classical gold standard (1870‒1914) has attracted considerable attention in the economic literature, only very few authors have inquired into the protracted confidence crisis of silver. Building on the results of Calomiris, Oppers, and Flandreau, this book explores the evolution of management practice in exchange banks in Asia. Using ‘forensic accounting’, it attempts to show that contemporaries were aware of problems caused by the gyrations of the silver price after 1870, and that they sought to actively remedy their harmful effects on trade between gold and silver using countries. It describes how the experiment with financial instruments, although originally mishaps, eventually led to success. Next, and contrary to the commonly held belief that nineteenth-century bankers did not have a sophisticated understanding of hedging strategies, it shows, in a quantitative way, that hedging strategies existed, impacting banks’ operations in profound ways. More specifically, it uses the mostly unexplored accounting data and archives of the Yokohama Specie Bank (YSB; the world’s third largest exchange bank before World War II) to describe the bank’s wrought management history in the tumultuous years around the turn of the twentieth century. YSB had to come to grips with Japan’s effort at adopting the gold standard (1897), the difficult expansionary ‘postbellum administration’ after the Sino-Japanese War (1894‒5), and the consolidation of the country’s imperialism (after the Russo-Japanese War of 1904‒5)—all events shaping not only the bank’s operations and expansion in Asia, but also affecting the organization of its branch network and management of its flow-of-funds.