The last Saturday the old banknotes could be used

March 2, 1946 (Sat) At bank counters nationwide

The Last Day of the Old Banknotes

March 2, 1946, was a Saturday. According to the Ordinance on the Deposit of Bank of Japan Notes and its enforcement regulations, as of this day, the old 10, 20, 100, 200, and 1000 yen banknotes would lose their status as legal tender. The 5 yen banknote had also been added to this list by Ministry of Finance Ordinance No. 16 on February 22. The Federation of Bankers Associations of Japan extended business hours on this day until 3:00 p.m. and also opened temporarily on the following Sunday, March 3, to handle only banknote exchanges and deposits. The Bank of Japan also extended its business hours on the 2nd and opened temporarily on the 3rd.

The old banknotes were not to be thrown away. If deposited in a bank or post office by March 7, they would become bank deposits. However, these deposits could not be freely withdrawn. This was because, since February 18, withdrawals from all deposits nationwide had already been halted.

The numbers reveal the magnitude of what happened. The amount of Bank of Japan notes in circulation was 61.45164 billion yen on February 16, just before the measures. After peaking at 61.8 billion yen on February 18, it shrank to 15.2 billion yen by March 12. This was 24.6% of the peak. The old banknotes collected between February 18 and March 8 amounted to 50.30409 billion yen, a collection rate of 81.9% against the amount in circulation on February 16.

This means that the majority of banknotes circulating in public returned to the banks. Why did the state go to such lengths? The story goes back to the day the war ended.

August 1945–February 1946

More Banknotes, Higher Prices

On July 2, 1946, at a plenary session of the House of Representatives, Finance Minister Ishibashi Tanzan explained the reason for the measures as follows. The amount of Bank of Japan notes was just over 30.2 billion yen on the day the war ended. By the end of that year, it had become just over 55.4 billion yen, and on the day the Financial Emergency Measures Ordinance was promulgated, it was just over 61.4 billion yen.

The prices of goods were also rising. The Bank of Japan's Wholesale Price Index (with the 1934–36 average as 1) was 3.360 in August 1945, the month the war ended, and 8.676 in February 1946. It had increased more than 2.5-fold in six months.

According to Finance Minister Ishibashi's explanation, there were two reasons for the increase in banknotes. Immediately after the end of the war, government funds were disbursed all at once. After that, the large purchasing power accumulated during the war in the form of deposits was withdrawn and spent, and then kept at home as banknotes. He also stated that when plans to tax assets were rumored, the movement to withdraw deposits and convert money into goods became active.

If left unchecked, there was a danger of entering so-called hyperinflation. Finance Minister Ishibashi explained that this was the reason for the measures.

February 16–March 20, 1946

Freezing Deposits, Collecting Banknotes

On February 16, 1946, the government announced the "Emergency Economic Crisis Countermeasures." The next day, February 17, two emergency imperial ordinances were promulgated and came into effect on the same day: the Financial Emergency Measures Ordinance and the Ordinance on the Deposit of Bank of Japan Notes. These were emergency imperial ordinances under Article 8, Paragraph 1 of the Imperial Constitution, and deliberations to seek parliamentary approval were held in the Imperial Diet starting on July 2.

Article 1 of the Financial Emergency Measures Ordinance is a short sentence: Financial institutions shall not make payments on deposits, etc., that exist at the time this ordinance comes into effect. The deposits continue to belong to their owners. However, under Article 9, the owners do not have the right to demand repayment until the prohibition is lifted.

The payment of deposits was actually halted from Monday, February 18. The amount that could be withdrawn for living expenses was determined by the enforcement regulations of a Ministry of Finance ordinance: 300 yen per month for the head of the household, and 100 yen per person for family members. Salaries were also calculated with a refundable amount of 500 yen per person per month. In Finance Minister Ishibashi's words, it was a method of "freezing each person's income above 500 yen."

Banknotes on hand were handled as follows. From February 25 to March 7, when depositing old banknotes, one could receive up to 100 yen per person in new banknotes. The printing of new banknotes was not ready in time, so what was initially distributed were banknotes with a validation stamp affixed. Banknotes with new designs were issued starting with the 100 yen and 10 yen notes on March 1, the 5 yen note on March 8, and the 1 yen note on March 20.

March 3, 1946 (Sun) 12:00 a.m.

Sunday at 12:00 a.m.

The day after the last day of the old banknotes, March 3, at 12:00 a.m. This time had another significance. The Temporary Property Investigation Ordinance, issued on the same day, February 17, had set this exact time as the reference point for investigating the nation's assets. This is according to Finance Minister Ishibashi's explanation in July.

The Property Tax Law, promulgated on November 12 of that year, also specified in Article 1 that the time of investigation was "March 3, 1946, at 0:00 a.m." No tax was levied on assets of 100,000 yen or less. A 25% tax was applied to the portion exceeding 100,000 yen, with rates increasing progressively, reaching 90% on the portion exceeding 15 million yen.

Finance Minister Ishibashi explained that easily transferable assets had to be investigated immediately in conjunction with the implementation of the financial emergency measures, as it would become almost impossible to verify them later. Thus, the measure to curb prices and the preparation to tax assets were linked at the very same moment in time.

There was a Diet member who questioned this sequence in the chamber. On July 2, Kinji Kawashima of the Socialist Party criticized that because the government announced the property tax plan at the beginning of the year but did not issue the investigation ordinance until March, influential landowners and capitalists had converted their assets into goods in the interim. Finance Minister Ishibashi replied that it was unavoidable due to circumstances that delayed the opening of the Diet. It is not known from the records how much property was converted.

March–July 1946

"The 500-yen livelihood"

When old banknotes became unusable on March 2, sales at department stores and retailers plummeted. The history of the Bank of Japan writes that street vendors also decreased sharply due to strengthened controls, and it was estimated that only 20 to 30 percent could continue their business.

The squeeze tightened further. On March 22, loans from financial institutions were restricted to the balance as of March 20, and from April 1, the living expenses that heads of households could withdraw were reduced from 300 yen to 100 yen per month. The history of the Bank of Japan writes that this indicated the limits of the initial measures' effectiveness.

At the House of Representatives on July 2, Representative Kawashima brought this up, calling it the "500-yen livelihood problem." He stated that according to a survey by the Ministry of Health and Welfare, the average income of workers in the six major cities was 504 yen and 82 sen, while living expenses were 844 yen and 8 sen, resulting in a deficit. He called for the limit to be raised to between 800 and 1,000 yen.

Finance Minister Ishibashi replied. The current method of freezing income over 500 yen is very unnatural, and he wanted to return to a state without restrictions as soon as possible. However, since an additional 100 yen could be withdrawn per family member, a family of five could withdraw up to 1,000 yen for living expenses.

March 1946–December 1948

So, did prices stop rising?

The amount of banknotes, after bottoming out at 15.2 billion yen on March 12, began to increase again. It was 23.3 billion yen at the end of March, 42.8 billion yen at the end of June, and 93.4 billion yen at the end of December.

Prices did not stop rising either. The wholesale price index was 11.95 in March 1946 and 22.49 in December. It reached 83.37 in December 1947 and 187.2 in December 1948.

The history of the Bank of Japan states that the effect of these measures was only temporary. The reasons given are, first, that a way was left to withdraw new money from frozen deposits for living expenses and business funds. From April to June 1946 alone, withdrawals from major financial institutions amounted to 15.4 billion yen. Second, transactions payable by check from frozen deposits remained, which created a "dual price" system with different prices for purchases with new money versus checks from frozen deposits. And finally, the new money issued by banks remained in black market transactions and did not return to the banking system.

Furthermore, the history of the Bank of Japan notes that these measures were a major negative in that they instilled in the public an indelible sense of distrust and anxiety towards currency measures.

Back to March 2, 1946

The Last Saturday

Let's return to the opening question. Why did the government collect even the banknotes in the hands of the people? Because the number of banknotes kept increasing, and prices had more than 2.5-folded in six months. By freezing deposits and converting old banknotes into deposits, the amount of usable money could be reduced at once. The time of this switchover was also set as the reference point for a property survey.

So, did prices stop rising? The amount of banknotes shrank to 24.6% of its peak between February 18 and March 12, and then began to increase again. The wholesale price index was 187.2 in December 1948. The halt was only for a moment.

This was not the first time deposits were frozen. The history of the Bank of Japan cites the payment moratoriums during the Great Kantō Earthquake of 1923 and the financial crisis of 1927, stating that their nature was fundamentally different. In those cases, the purpose was to give time to those who could not pay to prepare, and the period was fixed from the beginning. Withdrawals for salaries were unlimited, and withdrawals of deposits below a certain daily amount were not stopped. In 1946, to stop prices from rising, deposits were frozen indefinitely, and even banknotes were forced to be converted into deposits.