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FINANCE] bases of American. Each bank had to pay into the treasury 60% of its capital in government notes. It was credited in return with interest-bearing bonds, which bonds were to be left in the treasury as security for the issue of bank-notes to an equal amount, the banks being required to keep in gold the remaining 40% of their capital as a fund for converting the notes, which conversion must always be effected on application. The elaborators of this programme were Ito, Inouye, Okuma and Shibusawa. They added a provision designed to prevent the establishment of too small banks, namely, that the capital of each bank must bear a fixed ratio to the population of its place of business. Evidently the main object of the treasury was gradually to replace its own fiat paper with convertible bank-notes. But experience quickly proved that the scheme was unworkable. The treasury notes had been issued in such large volume that sharp depreciation had ensued; gold could not be procured except at a heavy cost, and the balance of foreign trade being against Japan, some 300,000,000 yen in specie flowed out of the country between 1872 and 1874.

It should be noted that at this time foreign trade was still invested with a perilous character in Japanese eyes. In early days, while the Dutch had free access to her ports, they sold her so much and bought so little in return that an immense quantity of the precious metals flowed out of her coffers. Again, when over-sea trade was renewed in modern times, Japan’s exceptional financial condition presented to foreigners an opportunity of which they did not fail to take full advantage. For, during her long centuries of seclusion, gold had come to hold to silver in her coinage a ratio of 1 to 8, so that gold cost, in terms of silver, only one-half of what it cost in the West. On the other hand, the treaty gave foreign traders the right to exchange their own silver coins against Japanese, weight for weight, and thus it fell out that the foreigner, going to Japan with a supply of Mexican dollars, could buy with them twice as much gold as they had cost in Mexico. Japan lost very heavily by this system, and its effects accentuated the dread with which her medieval experience had invested foreign commerce. Thus, when the balance of trade swayed heavily in the wrong direction between 1872 and 1874, the fact created undue consternation, and moreover there can be no doubt that the drafters of the bank regulations had over-estimated the quantity of available gold in the country.

All these things made it impossible to keep the bank-notes long in circulation. They were speedily returned for conversion; no deposits came to the aid of the banks, nor did the public make any use of them. Disaster became inevitable. The two great firms of Ono and Shimada, which had stood high in the nation’s estimation alike in feudal and in imperial days, closed their doors in 1874; a panic ensued, and the circulation of money ceased almost entirely.

Evidently the banking system must be changed. The government bowed to necessity. They issued a revised code of banking regulations which substituted treasury notes in the place of specie. Each bank was thenceforth required to invest 80% of its capital in 6% state bonds, and these

being lodged with the treasury, the bank became competent to issue an equal quantity of its own notes, forming with the remainder of its capital a reserve of treasury notes for purposes of redemption. This was a complete subversion of the government’s original scheme. But no alternative offered. Besides, the situation presented a new feature. The hereditary pensions of the feudatories had been commuted with bonds aggregating 174,000,000 yen. Were this large volume of bonds issued at once, their heavy depreciation would be likely to follow, and moreover their holders, unaccustomed to dealing with financial problems, might dispose of the bonds and invest the proceeds in hazardous enterprises. To devise some opportunity for the safe and profitable employment of these bonds seemed, therefore, a pressing necessity, and the newly organized national banks offered such an opportunity. For bond-holders, combining to form a bank, continued to draw from the treasury 6% on their bonds, while they acquired power to issue a corresponding amount of notes which could be lent at profitable rates. The programme worked well. Whereas, up to 1876, only five banks were established under the original regulations, the number under the new rule was 151 in 1879, their aggregate capital having grown in the same interval from 2,000,000 yen to 40,000,000 yen, and their note issues from less than 1,000,000 to over 34,000,000. Here, then, was a rapidly growing system resting wholly on state credit. Something like a mania for bank-organizing declared itself, and in 1878 the government deemed it necessary to legislate against the establishment of any more national banks, and to limit to 34,000,000 yen the aggregate note issues of those already in existence.

It is possible that the conditions which prevailed immediately after the establishment of the national banks might have developed some permanency had not the Satsuma rebellion broken out in 1877. Increased taxation to meet military outlay being impossible in such circumstances, nothing offered except recourse to further note issues. The result was that by 1881, fourteen years after the Restoration, notes whose face value aggregated 164,000,000 yen had been put into circulation; the treasury possessed specie amounting to only 8,000,000 yen, and 18 paper yen could be purchased with 10 silver ones.

Up to 1881 fitful efforts had been made to strengthen the specie value of fiat paper by throwing quantities of gold and silver upon the market from time to time, and 23,000,000 yen had been devoted to the promotion of industries whose products, it was hoped, would go to swell the list of

exports, and thus draw specie to the country. But these devices were now finally abandoned, and the government applied itself steadfastly to reducing the volume of the fiduciary currency on the one hand, and accumulating a specie reserve on the other. The steps of the programme were simple. By cutting down administrative expenditure; by transferring certain charges from the treasury to the local communes; by suspending all grants in aid of provincial public works and private enterprises, and by a moderate increase of the tax on alcohol, an annual surplus of revenue, totalling 7,500,000 yen, was secured. This was applied to reducing the volume of the notes in circulation. At the same time, it was resolved that all officially conducted industrial and agricultural works should be sold—since their purpose of instruction and example seemed now to have been sufficiently achieved—and the proceeds, together with various securities (aggregating 26,000,000 yen in face value) held by the treasury, were applied to the purchase of specie. Had the government entered the market openly as a seller of its own fiduciary notes, its credit must have suffered. There were also ample reasons to doubt whether any available stores of precious metal remained in the country. In obedience to elementary economical laws, the cheap money had steadily driven out the dear, and although the government mint at Osaka, founded in 1871, had struck gold and silver coins worth 80,000,000 yen between that date and 1881, the customs returns showed that a great part of this metallic currency had flowed out of the country. In these circumstances Japanese financiers decided that only one course remained: the treasury must play the part of national banker. Produce and manufactures destined for export must be purchased by the state with fiduciary notes, and the metallic proceeds of their sales abroad must be collected and stored in the treasury. This programme required the establishment of consulates in the chief marts of the Occident, and the organization of a great central bank—the present Bank of Japan—as well as of a secondary bank—the present Specie Bank of Yokohama—the former to conduct transactions with native producers and manufacturers, the latter to finance the business of exportation. The outcome of these various arrangements was that, by the middle of 1885, the volume of fiduciary notes had been reduced to 119,000,000 yen, their depreciation had fallen to 3%, and the metallic reserve of the treasury had increased to 45,000,000 yen. The resumption of specie payments was then announced, and became, in the autumn of that year, an accomplished fact. From the time when this programme began to be effective, Japan entered a period of favourable balance of trade. According to accepted economic theories, the influence of an appreciating currency should be to encourage imports; but the converse was seen in Japan’s case, for from 1882 her exports annually exceeded her imports, the maximum excess being reached in 1886, the very year after the resumption of specie payments.

The above facts deserve to figure largely in a retrospect of Japanese finance, not merely because they set forth a fine economic feat, indicating clear insight, good organizing capacity, and courageous energy, but also because volumes of adverse foreign criticism were written in the margin of the story during the course of the incidents it embodies. Now Japan was charged with robbing her own people because she bought their goods with paper money and sold them for specie; again, she was accused of an official conspiracy to ruin the foreign local banks because she purchased exporters’ bills on Europe and America at rates that defied ordinary competition; and while some declared that she was plainly without any understanding of her own doings, others predicted that her heroic method of dealing with the problem would paralyze industry, interrupt trade and produce widespread suffering. Undoubtedly, to carry the currency of a nation from a discount of 70 or 80% to par in the course of four years, reducing its volume at the same time from 160 to 119 million yen, was a financial enterprise violent and daring almost to rashness. The gentler expedient of a foreign loan would have commended itself to the majority of economists. But it may be here stated, once for all, that until her final adoption of a gold standard in 1897, the foreign money market was practically closed to Japan. Had she borrowed abroad it must have been on a sterling basis. Receiving a fixed sum in silver, she would have had to discharge her debt in rapidly appreciating gold. Twice, indeed, she had recourse to London for small sums, but when she came to cast up her accounts the cost of the accommodation stood out in deterrent proportions. A 9% loan, placed in England in 1868 and paid off in 1889, produced 3,750,000 yen, and cost altogether 11,750,000 yen in round figures; and a 7% loan, made in 1872 and paid off in 1897, produced 10,750,000 yen, and cost 36,000,000 yen. These considerations were supplemented by a strong aversion from incurring pecuniary obligations to Western states before the latter had consented