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• Banking In Germany.
• Chapter I.: Non-issuing Credit Institutions.
• Chapter II.: German Banks of Issue.
• History of Banking In Austria-hungary.
• Chapter I.: The Austrian National Bank.
• Chapter II.: Austrian Joint-stock Banks and Banking Associations.
• Chapter III.: Hungarian Joint-stock Banks and Private Credit Institutions.
• Appendix to Banking In Germany and Austria-hungary.
• II.: Statistics of Banking In Austria-hungary.
• Banking In the Netherlands.
• Introduction.
• Chapter I.: Era of Exchange Banks.
• Chapter II.: Period From 1814. Modern Dutch Banking.
• Chapter III.: Period 1814-1863. the Netherlands Bank.
• Chapter IV.: The Netherlands Bank, 1864 to 1895.
• Chapter V.: Banks of Issue In the Dutch Colonies.
• Chapter VI.: “cashiers,” Joint-stock Banks, and Private Bankers.
• Banking In the Scandinavian Nations.
• Part I.: Banking In Denmark.
• Chapter I.: History Previous to the National Bank.
• Chapter II.: The National Bank During the First Half of the Nineteenth Century.
• Chapter III.: Private Banks.
• Part II.: Banking In Sweden.
• Part III.: Banking In Norway.
• Banking and Money In Japan.
• Part I.: The Banking System.
• Chapter I.: Common Banks.
• Chapter II.: The National Banks.
• Chapter III.: The Yokohama Specie Bank. ( Shiokinginko. )
• Chapter IV.: The Bank of Japan. ( Nippon Ginko )
• Chapter V.: Land Mortgage Banks.
• Part II.: The Currency of Japan.
• Chapter I.: The Old Coinage System.
• Chapter II.: The New Coinage Period.
• Chapter III.: The Paper Currency.
• Chapter IV.: Readjustment of the Public Debt.
• Chapter V.: The Future Money Standard.
• Appendices.
• Appendix D.: National Debt In Japan. (from the “british Economic Association Journal” of June, 1895.)
• Banking, Currency and Land Tenure In the Chinese Empire.
• I.: China’s Currencies.
• II.: Chinese Banking: Ancient and Modern.
• III.: Land Tenure and Taxation In China.

CHAPTER IV.

THE BANK OF JAPAN.

(NIPPON GINKO)

ITS ORIGIN.

FROM the preceding chapters it may be seen that the want of credit institutions led to the establishment, among others, of national banks. But on account of the lack of business activity, the depreciated state of the paper currency, and a continuously depressed foreign trade, little benefit was derived from them. The rate of interest in particular remained still very high. The Yokohama Specie Bank did much to lighten the difficulty. But there arose at the same time a spirit of exclusiveness among the bankers, causing, among other things, new diversities in the paper currency. The necessity of co-operation and assimilation prompted the idea of establishing a central bank. The Minister of Finance, Count Matsukata, prepared a memorandum on this subject in which it was pointed out: 1. That the exclusiveness and individualism prevalent among the national banks cannot be remedied except by the creation of a powerful central bank. 2. That without the help obtainable from such a central bank, sudden runs causing panics cannot be avoided in a time of extremity, and even in ordinary times lack of resources prevents the banks meeting the demands for discount to the extent demanded. 3. That the present high rate of interest is unfavorable to the advancement of commerce and industry. But this is the result not of the deficiency of capital but rather of the lack of channels through which capital may flow and its distribution be equalized. Moreover, if the central bank were to discount bills at a low rate of discount, the example will be followed by the others. 4. That to allow the money collected in the form of taxes to lie idle in the vaults of the Treasury, causing thereby a scarcity of funds, is a most wasteful method. If to the central bank were intrusted the receipt and disbursement of the public money, the losses incident to such a practice could be avoided. 5. That while it is true that the efflux of specie is due to the excess of imports, the want of a central bank to regulate the flowing in and out of specie by an advance of rates or by entering into correspondence with foreign banks, has much to do with it. 6. That to unify the paper currency and make it convertible into specie by the aid of the accumulated reserve of gold and silver, can best be done by the agency of a central bank, which must, to some extent, be specially protected.

THE BANK FOUNDED BY ACT OF 1882.

These views were adopted by the Government, and in June, 1882, the Bank of Japan Act was promulgated by Law No. 32. The organizing committee was formed within the Treasury, and on the notification of the subscription in July the offers were so numerous that the list was filled up by August. In October, the Vice-Minister of Finance, Mr. Yoshiwari, was appointed the president, and the Secretary of the department, Mr. Tomita, the vice-president. The by-laws having been agreed on, the bank was opened on the tenth of the same month. The main points of the act creating it were:

1. This bank is a joint-stock company, with its head office in Tokio, and has a term of existence for thirty years from the tenth of October, 1882.

2. Its capital is to be 10,000,000 yen, and for half this amount the Government will be a shareholder.*

3. After deducting the dividends, at least one-tenth of the remainder must be laid aside as a reserve fund, to make up for losses, or to equalize the annual dividends, the reserve being kept in gold or silver and Government bonds.

4. The Bank can discount bills, buy and sell bullion, collect money due for its customers, receive deposits, and allow credit on Government bonds or notes as well as negotiable bills of corporations under the State control. But it must not lend on shares or real property, buy shares of its own or those of industrial companies, nor own real estate except for its own use. Also the bills which it can discount must bear the names of at least two trustworthy men, and have a term of within one hundred days. The Bank must not lend more than four-fifths of the value of the pledge.

5. The power of issuing convertible notes to be exercised later was also conferred, and with it a certain control over the public finances.

6. Profits were to be thus divided:

a. Eight per cent. on the shares in general.†

b. Six per cent. on the Government shares.

c. One-tenth of the remainder reserved.

d. One-tenth of the further remainder divided among directors and other members of the banking staff.

7. The monthly reports and the half-yearly balance-sheet must be presented to the Government, and the latter published in the newspapers.

8. The Government to have the power to appoint the president and vice-president, as well as to select directors out of the double number of candidates elected by shareholders. These officials and the auditor are to devote themselves solely to the work of the Bank. A general meeting must be held at least twice a year, and the directors must hold a meeting every month.

9. The permission of the Minister of Finance must be obtained for forming branch offices, agencies, or correspondents, for the prolongation of the time of the Bank’s existence or its dissolution, for increasing capital, admitting shareholders, making transfers of shares, paying dividends, for the amount of discounts of Government bills or those of private individuals, the sale or purchase of Government bills or notes, and the modification of the by-laws.

10. The Government has the appointment of the comptrollers, and has the power to stop any act contrary to the laws or by-laws which is deemed against its own interest.

PROSPERITY OF THE BRANCH AT OSAKA.

Osaka being, as already stated, the centre of commerce and industry, a branch office was established there in December, with a working fund of 50,000 yen, to be finally increased to 3,000,000 yen. In 1883, much was already done toward the regulation of the finances, the providing of bullion to be coined, as well as the redemption of the national bank notes. Correspondence was entered into with other banks, but the chief business was that relating to the Government. By 1884, however, business increased in every direction, and especially in Osaka the discount of bills grew to an enormous extent. However, the amount deposited by the public was comparatively small, on account of the depressed state of business and the Bank not allowing interest on casual deposits. By 1886 a general process of growth began, especially in the circulation of the convertible notes. On account of the redemption of its paper money, and the issue of the Treasury bonds and other securities of the consolidated debt, there was a great increase of Government business. The next year presented a still more flourishing condition, and 10,000,000 yen more of the capital was added in February. By the revision of the Convertible Bank Note Act, to be mentioned afterward, the circulation greatly expanded, as did the amount lent out. Though the rate of interest was still high, there was a notable increase in the number of joint-stock companies. In 1889, the rediscounting of the bills for the Specie Bank having begun, an increase of business took place, though the commercial depression caused a decrease in other lines.

RELATIONS OF THE BANK WITH THE GOVERNMENT.

In 1890, the sphere of the Bank’s action in regard to the public finances was greatly extended, the president assuming the responsibility for the receipt, custody, and disbursement of money at the order of the Treasury. The accounts concerning these transactions were kept by themselves, and what is called the Central Chest Department was instituted in the Bank. For their management the Bank is paid, but after April,* 1899, the work must be done free. The year 1890 was not very favorable for the Bank on account of the large demand for the conversion of notes, the fall in the prices of stocks and shares, and the rise and fluctuations of the gold quotations for silver. The Bank allowed interest on casual deposits, and tried hard to give facilities for the discount of bills. The next year ended without any striking events, and the increase of specie reserve, which rose nearly to 83,000,000 yen in 1892, would have decreased the profit of the Bank had extra benefit not been derived from the exchange of gold for silver. In 1893, the money market became easy, and the Bank abolished its interest on deposits, but toward the close of the year a brisk business set in, increasing the amount on loan. In this year the control of the deposit money and goods hitherto in the custody of the Government was added to the work of the Bank. In 1894, the Corean affair, leading to the war with China, checked business activity, and the demand for silver increased both on the part of the public and the Government. Moreover, the war loan strained the resources of the money market, and the Bank was obliged to raise the rate of interest many times after June. Such devices were, however, not equal to the urgency of the time, and the only recourse left to the Bank was to issue notes beyond the ordinary limit. The crisis was passed much more easily than was anticipated, and the year 1895 began rather quietly. But an increase of trade, especially in silk manufactures, necessitated another excess of the note limit, and in June additions were made to the extra issue, which gradually increased, as shown in the table on page 466.

In August, the steady expansion of the field of action made it necessary to increase the capital of the Bank of Japan to 30,000,000 yen, and a branch office was opened in Yezo Island, so that the Bank has now three branch offices—the one in Osaka being opened in 1882, and one in Shimonoseki in 1893, besides agencies in Kioto opened in 1894 and Sapporo in 1893.

THE POWER TO ISSUE CONVERTIBLE NOTES.

The unique privilege, paramount influence, and heavy responsibility of the central bank rests in its being empowered to issue bank notes convertible into silver. Though it was provided in the Bank of Japan Act that the Bank should issue notes in a way to be specially prescribed, the actual issue was postponed for a time on account of the depreciated and confused state of the paper currency. But as by 1884 the value of paper money began to be restored, the Convertible Bank Note Act was promulgated. With some modifications in 1888, it ran as follows:

1. The note is convertible into silver coin at any time in the main and branch offices of the Bank, without any commission or fees whatsoever.

2. Gold and silver coins and bullion must be kept to furnish a basis for conversion.

3. The Bank can issue notes to the extent of 70,000,000 yen, with Government bonds and notes, or other first-rate commercial bills and negotiable instruments as security. But 27,000,000 of this can be issued only as the national bank notes are redeemed.

4. In addition to the above, notes on a security basis can be issued. But on these a tax must be paid to the Government, the rate of which is to be fixed by the Minister of Finance at not less than five per cent.

5. The Bank has the obligation to lend to the Government 22,000,000 yen, to be used for the redemption of its paper money, at the rate of interest of two per cent., which is to cease by 1898.

6. The Bank must present to the Treasury a daily and weekly statement of the amount of its note issue and the basis thereof. The weekly account must be published in the official gazette.

7. The denominations of the notes are 1, 5, 10, 20, 50, 100 and 200 yen, and their form is decided by the Minister of Finance.

8. The Comptroller of the Bank must oversee and can examine the actual amount of the note issue, as well as all books and accounts.

9. Any mutilated or spoiled notes are to be converted without commission, and the forgery of notes punished according to the penal code.

10. The procedure regarding the manufacture, conversion, and redemption of notes is to be fixed by the Minister of Finance.

The purpose of this enactment was to convert the paper currency issued by the Government and the national banks into the convertible notes of the central bank, without at the same time swelling the bulk of the circulation. In 1889, though high rates and general stringency prevailed, the ordinary limit of issue was not exceeded on account of the importation of specie in payment of exported silk goods. However, in February of 1890 there was a rise in the value of stocks, and to meet the urgent demand for purposes of trade and speculation, notes were issued in March beyond the ordinary limit, bearing five per cent. interest. This and the redemption of the Government bonds to the amount of 5,000,000 yen checked the stringency, and by April the excess was stopped at the comparatively small sum of 500,000 yen. This led to the conclusion that the ordinary limit is too narrow for the gradually expanding amount of trade and industry. So in May, the act was modified, and the ordinary limit was extended to 85,000,000 yen, the interest on the amount lent to the Government being at the same time abolished as an offset. It was also in April that the procedure to exchange the Government paper money into convertible notes was prescribed, the chief points being:

1. Government paper of one yen and upward is convertible into silver coin, and below one yen, viz., 50, 20, and 10 cent notes, into subsidiary silver or nickel coin.

2. When redeemed, the paper money must be mutilated and handed over to the Treasury to be destroyed.

3. No fees are to be paid for redemption, except in the case of the ten cent paper currency, for which 3-1000 discount must be paid.

At first no clear division was made between the specie and security basis, but since 1888 a broad distinction has been drawn. In this year also, a new form of note was adopted, the old ones being easily spoiled and badly printed. The notes actually issued were of the denominations of 1, 5, 10, and 100 yen only, out of seven kinds permitted by the law. The mutilation, etc., which was very frequent in the case of old notes, decreased. Renewals, however, reached 1,530,000 yen between 1887 and 1894. The amount of the reserve and of the notes issued is shown in the following table, for a series of years:

REDEMPTION IN SILVER.

Redemption in silver is done in Tokio and Osaka, as well as in Yokohama and Kobé, the work being intrusted to the Specie Bank, and an annual payment of 6000 yen is made for this service. The general rule is that if, by excess of exports of goods, the importation of silver increases, the conversion of silver into notes shows a corresponding increase; if silver be exported, the contrary process ensues, as indicated in the following table:

GOVERNMENT CONTROL OF THE BANK.

The Bank of Japan being the only bank of issue and of supreme power, in addition to being the custodian of public money, it is placed under the control of the Government. A comptroller is appointed, the selection usually falling upon the Accountant-General of the Treasury. He visits the Bank once a week, examines books and vaults, and is required to be present at all meetings. Besides appointing the president and directors, the Government can direct the general policy of the Bank, the president having no alternative but to resign if he does not approve of his instructions. Indeed, such a case happened in the experience of the president before the present one. A conflict may occur because of the personality of the Minister and the president. If the former be a man of strong will, the Government policy will carry the day, but if the latter be the stronger, the interest of the Bank and the shareholders will prevail. These two interests, however, seldom come into conflict, because the Government acts with moderation and the Bank for the public good.

THE BANK’S OBLIGATIONS IN THE FUTURE.

The Bank is heavily burdened in return for the privileges granted. It has, as said before, to perform the following among other functions: 1. The custody and disbursement of Government money. 2. The call and payment of the principal as well as the interest of the national debt. 3. The custody of money and goods intrusted to the Government. 4. The redemption of the Government paper money in silver. 5. The redemption of the national bank notes. 6. The rediscounting of bills of exchange for the Specie Bank. 7. The regulation of the general rate of interest. All these involve considerable sacrifices, but are done simply for the public convenience as directed by the Government. If, for instance, the actual work of the receipt and payment of public money were to be done by the Government officials, there would be a considerable increase of expenditure, besides risks, inconvenience, and complexity. The work of the redemption of national bank notes is also a very troublesome one. The Bank has to collect the funds, buy Government bonds, calculate the amount to be redeemed by each bank, and render the redeemed notes unfit for further circulation. To be content with the business of rediscount at a very low rate of interest is a harsh necessity, when the general rate is not lower than six per cent. Besides, the Bank has to advance money to the Government, though this is seldom, and the Government deposit usually surpasses the amount lent, unless in extraordinary emergencies. But thanks to the ability of its management and the general state of the market, the profits of the Bank have been higher than those of others. Hence it has become an object of envy and attack. Its opponents complain “that the exorbitantly large profits of the Bank are due to its having a privilege—rather monopoly—of issue of notes, that a part if not the whole of the profit should belong to the State, and it is unfair that the Bank should reap the entire benefit; that the way the Bank treats other banks and lends out money is partial, and not quite in accordance with the public interest, also that the benefits of the Bank are not widely distributed throughout the country for the lack of branch offices.” Into these attacks sentimentalism, self-interest, and personal considerations enter more or less. However, as our proverb says “the wind blows most strongly on the highest tree in the forest,” critics are not few even in the legislative body. In January, 1895, a bill was introduced in the House of Commons to tax the profits of the Bank. It was rumored that some supported the idea of making the Bank pay a tax on the amount of its note circulation. The essential clause of the bill was about as follows: “In case the net profits of the Bank be above six per cent., one-half of the sum left after deducting from the profits an amount equal to a dividend of six per cent., as well as the reserve and cash carried forward from the preceding year, must be paid to the Government as a tax.”

In order to leave no loop-hole of escape open, the sum to be accumulated as the reserve was limited to between one-tenth and three-tenths of the remainder, after deducting the dividend of six per cent. from the gross profit. The bill passed the Commons, but when it came to the Lords, its fate became doubtful. The Government thought it more expedient not to tax the Bank, because if taxed, a considerable sum would have to be paid to the Bank in order to compensate it for many public services. As in the case of the bill to transform national banks, this view seemed to be unpopular, but the bill was negatived, nevertheless. The chief reason for this was that the Lords had to take into account the valuable services performed by the Bank during the war. Indeed, since the commencement of the war, the Bank has been of great benefit to the country. It supplied the Government with necessary funds, and did its best in collecting subscriptions to the war loan. But for the high credit of this bank enabling its paper notes to circulate even in the heart of the Leao-Tung district of China, many more difficulties would have been encountered in the mobilization of troops and the transportation of material of war. Not only this, had it been necessary to make payments in specie, so decreasing the metallic reserve of the Bank, the credit of the notes might have been affected even at home. Also during the war, contraction prevailed everywhere; banks becoming cautious in advancing loans, manufacturers lessening their production, and the public drawing out deposits. The silk producers especially were in need of capital. The Bank made them loans freely and succeeded in assuring a large output of silk as well as the recovery of trade toward the end of 1895. These services of the Bank were not forgotten. In October, the president, Mr. Kawada, was made a baron by his Majesty. It was further made obvious that in future the work of the Bank would not decrease. On the contrary, the indemnity paid by China, and which is now deposited in the Bank of England, may be transferred to the credit of the Bank, though the actual work may be done through the agency of the Specie Bank. A different line of policy from that pursued by the Bank would have led not only to its own loss, but to that of Japan and other countries. Trade and industry are now showing rapid progress and expansion. The demands for their support must in the end fall on the Bank. When the national banks come to an end, this institution will be the only bank of issue, and must do its work as “the bank of banks.” With such a future, the Bank has a good prospect of further aggrandizement and influence, and a proportionate increase of responsibility. An idea of the actual condition of the business of this bank may be gathered from the following tables:

After 1889, in discount bills are included the following rediscounts for account of the Specie Bank:

[* ] These shares were afterward transferred to the Crown Property in the way described in the case of the Specie Bank, Chapter III.

[† ] In 1886, all fixed at six per cent.

[* ] Fiscal year begins with April and ends in March of the year following.