Front Page Titles (by Subject) CHAPTER IV.: READJUSTMENT OF THE PUBLIC DEBT. - A History of Banking in all the Leading Nations, vol. 4 (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China)
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CHAPTER IV.: READJUSTMENT OF THE PUBLIC DEBT. - A History of Banking in all the Leading Nations, vol. 4 (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 4 A History of Banking in all the Leading Nations, (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China).
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READJUSTMENT OF THE PUBLIC DEBT.
RETIREMENT OF CIRCULATING NOTES.
IN 1878, the plan of redemption of the paper money and the national debt was prepared. It was published in the next year. By that time, the depreciation of paper money had reached over twenty-five per cent. Startled at this, the Government sold out silver to the amount of 2,400,000 yen in April. By this, the price of paper somewhat recovered, but when the sales ceased in July, the discount on paper not only advanced to the former figure, but in April, 1880, it was as much as 57.9 per cent. Again 6,000,000 yen of silver was thrown on the market, but with the same result as before, and the Government was obliged to give up the fruitless idea of artificially raising the value of paper. It is unfortunate that it did not resort to the remedy of contracting the volume of the notes. Dealings in gold and silver were prohibited on the Stock Exchange. The Yokohama Specie Bank was instituted to collect specie at home and to call it in from abroad. These precautions did not much improve the matter, and at last the Government turned toward the real remedy. The tax on sake (a beverage brewed from rice) was increased, and with the added revenue, the paper money was to be redeemed.
The demand for the note conversion loan increased, because not only the interest but the principal was to be paid in specie. In November, a retrenchment of 1,000,000 yen in the central and of 2,500,000 yen in the local budget was proposed, the proceeds to be devoted to the redemption of the notes. The Government factories* were sold and the payments abroad for diplomatic services, etc., were to be made from the specie collected at the custom-house. The existing paper notes being brittle, easily forged on account of the poor coloring and by being of the same size for all denominations, were replaced by new ones made at the Government printing office, which, by careful and earnest efforts, improved the type. The depreciation of paper reached its climax in 1881, and in April it was one day at a discount of eighty-one and a half per cent., and on the monthly average of seventy-nine and a half per cent. From this cause, the income of the Government lost nearly half of its purchasing power. Officials and others who lived on fixed incomes suffered greatly. Interest rose, Government bonds fell, and the price of rice advanced. Rice being the most important element of the people’s food, its rise or fall affects, sooner or later, all prices. This must be always borne in mind by those who study economic movements in Japan. Moreover, the agricultural class pay most of the taxes, and comprise the majority of the population. A rise of the price of rice, which was equivalent to making them well off and thus increasing their purchasing power, promoted the importation of articles consumed by them, such as sugar, oil, blankets, flannel, watches, wines, tobacco, etc. In this year, the rise of rice produced this effect, increasing importation and quickening the efflux of specie. Speculation was stimulated, as the fluctuation of prices was incessant, while sound enterprises were checked by a high rate of interest. How matters stood may be seen from the following table:
Average value of paper per one yen in silver: 1877, 1.033 yen; 1878, 1.099 yen; 1879, 1.212 yen; 1880, 1.477 yen; 1881, 1.696 yen. Average price of rice per koku in Tokio: 1877, 5.150 yen; 1878, 6.200 yen; 1879, 8.210 yen; 1880, 10.130 yen; 1881, 10.485 yen. Average price of seven per cent. pension bonds: 1878, 83.495 yen; 1879, 81.302 yen; 1880, 71.851 yen; 1881, 69.500 yen. Average rate of interest for loans (for above one hundred yen): 1877, 10.03 per cent.; 1878, 10.54 per cent.; 1879, 12.57 per cent.; 1880, 14.14 per cent.; 1881, 15.22 per cent.
MINISTER MATSUKATA’S INTERVENTION.
How to overcome the difficulty, and allay the stormy condition of affairs was the question of the time. Some proposed to raise a foreign loan of 50,000,000 yen and redeem the paper, while some advised the issue of lottery bonds for the same purpose. These schemes were put aside by the new Finance Minister Matsukata, who occupied this trying position in October. His opinion was decidedly against the raising of a loan, especially an external loan, and was also against inflation. With an enormous amount of depreciated inconvertible paper money (15,483,242 yen), unreliable revenues, and ever-increasing expenditures before him, he boldly pulled up the anchor and took the helm of the ship of finance. His first care was the redemption of the paper money, then its conversion into specie, next the organization of the central bank, and, after all, the establishment of savings-banks and the Crédit Foncier. His policy was opposed by many, especially by speculators and inflationists. He had opponents not only outside but also within the Government. But his resolution was unassailable, and though the result seemed doubtful at first, complete success was finally attained. His policy was not only to contract the volume of the paper money, but to increase the specie basis at the same time. The retirement of notes was to be effected by means of the yearly surplus, which was estimated to be nearly 7,000,000 yen at the time of his assuming the responsibility of office. But in 1882, bad times set in, revenues decreased, while the expenditures increased, and the expected surplus was found hard to realize. So, the new taxes, such as the stamp duty on drugs and the tax on rice exchange, were imposed, together with an increase in the rate of tax on sake and tobacco. At the same time, retrenchment was enforced, and no increase in expenditures was permitted for the period of three years, viz., from the beginning of 1882 to the close of 1884. These rigorous measures were the turning-point in the process of financial recovery. However, the surplus was not all devoted to note redemption, only one-half being used for the increase of the reserve fund, with which the specie was purchased.
To the above 13,640,000 should be added 7,166,806 redeemed in 1878; 2,000,000 redeemed in 1879; 2,000,000 redeemed in 1880; total, 24,806,806 yen. Thus we get the total amount redeemed by the aid of the surplus between 1878 and 1885. Besides, by the issue of the Kinsatsu Hikikaye Loan, nearly 4,000,000 yen more was redeemed. By the use of the reserve and the redemption system of the national bank notes, 18,000,000 yen more of inconvertible notes were canceled. At the same time, the increase of specie was continued by the utilization of the reserve.
To return to the history of this reserve we must mention the name of another financier, Mr. (now Count) Inouye. He set aside 11,330,000 yen from the money in hand for the payment of the Government debts and paper notes in 1872. This sum consisted of specie surrendered by Daimios as the fund to redeem their notes, and of revenues outside of taxes. It was to be used for the purchase of specie as well as the redemption of Government bonds and paper money. The increase of the fund was persisted in, the annual surplus, which reached 20,000,000 in 1875, being turned over to the reserve. In 1878, this fund was divided into two, one for the redemption of paper money and the other forming a sinking fund, which was abolished in 1882, when again the whole sum was devoted to the increase of specie.
GROWTH OF THE METALLIC RESERVE.
It will be observed that the amount of paper decreased, while the specie increased. This increase was secured by the means of foreign exchange. In 1880, large sums were placed in the hands of the Yokohama Specie Bank to increase the import of coin and bullion. But it was not very productive at first. However, by experience and caution, failure was converted into a great success. In 1884, not only were payments abroad done by the means of bills of exchange, but enormous amounts of silver coin and bullion were imported, so that, as shown below, the metallic basis of the notes greatly increased:
To be correct, the national bank notes should be added to the calculation; but if so, the reserve will be only a little weakened.
The value of paper gradually rose, and the discount fell to five and a half per cent. in 1885. Specie also flowed in through an excess of exports over imports. Prices and the rate of interest declined, while the Government bonds rose in price. The state of the national finances became stable, sure, and sound, but still the annual surplus was devoted to the increase of specie.
CREATION OF THE BANK OF JAPAN.
Thus, the scheme of restoring the value of the paper money being crowned with success, the cherished hope of establishing the central bank was carried out in 1882. In 1883, the redemption scheme for national bank notes was executed, and in 1884 the Convertible Bank Note Act was promulgated, followed by the issue of notes by the Bank of Japan in 1885. In this year, also, the law was promulgated to convert “gradually” the Government paper money into silver after 1886, and to cancel the so converted paper at the Bank of Japan, according to the direction of the Minister of Finance. The specie contained in the reserve was handed over to the central bank for the conversion, which began with January, 1886. But as paper was at par, very few applied for redemption. The next thing done this year was the abolition, in June, of ten-cent notes. As a matter of order, the conversion of fractional paper money had to precede that of notes above one yen. This was one of the reasons for the step; the other was the too great abundance of small notes,* having the effect of driving small silver coins out of circulation. The amount of ten-cent notes redeemed up to March, 1890, was 4,645,561 yen, out of a total of 5,025,848.10 yen of original issue, the difference being mostly lost.
CONSUMMATION OF THE NOTE-CONVERSION SCHEME.
The conversion of paper changed the whole economic aspect. Interest fell, true industrial and commercial prosperity set in; railways, cotton mills, and other companies sprang up in succession; foreign trade increased, and real and healthy improvement was seen in every branch of business. The conversion of the national debt also increased the supply of capital for productive use.
The Government paper was so far only gradually convertible. This was regarded as untrustworthy and insufficient. In 1888, the Convertible Bank Note Act was amended to enable the Government to borrow 22,000,000 yen at two per cent. interest from the Bank of Japan, in return for permission to expand the limit of the issue of notes on security to 70,000,000 yen. This 22,000,000 yen was equivalent to then existing unredeemed paper money, because, although the sum outstanding in May, 1888, was 52,115,148 yen, of this, 8,447,712 yen was fractional currency, and against 21,667,436 yen there was a corresponding amount of specie to be used for redemption purposes. The question remained as to what was to take the place of the fractional notes. Since 1890, there had been 1,000,000 yen inserted in the annual budget, to be devoted to the production of small silver coins, with which they were to be redeemed.
In 1890, the interest of two per cent. on the money borrowed from the central bank was remitted, and the limit of the Bank’s note issue was extended to 85,000,000 yen. The loan of 22,000,000 yen was added to the already existing redemption fund of 10,000,000 yen, and from these a separate fund was formed, to be devoted solely to the redemption of paper money. The way redemption is effected is very simple. The fund is placed in the keeping of the Bank of Japan, which redeems on demand, and afterward sends an account to the Treasury.
Thus the whole scheme has culminated in the assimilation of Government paper money and bank notes, by making them convertible into silver or into the notes of the Bank of Japan, which keeps a substantial metallic reserve, and the notes of which only will, in the course of time, remain in circulation. The once chaotic, deranged, and deteriorated paper currency has thus been simplified and restored in value, expanding or contracting according to the amount of reserve, and to the real necessities of the money market. The goal of monetary legislation was at last reached, benefiting the Government and the people as well. In order to show the percentage of the metallic reserve, and the gradual absorption of other paper money into the Bank of Japan notes, the following tables are inserted:
THE NOTES NOW IN USE.
It is clear, from what has been just said, that the chief factor of the paper currency is the convertible notes issued by the Bank of Japan; the Government paper and the national bank notes being gradually redeemed, only a little over 10,000,000 yen of the former and 20,000,000 yen of the latter remaining. These latter having been longer in use, are more or less disfigured and are not so much liked by the public as the notes of the central bank. But owing to the simplicity of the design of the note of the central bank, its imitation became frequent, illiterate persons being cheated thereby. The origin of this imitation is not without interest. At first someone made an imitation for the use of children. The penalty for counterfeiting provided by the penal code being inapplicable, this imitation became very elaborate, in some cases approaching the true note, only the letters and characters were intentionally changed. Gamblers used them in piles to attract by-standers and tempt them to join the game. Peddlers began to use them, and shops open at night often received them. Those discovered were mostly Bank of Japan notes, the imitations of the Government and national bank notes being very few. The audacity of imitators went so far as to apply their methods to Government bonds. Spurious copies of these can be easily discovered by ordinary men who can read. But fearing that it might impair the circulation of these credit instruments, a law was passed in 1895 to put an end to such practices. By this law the manufacture of or dealing in imitations of metallic or paper money, whether issued by the Government or banks of issue, as well as imitations of national or local debt bonds, are forbidden, under penalty of imprisonment from one month to three years, with an additional fine of from five to fifteen yen. If such articles be discovered by the police or examiners at banks, etc., they must be mutilated. This enactment seems to have had an effect, and less is now heard of this silly form of mischief.
The small paper currency is not liked and is becoming less year by year as its redemption goes on. So, now we have a sound system of convertible paper currency, and are free from the confusion and uncertainty which prevailed before. Indeed, the credit of the Bank of Japan notes is so high that they have never been at a discount, and they are preferred to silver yen in the daily transactions of the people.
[* ] A policy had been adopted of encouraging industry by lending out money to manufacturers and setting up typical factories. Both, however, ended in failures; of the money lent, 23,000,000 out of a total reserve of 52,000,000, was mostly irreclaimable.