Japan by the Japanese/Chapter 15.1

To properly understand the economic and financial condition of Japan it is necessary to look back to the beginning of the present era, and trace the growth of the various causes which finally resulted in the situation of the present day. Before the restoration of his full power to the Emperor the country was under the de facto rule of the hereditary feudal chief Tokugawa, the Emperor having only nominal executive power. In those times the taxes were paid in rice, and the value of land and all other property was estimated at so many kokus of rice. Copper coinage was only used for the payment of dues upon land unproductive of rice, such as forest land, and for similar purposes. The feudal chiefs of each province subordinate to the supreme rule of Tokugawa owned much land, and received dues in rice from the people entrusted to their respective protection and government. They also issued paper-money each in his own locality.

When the Emperor had been restored to his full power, the financial state of the country was not at all an enviable one. There was no ready-money at the disposal of the new Government, and paper-money was of necessity issued to defray the expenses of administration. The taxes were still paid in rice, and as the price of rice varied very much there was no stability of the revenue. On the other hand, the leaders of the new Government were principally men who had been accustomed to regard war and the use of arms as a profession. These naturally had no great idea of economic and financial questions.

The feeling of the leaders of the nation before the Restoration was strongly anti-foreign, and the firing upon foreign ​vessels by the southern chiefs was but an outward sign of the feeling of the people as a whole. After the Restoration, however, it was realized that it would only be possible to successfully contend with the foreigners by adopting their own methods. The former anti-foreign feeling was principally due to the teaching of the Chinese philosophers. The revulsion of feeling was very great, and the Europeanizing of everything took place with a rush. Formerly, under the Tokugawa Government, it was even forbidden to any Japanese subject to leave the country. In company with the present Marquis Ito and three other young men, however, I managed to reach London some forty years ago, four years before the Restoration. When we returned we spoke strongly in favour of the introduction of foreign methods. Little by little, as time passed on, the reaction set in, and everything was modelled upon the European plan—education, courts of justice, the army and the navy, etc. The peculiar situation then arose that the upper classes of public life moved much more rapidly along the path of progress than did the lower, and that the outward skeleton and framework of a modern civilized and complicated State system was adopted before the muscles and sinews had time to develop themselves correspondingly. Thus, courts of justice were established while yet the Civil Code and the penal laws were unrevised. Such was the peculiar condition of the country at the beginning of the new era.

If we return to the financial side of the situation, we note at first how very unsatisfactory was the method of the collection of the revenue. Each feudal lord had his own methods and his own taxes. Besides this, as has been said before, the taxes were paid in rice. It was quite natural that under such circumstances much expense was incurred on the one hand, necessitated by sudden and wholesale reforms, and the revenue was so uncertain, on the other, that the finances were in a most unenviable state. The various paper-moneys in circulation also added to the difficulties of finance. Now, various departments having been modelled upon European lines, the expenditure became a fixed and tangible amount. And this had to be met by an ever-varying and uncertain revenue. This was a state of things that could not last long, and in the third year of Meiji (1870) the feudal system was abolished, and the lands of the feudal lords placed under the immediate control of the Government. The various paper-moneys were also all gathered in and centralized under the Imperial Government.

The Financial Department at that time was under the direction of the late Marquis Okubo, while I and Baron Shibusawa were Vice-Ministers. The expenditure continued to grow ​rapidly, and the Government was disinclined to adopt the necessary measures to meet these expenditures, and to regulate and moderate the progress and development of the country. Everybody was revelling in the luxury of European ideas. Such was the state of affairs at that time, when I and my colleague had quite an opposite opinion that some radical step must be taken before it was too late. Finally, in 1873, we resigned our offices, leaving a memorandum of what we thought necessary to be done to set the financial situation in order.

Count Okuma then assumed control of the Financial Department, and made great efforts to maintain the convertibility of the paper-moneys issued by the State. All hope of success was, however, removed by the outbreak of the Kagoshima Rebellion, which necessitated still further issues of paper-money. In 1881 Count Matsukata became Minister of Finance, and it was then found absolutely necessary to take decisive steps towards the redemption of the paper-money. This was agreed to by all parties, so apparent was the danger. In that year the silver yen was worth 1 yen 80 sen of paper-money. It was determined that all the paper-money should be made convertible within six years, and by the end of the fourth year already—in 1885—this work was accomplished, and the financial situation was improved.

The Europeanizing of the higher strata of public life while the lower ones were unchanged caused much disturbance and unquiet. The people at large began to clamour for some say in the Government, and in 1880 a Constitution was promised them. Marquis Ito was sent on a special mission abroad to study the different forms of governments and constitutions. On his return he drew up the present Constitution of Japan. This was inaugurated in 1889, but was not very successful at first, and cannot at present be described as working successfully, owing principally to the unpreparedness of the people for such unprecedented a share of power and authority. Thus, with many of the deputies local interests or self-interest outweighed national concern. There has constantly been friction between the Government and the Parliament, and the consequent frequency of changes of Cabinet have rendered it difficult to ensure the adoption of permanent and far-seeing measures for the good of Japan. At this time the question of organization, and of course of constitution, was in the foreground, and there ensued almost a craze for legislation on every conceivable subject. For example, a system of municipal government was introduced from Europe, and all other branches of national life were framed out in new forms. This period was also that in which the lower classes of society ​desired to progress more rapidly than did the higher. The result was that various laws, or sets of laws, were introduced from various countries, and put into operation with the assistance of French, German, or English lawyers. This had as a necessary result inconsistency, and even discord, between the different parts of the legal system.

The Europeanization of the country having progressed very rapidly, the foreign Powers might have been expected to have been ready to consent even earlier to a revision of treaties, but as a matter of fact this was not so. When the first conference of the representatives of the foreign Powers bound by treaty to Japan was held, I was Foreign Minister, and it was my earnest desire to restore tariff autonomy to Japan. It seemed to me to be most necessary that we should have the power to protect our industries should it be found necessary. On looking at the systems in force throughout the world, I found that the universal tendency was in favour of protective tariffs. England was the leading exception, and it is well known why she is an adherent to the principles of Free Trade. Thus it seemed to me that it was only just to Japan that she should be allowed to follow the example of other nations, and erect tariff walls if she should so desire. The foreign representatives, each bent upon obtaining as much advantage for his own country as possible, refused to restore autonomy to Japan in her tariff affairs. I therefore resigned my office, since it was impossible for me to arrange matters for the highest good to Japan.

In 1894 came the war with China, which must be regarded as a very victorious one, when we consider the action of the army and navy, and also the fact that 350,000,000 yen were paid as an indemnity. It is a curious thing that the very magnitude of the indemnity produced such effects as to make one imagine that a victorious war may be almost ruinous to the victor. Up to the time of the payment of the indemnity there had been no occasion to use the phrase hundreds of millions of yen in the financial government of the country. The revenue had only reached 80,000,000 yen. Thus the idea of 350,000,000 yen coming into the country produced a feeling of illimitable riches both in Government circles and to the private individual. All branches of the Government were enormously expanded, the unproductive as well as the productive. The vast sum of money brought into the country did not benefit it at all; indeed, it did more harm by causing a mushroom growth of industries. The fact was that all the hard cash went out of the country very rapidly, both through Government and individual action. The industries that were established were dependent upon outside assistance, and only ​in very rare cases did they develop any of the natural resources of the country. It may be noted that of the expenditure upon railways and upon weaving industries, 40 per cent. and 70 per cent. respectively represented hard cash sent out of the country for the purchase of machinery, etc. Thus, not only did the indemnity drain out of the country itself, but much more money left the country as a result of the victorious war.

I was in London during the Franco-Prussian War, and visited Berlin soon after the declaration of peace. There I found everything most wonderfully prosperous as far as outward signs went. The price of a room which before the war was 5 yen had risen to 25 yen. The enormous indemnity had produced the same effect in Germany as did the Chinese indemnity upon Japan. Four years later there came the depression in Germany, with the failing of numbers of the banks and other concerns which had grown up as a result of the war. Soon most of the indemnity had left Germany, and much returned to France. In the case of Japan, the money went to four or five Powers instead of to one, otherwise the parallel is exact. But there was a great difference between the action of the Germans during the depression and that of the Japanese. This difference explains why it was more easy for Germany to bear the hard times than it was for Japan. Germany had been ground down under the oppression of Napoleon I., and reduced to poverty so severe as to teach the inhabitants the strictest economy of living. The prospect of the length of the war with France and its certain cost also encouraged, if it did not enforce, economy. The German system of education was also very severe. Thus the Germans were able to pull themselves together at the end of their prosperity, and return to their old economical habits. Also during the prosperous times in Germany factories and other productive works which had utilized the resources of the country as well as developed them had been established. Thus in many ways it was easier for Germany to recover from the effects of the fictitious prosperity resulting from the indemnity than it was for Japan.

Germany was, and is, able to protect her industries by tariffs, and thus assure their even growth. Japan has been denied this right for several more years, owing to the action of the foreign nations at the time of the revision of the treaties. This lack of tariff autonomy has prevented the proper and even development of Japan’s resources, and has. tended to the importation of the raw materials from abroad to supply the various manufacturing industries. And this although in many instances the raw materials could be obtained in Japan. This fact reminds us how much the new Japan has been made ​by the laws. When municipal government was introduced, and the necessary laws framed, the districts framed themselves upon the new laws, and did not shape the laws to suit actual conditions. Thus also, by the practical prohibition of tariff autonomy, and the consequent inability to protect her industries, Japan was forced to import her raw materials from abroad. Such action must naturally lead to the draining of money from the country.

It seems to me that Japan’s position is so necessary to the Great Powers in maintaining the balance in the Far East that they should be prepared to amend the revised treaties, and grant Japan power to protect her industries. By such action they would enable Japan to set her trade upon a firm basis. Owing to the great importations subsequent to the war, and owing to the impossibility of changing the tariff rates, the balance of trade was for many years adverse to Japan. Thus the original imperfections of Japanese finance, the rapid Europeanization of the country, with its necessary expenditure, the craze for business expansion after the victorious war, the inability to protect our industries against foreign competition, and many other causes cursorily mentioned, contributed to bring about the great financial depression of 1900.

I will not, however, dwell upon the details of such depression, but rather, having shown the causes, will give the broad outline of a plan to steady the financial situation permanently. Foreign capital is absolutely necessary to Japan’s consistent progress. Such capital may be introduced either by the investing of money by foreign investors in Japan, or else by the raising of loans by the Government abroad. The danger of the latter plan is that the money thus obtained would be spent without bringing real benefit to Japan and Japanese industries. Also there is the danger that large loans would produce similar effects to those of the indemnity. In my opinion, there would be considerable difficulty in raising a large foreign loan simply upon the credit of the country, there being considerable distrust of Japan as an investment. I would propose the nationalization of the railways of Japan, paying the present shareholders in Government bonds. With these nationalized railways as a security, it should be easy to raise a loan abroad. Full particulars of the revenue of the railways being brought to the notice of foreign nations, the security would be recognised as sound, and favourable terms would be obtained. The money raised in this way should be employed in the redeeming of the Government bonds issued to the holders of railway shares at the time of the nationalization. In this way the loan would pay off the debt upon the security upon which the loan was raised. But the most ​valuable result of the gradual repayment of the bonds would be the distribution of a great quantity of actual money about the country in small amounts, which would be most easily reinvested in home industries, thus developing Japan’s resources to a very high degree. This method of utilizing a loan would keep the money in the country, whereas ordinary methods do not.

It is also very necessary that there should be economy introduced into all branches of the Government. There is at present a decided tendency towards extravagance in the carrying on of the national concerns. This extravagance is due chiefly to the haste with which the expansion has taken place in the past. The same necessity for economy exists in the case of private businesses, which labour besides under the disadvantage of their disinclination for union and mutual confidence.

But, everything being taken into consideration, it cannot be said that the financial condition of Japan is unsound. Just before the war with China, assuming that the national wealth of the Empire was £50,000,000, now it is more than £150,000,000, and that without taking into account non-productive works. The value of productive works has practically trebled since the war (1895). Thus, considered as property, Japan is much more valuable than ever before, and this being the case, she ought to be easily able, if the above circumstances were accurately known to the business world, to raise favourable loans upon her productive works, or at least upon some of them.