Japan by the Japanese/Chapter 15.3

The war of 1894–95 produced remarkable changes in the financial condition of Japan, the annual State expenditure, which used to be about 80,000,000 yen before the war, suddenly rising to more than 200,000,000 yen in the year subsequent to it. How this novel situation has been met by the Government is stated in detail in the ‘Report on the Post-Bellum Financial Administration’ (published both in Japanese and in English) which I presented to the Minister President of State in March, 1900, when I held the office of Minister of Finance. My letter to the Minister President may be quoted here, because the whole work is summarized in it:

In March of the 28th year of Meiji (1895), when the war with China was not yet brought to its close, and the whole nation was overwhelmed with joy and wonder at the glorious news of victory, His Majesty the Emperor being deeply concerned about the future financial policy of the country, ordered me especially to his presence at his military headquarters in Hiroshima, and conferred on me his gracious words, at the same time entrusting me with the task of administering the national finance with the view to its post-bellum rearrangement. I was most deeply touched with all this, and, at once accepting the Portfolio of Finance, laboured day and night, earnestly hoping that I might prove myself worthy of the great trust imposed on me. On entering upon my duties, I saw immediately that the first thing to do was to fix upon a scheme of financial policy to be pursued, which should be in harmony with ​the changed status of the country, and with the particular state of affairs at home and abroad. Such a scheme was accordingly drawn up, and presented not long after to the Cabinet Council. I felt indeed the gravity of my attempt. For it was evident that, in view of the greatness of the war expenditures, as well as of the immense expensiveness of the unavoidable post-bellum undertakings, such a scheme would have to be drawn up with the greatest care; otherwise, through some piece of mistaken policy, not only the whole result of our victorious war might have been destroyed, but the roots of future calamities might have been left to the country for centuries to come. Such, no doubt, were the ideas in the mind of the Emperor, which led him to take so much concern, and I felt that I was acting in union with these feelings of our august master in putting forth my best efforts to perform my duties at this important stage in the nation’s history. The main points in the financial policy now adopted, at my humble suggestion, were to increase the national revenue so far as necessary, and practise economy in expenditure as much as possible. With regard to the sources of revenue for meeting the increased expenditures on account of the post-bellum undertakings, it was decided to depend on increased taxation for the ordinary class of expenditures, and for the extraordinary class of expenditures to look to the Chinese indemnity and the public loan. At the same time measures were taken with the object of developing the resources of the country, so that the growth of the country’s wealth might keep pace with its increased expenditures. For it was clear from the very start that the true post-bellum financial measures should consist, not only of the rearrangement of the national finance, but also of the measures taken for the economical development of the country; thus only would the measures now adopted by the Government prove to be no temporary makeshift, but something lastingly beneficial to the nation. These two lines of policy—the rearrangement of finance and the development of resources—were therefore both equally emphasized in the new scheme adopted by the Government. The main items of the programme presented to the Cabinet Council were as follows:

Part I.: A scheme for meeting the increased expenditures of the Government, beginning with 1896–97.

1. To meet the ordinary class of the increased expenditures, on account of the post-bellum undertakings, by the increased revenue from the saké tax, business tax, registration duties, and the leaf-tobacco monopoly.
2. To pay for the expenses of the military and expansion, and of establishing the iron-foundry, from the Chinese Indemnity Fund. ​
3. To find the revenue needed for defraying the expenses of making improvements in the Government railways and of expanding the telephone service by issuing public loans.

Part II.: A scheme concerning the extraordinary War expenditures, the Chinese indemnity, and the annual estimate for the administration of Formosa.

1. To close up the special comptabilité of the extraordinary war fund on the last day of March, 1896, and transfer its remaining business to the General Account of the Government to be thereby transacted.
2. Since the Chinese indemnity was to be received in partial instalments covering a number of years, it was thought more reasonable to spend it for the class of expenditures covering a number of years. It was therefore proposed to spend the said fund for the redemption of the war expenses, for the military and naval expansion, and for the establishment of the iron-foundry, as well as for the extraordinary reserve fund, and for subsidizing a portion of the capital of the proposed local industrial banks.
3. To separate the annual account of Formosa from the general account of the Government at home, and set up a special comptabilité for Formosa, with the object of adopting a scheme of self-supporting financial administration for that island.

Part III.: A scheme of expansion concerning the public organizations for communication and for monetary circulation.

1. To bring about the improvement and the extension of railways and telephone service by issuing a public loan.
2. To expand the business of the Bank of Japan and of the Yokohama Specie Bank, and to establish the central industrial bank and local industrial banks.

Now, the post-bellum national measures being no other than the undertaking of various enterprises, made necessary on account of the expansion of national affairs, it is but reasonable that all plans for such measures should be extensive and far-reaching, and that every step to be taken for the realization of such plans should be well considered and accurately thought out. It was with these ends in view that I thought it necessary to look to an increased taxation for the increased revenue needed to meet the enlarged expenditures, so that a financial basis might be securely laid; to determine beforehand upon a line of policy to be pursued in regard to the uses of the indemnity money, so that in this way all future disputes and troubles concerning the matter might be avoided; and, lastly, to make provision for developing national industry—all these with the view to the collateral development of the country in ​both finance and economy, so as to successfully bring about results aimed at by the post-bellum measures. Before, however, these suggestions of mine were carried into execution, in August of 1895, 1 felt it my duty to tender my resignation; but my successor in office, Viscount Watanabe, largely shared my views, and proposed, in the ninth session of the Imperial Diet, measures for the improvement and extension of public organizations for transportation, communication, and monetary circulation. These measures being adopted by the Diet, it must be said that the first important step was taken in a general way in the great work of post-bellum financial and economical rearrangements.

In September of 1896 I was again appointed Minister of Finance, and I immediately took steps to bring about the adoption of the gold standard, through the enactment of the Coinage Law—a scheme which had been a long time in maturing—and I succeeded further in bringing about the setting up of a special comptabilité for Formosa, thus making it independent of the General Account of the Government, as well as the adoption of measures for the second period of military and naval programme expansion—these measures all forming parts of the scheme for adjusting the post-bellum financial affairs.

A remarkable state of affairs produced through the impetus given by the late victorious war was the sudden uprising of industrial enterprises of all kinds; so that, in the matter of shipping and navigation, for instance, such great and rapid strides were made by the nation that the amount of navigation subsidy paid by the Government to private companies had to be at once increased from 1,000,000 yen to 5,000,000 yen. One of the results of this sudden industrial expansion was the rise of prices and wages, which necessarily helped to increase the deficit in the State revenue; added to this, the cost of administration of Formosa came to grow more and more heavy. All these things combined to create a deficit of some 21,000,000 yen in the Budget of 1898, notwithstanding the fact that the greatest economy was practised in certain lines of expenditure, and that in the matter of revenue the rates of the saké tax and some other Excise duties were increased. Now, it seemed to me that in these circumstances no half-measures would suffice, and that, unless some thorough-going steps were taken to make good this deficit, it was clear as daylight that a great disorder of national finance would be the result. I could only think of an increase of land tax as surely calculated to lay firm financial foundations. For this reason, although the measure was very unpopular and difficult to carry through, I had a scheme of increased land tax drawn up. I felt somewhat encouraged to do so, since, on account of the adoption of the gold standard ​in the previous session of the Diet, the land tax had come to be practically reduced, so that if the rate was. somewhat raised, it would not very greatly increase the burden of the land-owners. But, unfortunately, the Diet was dissolved before the Bill for the measure could be passed; and soon after, in January, 1898, I was relieved of my official charge.

My successor in office, Count Inouye, laboured hard to keep up the equilibrium of the economical body politic and the balance between the receipts and the expenditure in the State finances; and with this end in view he greatly reduced expenditure, by postponing the carrying into effect of certain predetermined measures concerning national enterprises. Yet, notwithstanding all this, there was still found in the Budget of 1898–99 a deficit of some 20,000,000 yen. More than that, there came to prevail a great stringency in the money market as a result of reaction from the recent sudden expansion of industry, and it was found impossible to issue, as was expected, a public loan in the home market; so that the deficit, temporarily made good from the Chinese indemnity, came to amount altogether to an immense sum of some 70,000,000 yen. For this reason the Government decided to resort to increased taxation, and presented, in May, 1898, to the twelfth session of the Diet, a Bill for increasing the rates of the land tax, the income tax, the saké tax, etc., which would raise the amount of revenue by some 35,000,000 yen, hoping in this way to keep up the balance between the receipts and the expenditures of State.

But, unfortunately, the Bill was rejected, and the Diet was subsequently dissolved. The Cabinet also resigned. In July of the same year Mr. Matsuda Masahisa became the Minister of Finance, but the new Cabinet lasted only a few months, resigning before the meeting of the thirteenth session of the Diet, which had been convened to meet a few days afterward.

Now, it is needless to repeat that all these financial difficulties were due to the great change wrought by the late war on the position of Japan, which necessitated the expansion of the State expenditures for various measures connected with the armament, diplomacy, education, communication, industry, etc. This expansion was so sudden and so great that immediately a large deficit was created in the revenue of the country; while at the same time great distress came to prevail among the industrial classes, owing to certain unavoidable causes. For these reasons the relief of the financial and economical distress of the country came now to assume the greatest importance.

In November of 1898 the economical distress of the country was at its last stage, the greatest uneasiness prevailing among all classes.

​Twice had the Imperial Diet been dissolved in succession, and the national treasury was almost empty. The state of affairs evidently demanded the adoption of some thorough-going measures of relief; otherwise things would have reached such a pass that the post-bellum enterprises would have had to be given up before completion, the national progress and development stopped, and the political machinery of the country would have ceased to move altogether. I saw immediately, on examining the Budget for 1899–1900, prepared by the previous Financial Minister, that there would be a deficit of about 37,600,000 yen. No other course was now possible to pursue but to resort to an increased taxation, if we would restore the parity between the receipts and the expenditure of the Government, and hope for the healthy growth of national finance.

I drew up a Bill for increasing the rate of saké tax, as well as for revising the rate of income tax and registration duties, as also a Bill on tonnage dues and on the tax on the net profit of the Bank of Japan. These Bills, together with a Bill for the increased land tax, which was accompanied by a Bill for revising the legal valuation of lands, were presented to the thirteenth session of the Imperial Diet.

Then, further, the Government was obliged to resort to some public loans for paying back the sum of about 70,000,000 yen which had been temporarily borrowed from the Chinese Indemnity Fund in order to fill up the gap created by the difficulty in raising loans, as had been intended; otherwise it was clear that the enterprises already set on foot with the expectation of applying those 70,000,000 yen toward their expenses would have had to be stopped. Besides, there was the need of issuing another public loan of about 20,000,000 yen set down in the Budget of 1899–1900. Since, however, the condition of the money market at home did not permit of the issuing of so large a loan altogether, it was decided to resort to a foreign loan; and accordingly a Bill for the issuing of a foreign loan was presented, together with the increased taxation Bills, to the thirteenth session of the Diet.

Most fortunately, the Imperial Diet adopted the measures proposed by the Government. The result was an increase of the national revenue by about 40,000,000 yen, and the raising of a foreign loan in London, in June of 1899, of the sum, according to the face value of the bonds, of £10,000,000. Thus was at last attained the object aimed at, of relieving a most distressing condition of national finance.

The Government was now at last enabled, in preparing the Budget for 1900–01, to abandon the habit of employing temporary makeshifts, and, instead, to depend on revenues resting on a secure basis; and, moreover, to balance all ordinary ​expenditures with the ordinary receipts, and also take proper steps toward obtaining a revenue needed for meeting the extraordinary expenditures. The parity between the receipts and the expenditures was restored, and the national finance at last brought back to its normal path of progress.

When the Bill for increased taxation was first brought before the thirteenth session of the Diet—a Bill which, when passed, would suddenly increase the burden of taxation as has never happened since the Restoration—a great confusion of opinion prevailed, not only among members of both Houses of the Diet, but also among members of different political parties. Even among those who adhered to the positive programme of national expansion and supported the Bill, there were not a few who were afraid that the practical working of the Bill might not be as satisfactory as was expected. The country is to be congratulated, however, that scarcely a trace has been found since then that the people found the increased burden unbearable, that the result of collecting the taxes has proved as good as was expected, and that one important stage has been finally passed in the normal development of the post-bellum programme.

I cannot hide from myself the confidence that, with the foundations thus laid by the post-bellum financial adjustment, if the future policy of the Government is determined in accordance with the lines thus laid down, all the benefits of the victorious war will be finally gathered in.

As may be seen from the foregoing, the main points of the post-bellum administration were that the increase in the ordinary expenditures should be met by increased taxation, and that the extraordinary expenditures should be met by appropriating the Chinese indemnity and raising public loans. Owing to the unexpected rapidity with which the expenditures increased, as well as to certain differences of views between the Government and the Diet, temporary makeshifts had sometimes to be employed; but, thanks to the adoption of the two excessive measures of increased taxation, the financial equilibrium was properly maintained in the Budget of the fiscal year of 1900–01. The estimated revenue and expenditure in 1900–01 were as follows:

My report carries the account of the financial administration to the time when this satisfactory state was attained. I shall now add a few facts of importance in order to bring my account up ​to date. But, as I retired from office in October, 1900, I can state only my private views with regard to what has taken place since then.

The Boxer disturbances and the consequent despatch of our forces to China necessitated an unexpected expenditure on the part of the Japanese Government. The estimated outlay on this account for the fiscal year ended March, 1901, amounted to 28,600,000 yen, and no inconsiderable expenditure continued to be made in the following fiscal year. The financial equilibrium was not affected by this unexpected expenditure, because, out of the Chinese indemnity, a sum of 50,000,000 yen had been set apart, on which the Government could draw to pay the expenses connected with the Boxer disturbances. But in view of the prolongation of the Chinese complication, and of the necessity of replenishing the emergency fund, a measure for increased taxation was adopted once again in the session of the Diet, March, 1901. An increase of 21,000,000 yen in the annual revenue was expected to accrue from the said measure, which consisted of increasing the saké tax and the Customs duties on certain articles, imposing a new tax on sugar and on beer, and raising the price of leaf tobacco monopolized by the Government. Thus, in spite of the troubles connected with the Chinese disturbance, the financial equilibrium was maintained in the Budget for 1901–02 in the same satisfactory manner as in the Budget for 1900–01. The figures for the fiscal year 1901–02 were as follows:

Both in 1900–01 and in 1901–02 the excess of the ordinary revenue over the ordinary expenditure amounted to about 40,000,000 yen, and I venture to say that this state of national finances is not to be stamped as unsound. Now, the impression generally entertained, that the political troubles which led to the resignation of the Ito Cabinet on the 2nd of May, 1901, and the formation of the Katsura Cabinet just a month later, were caused by a financial question, is very misleading, if not entirely mistaken. If a Cabinet fell in consequence of financial troubles, and another was formed only after almost unexampled delay and difficulty, it would seem that the basis of our national finances was dangerously insecure. But such is far from being the case. It seems at first sight that the Ito Cabinet was embarrassed by a financial question; but the question only related to the extraordinary public undertakings, such as the extension of railways and other means of communication, for ​which the necessary funds had to be provided by public loans. The Minister of Finance was of opinion that the economic condition of the country was not favourable for raising public loans, and proposed temporarily to curtail the public undertakings. Other Ministers objected to this proposal at first; but, a compromise having been effected, the expenditure for extraordinary public undertakings was reduced by about 9,000,000 yen, by postponing the execution of some of the projected works. When, however, the general line of policy to be adopted in drawing up the Budget for 1902–03 came to be discussed, an untoward disagreement arose again between the Financial Minister and other Ministers with reference to the execution of the public undertakings, and this led to the resignation of Marquis Ito. The so-called financial question was nothing more than this. Whatever may be the difficulties in connection with the carrying out of the extraordinary undertakings, the normal financial equilibrium is hardly affected by them. In fact, the members of the Ito Cabinet seem not to have been in perfect harmony from the outset, and the financial question was probably not so much the cause as an incident of the political trouble.

If the execution of the public undertakings projected for the purpose of facilitating the economic progress of the country had to be postponed, it would certainly be a cause for regret. But the normal financial equilibrium is not affected by it. Besides, the execution of public undertakings is simply a question of time. With a considerable excess of the ordinary revenue over the ordinary expenditure, the public undertakings may be carried on steadily. The Chinese trouble being over, and the emergency fund replenished, the revenue accruing from the last adopted measure of increased taxation may be employed for carrying on the public works, because in Japan the imposition of taxes is provided not only in annual Budgets, but in statutes, so that a tax, once imposed, remains effective until it is repealed by another statute. As to the burden of the taxation imposed upon the people, there may be some who doubt if it has not become too heavy in consequence of the remarkable increase after the war of 1894–95; but if a broad view is taken of the situation, it will be seen that the national financial burden is by no means out of proportion to the general progress of the country. While the national wealth has steadily grown with remarkable rapidity since the inauguration of the present régime, the increase of taxation did not keep pace with it before the war of 1894–95. As that struggle was an occasion for the manifestation of our accumulated national forces, the changes subsequent to it may appear sudden and abrupt. The increase of taxation is one of the instances. But if comparison ​is made with the state of things thirty years ago, the present burden is not to be considered unreasonably heavy. The reasons for the opposition in the Diet to the successive measures of increased taxation have been political rather than financial. It may be safely asserted that in maintaining the equilibrium of State finances after the war with China the taxpaying capacity of the people has not been unduly strained.

It is true that great economic distress prevailed in the country in 1901; but it was the reaction of the expansion of enterprises that came about after our victory over China. That a period of expansion is followed by a period of depression is not an uncommon economic phenomenon; only in this case the reaction had been aggravated owing to the lack of experience on the part of the promoters of business enterprises, and to their refusal to listen to the warning of prudent and far-seeing men. It is only of recent date that commercial notes came to be widely used among us, and those who have not quite realized the conditions of this system have succumbed to the temptation of abusing their credit. The failure of a number of banks produced an undue sensation in certain quarters. As a matter of fact, the failing banks were all small ones that had been recently established, and whose organization and management had been defective from the outset, and there was not one instance of the failure of a bank of long standing and established credit. All this shows that the distress of 1901 was the result not so much of the exhaustion of economical vitality as of the imperfection of method. Thus, the general economic situation was never so grave in reality as a cursory observer might conclude from the apparently alarming symptoms. This distress will have served to eliminate unsound elements from the economic world. If the lesson furnished by it is taken to heart by business men, as it will certainly be, a healthier development of the abundant national resources may safely be looked to in the future. The depression has passed the culminating point, and the balance of foreign trade has been turned in favour of our country. We need not, therefore, entertain misgivings about the carrying out of our financial programmes, even if they have had to be postponed for a time.

To establish gold monometallism in place of a de facto silver standard is indeed a thoroughgoing change, and the influence of that change on the future economy and finance of the country will doubtless be great and far-reaching.

The coinage system in vogue at the time of the Restoration (1868) was based on the system that was first established in the 6th year of Keicho (A.D. 1600), and since that time, for more than 260 years, no change has ever been introduced into the system. Yet, owing to growing financial distress, the Shogunate ​Government frequently resorted to recoinage as its invariable relief measure, which in every case, excepting the solitary case of Kioho time (A.D. 1715 to A.D. 1734), brought out coins of lighter weight and poorer quality. The coinage system was thus, though nominally kept intact, practically destroyed in the end through successive debasement. Besides, some of the Daimios (feudal princes) often took the liberty of secretly coining money, while the practice of issuing paper-money for circulation within their separate jurisdictions had become well-nigh universal. In a word, the currency system of the country at the end of the Shogunate period was in a most disordered condition.

Soon after the Restoration the Imperial Government saw the necessity of reorganizing the existing system of coinage on a sound basis, and in May, 1871 (4th year of Meiji) a new Coinage Law was promulgated, which opened the way for the final establishment of the gold standard system. This is a fact that must be particularly noted in order to clearly understand the monetary history of modern Japan. However, the gold standard could not yet be thus at once established. In those days the universal medium of exchange in the Far East was the Mexican dollar, and the Government thought the interest of foreign trade would be best served by issuing, besides the standard gold coins, the silver one-yen (or trade dollar), equal in size and quality to the Mexican dollar, and by making it legal tender only within the limits of the treaty ports. So the provision was made in the new Coinage Law of 1871 for the coinage of the silver yen to be called Boyeki ichi yen gin (or trade silver dollar). At the same time, the disordered condition of finance, especially the issuing of inconvertible paper-money, drove gold coins out of the country with enormous rapidity. Under these circumstances, situated as the country was in the midst of the silver countries of the East, it was found impossible to maintain the gold standard. These reasons, as well as the inconvenience of maintaining the two kinds of money, one for foreign and the other for home trade, led the Government to issue Imperial Ordinances Nos. XII. and XIII. in May, 1878 (11th year of Meiji), which made the trade dollar legal tender throughout the country side by side with the gold coins. Thus we no longer maintained a gold standard, but a gold and silver bimetallic system. This change must be regarded as one deviating step in the development of our monetary system.

The Government of that time should not, however, be too severely judged. The expenses of the revolutionary wars were very heavy, and the financial need most pressing. Almost the only resort of the Government was the issuing of paper money. Moreover, when feudalism was abolished in 1871 (4th year of ​Meiji), the Imperial Government was obliged to take over all the paper money which had been issued by different Daimios, and for the adjustment of this class of paper money the Government was again obliged to issue further a large amount of paper currency. All these causes combined to raise the amount of inconvertible paper money to an enormous figure.

The credit of these notes was at first exceedingly bad. This was doubtless due largely to the lack of credit of the Imperial Government itself, but also to the fact that the people could not free their minds of the sad experiences of the losses they had incurred on account of the various inconvertible notes of feudal times. The new paper money was shunned by the people, even at a large discount, so much so that the Government felt compelled to take steps to reduce its amount by exchanging it for Government bonds, bearing 6 per cent. interest, which were issued under the Kinsatu (literally, gold note) Exchange Bond Regulations. Through these measures, as well as owing to the increase of the Government’s credit, the hatred of paper money gradually wore off, the people finally even coming to prefer it to specie, because of the convenience of handling.

Matters were progressing favourably when, in 1877 (10th year of Meiji), a rebellion broke out in the south-western provinces. The Government was again forced to resort to the issuing of a large amount of inconvertible notes, which brought on an inflation, and consequent depreciation, of these notes. There was also another cause for this result—namely, the increase after 1876 of the amount of the national bank-notes, due to the increase in the number of national banks, owing to certain amendments in the National Bank Regulations, which took place through Imperial Ordinance No. CVI. The effect of this depreciation was felt in various directions: for instance, prices rose rapidly, gold and silver left the country, the imports came to exceed the exports, the farmers contracted habits of luxury, the industrial classes became overexcited with vain hopes of speculation. Thus was brought about the great financial distress of 1880–81. That disastrous results would inevitably follow if inconvertible paper money were made the standard of value might have been foreseen by mere common-sense; but the measures adopted by the Government at this crisis seemed to show that the authorities did not grasp this simple truth. They regarded the difference in price between silver and paper as an indication, not of the depreciation of paper, but of the appreciation of silver. They attempted, therefore, to stop the rise of the price of silver by increasing the amount of its circulation. The Government sold silver coins, opened places for the exchange of Mexican dollars, and established the Yokohama Specie Bank, in order to call forth the ​coins hoarded by the people. But the more these measures were resorted to, so much more rose the price of silver. The Yokohama Specie Bank finally became almost bankrupt, and no one knew how far the paper currency would go down in the scale of depreciation.

At last, however, the true method of relieving the financial distress began to dawn on the minds of the men in authority. From September, 1880, the Government began to take steps to redeem a part of the paper money in circulation. The depreciation, however, still continued, without a sign of abatement. It was at this crisis, in October, 1880, that I received the Portfolio of Finance. It occurred to me, as I studied the case, that in order to effect the object in view the Government should, side by side with the redemption of a portion of the paper money in circulation, take steps to increase the specie reserve of the Government preparatory to the resumption of specie payment. Moreover, in order to put the country’s finance on a sound basis and relieve the pressing distress of the time, I felt the need of a central bank, having the sole privilege of issuing convertible notes. I submitted a scheme for the establishment of such a central bank to the consideration of my colleagues. In the Cabinet Council which followed my suggestions were approved, and in June, 1882, by Imperial Ordinance No. XXXII., the Nippon Ginko (Bank of Japan) was established. Two years later, in May, 1884, by Imperial Ordinance No. XVII., the Bank of Japan was empowered to issue convertible notes. After the necessary foundations were in this way laid, the Government used every means in its power to raise on these foundations a sound financial superstructure. The methods of receiving and disbursing the Government revenue was changed, and the strictest economy was practised in the expenditures of the different departments. One-half of the surplus obtained in this way was devoted to the redemption of paper money, while the other half was added to the specie reserve of the Government. Besides, after the latter part of 1881 this reserve fund was employed for discounting foreign bills of exchange, with a view to encourage the export trade of the country, which in its turn would lead to the importation of the specie. Thus, the Government took every possible measure, and left no stone unturned for the establishment of a convertible notes system.

Thus took place on the one hand the gradual redemption of paper money, and on the other hand the increase of the specie reserve of the Government, so that not long after, about the close of 1885, the credit of the Government rose so much that the difference between the value of silver and that of paper almost disappeared. The opportune moment seemed now to have arrived to effect the substitution of the convertible notes ​for the inconvertible. The Government, therefore, gave notice by Imperial Ordinance No. XIV., of June, 1885, that specie payment would be resumed after the 1st of January, 1886. Thus at last was overthrown the system of inconvertible paper money, together with all the evils resulting from that system.

Previous to this the Government saw that the notes of the national banks were also in need of adjustment, and through the Imperial Ordinance No. XIV., of May, 1883, certain amendments were introduced in the National Bank Regulations, the main point in those amendments being a method of conjoined redemption of the notes of all the banks. Thus, the redemption of the bank notes began to take place, as also that of the Government paper money. The circulation of both ceased altogether on the 31st of December, 1899.

While the evils of inconvertible paper currency were thus swept away, on the other hand, however, one effect of all these reforms was to make Japan a de facto silver standard country. This was, perhaps, an inevitable step the country had to take to arrive at last upon a sound financial footing. The authorities knew, of course, that, to ensure healthy financial development, Japan would have to enter sooner or later the international economic community, and that in order to do this she would have to adopt a gold standard. That the Government pursued a policy which led to the inevitable result of making Japan a de facto silver country was owing mainly to the great difficulty of at once accumulating a large gold reserve necessary for the establishment of gold monometallism. It was thought advisable, therefore, to leave the latter, as the second end to be aimed at, to some more favourable time.

The first cause of the recent rapid depreciation of silver we must attribute to Germany’s adoption of a gold standard in 1873, in consequence of which she began to sell silver. Among other main causes may be mentioned the limitation and final cessation of the coining of silver in the countries of the Latin Union, and the discovery of the rich silver-mines of North America. When, however, in 1893, India, the greatest silver country in Asia, took steps to reorganize her currency system, the sudden fall in the price in silver was exceptionally noticeable. At that time, Japan being a de facto silver country, the effect upon her of this sudden fall was very great. Fluctuations in foreign exchange now became exceeding frequent and unreliable. Business men lost a constant standard of value, and became compelled to pay constant attention to changes in the money market, so that foreign trade tended to become largely a matter of momentary speculation. It became more and more hopeless to expect to see the healthy growth of trade, both home and foreign. Thus was impressed ​most clearly upon the minds of the financiers of the country the necessity of adopting gold as the standard coinage in Japan, that metal being least subjected to changes in its price, and most fitted for use as the medium of exchange.

The reform so necessary was, however, very difficult to undertake. Unexpectedly the reception of the Chinese indemnity seemed to offer the desired opportunity. Now, according to the terms of the treaty of peace, Japan was to receive her indemnity in kuping taels. It occurred to me then that, on account of the inconsistency in the past of silver, as well as in view of the possible adoption of a gold standard by our country, it would be greatly to our advantage to receive the payment of the indemnity in British, instead of Chinese, money. The Minister President of State, Marquis Ito, acting on my suggestion, negotiated with the Chinese authorities, which led to our receiving the indemnity money in pounds sterling.

Not long after, on my appointment to fill the post of Minister President of State, my efforts were immediately directed toward making preparations for adopting the gold standard. In February, 1897, the Bill for effecting the reform was drawn up. There was, however, no little opposition. Some said the fall in the price of silver would rather encourage trade with the gold standard countries, while the adoption of a gold standard by Japan would decrease the amount of our exports to those countries. Others said Japan, situated as she was in the midst of the silver countries of the East, would be placed in a position of much disadvantage in her trade with these countries if she adopted gold monometallism. Some others said Japan did not produce a sufficient amount of gold to be able to maintain permanently a gold standard system. Yet again, others said the silver yen exported to foreign lands exceeded 100,000,000, and if all these coins came back for exchange, as might possibly be the case, the national treasury would have to suffer an immense loss. In the midst of all this opposition the Government stood firm in its purpose, and the Bill was introduced into the Imperial Diet in March, 1897, which, after being passed by both Houses of the Diet, was sanctioned by the Emperor, and promulgated as Law No. XVI. on the 29th day of the same month.

The Government had to find some proper method of disposal of the silver coins now suddenly brought in. They amounted to the sum of 75,093,822 yen. This large sum was disposed of as follows: 27,567,012 yen were recoined into subsidiary coins between the 30th and 32nd fiscal year of Meiji (1897–1900); 40,786,662 yen were sold in Shanghai, ​Hong Kong, and elsewhere; 6,740,148 yen were taken over to Formosa, Corea, and elsewhere, and expended in those countries. The whole amount was thus disposed of in just one year and three months after the new Coinage Law was promulgated.

It is possible that the state of coinage in Formosa may act as a disturbing factor in the successful working of gold monometallism in Japan. Much as it was desired to establish a pure and simple gold standard in the island of Formosa, it was found impossible to do so, in view of the great difficulty of changing the uses and customs of the Chinese population in that island, and also because of the exceptionally close commercial relationship that is maintained between Formosa and the mainland. For these reasons, while gold is made the standard of value, yet for a limited period of time the silver yen is to be allowed to circulate as legal tender at a value fixed by the Government from time to time.^[1]

It is plain, however, that, in order to strengthen the foundations of the gold standard system now established, it will be necessary that efforts be made in the future not only to keep up, but to increase, the gold reserve of the Bank of Japan. It will also be necessary that efforts be increasingly directed toward the development of the agricultural and industrial enterprises of the country, and the consequent growth of foreign trade.