Chapter XVIII: Part 18

This question of paper currency inaugurates the story of banking; a story on almost every page of which are to be found inscribed the names of Prince Ito, Marquis Inouye, Marquis Matsukata, Count Okuma and Baron Shibusawa, the fathers of their country's economic and financial progress in modern times. The only substitutes for banks in feudal days were a few private firms--"households" would, perhaps, be a more correct expression--which received local taxes in kind, converted them into money, paid the proceeds to the central government or to the feudatories, gave accommodation to officials, did some exchange business, and occasionally extended accommodation to private individuals. They were not banks in the Occidental sense, for they neither collected funds by receiving deposits nor distributed capital by making loans. The various fiefs were so isolated that neither social nor financial intercourse was possible, and moreover the mercantile and manufacturing classes were regarded with some disdain by the gentry. The people had never been familiarized with combinations of capital for productive purposes, and such a thing as a joint-stock company was unknown. In these circumstances, when the administration of state affairs fell into the hands of the men who had made the restoration, they not only lacked the first essential of rule, money, but were also without means of obtaining any, for they could not collect taxes in the fiefs, these being still under the control of the feudal barons; and in the absence of widely organized commerce or finance, no access to funds presented itself. Doubtless the minds of these men were sharpened by the necessities confronting them, yet it speaks eloquently for their discernment that, samurai as they were, without any business training whatever, one of their first essays was to establish organizations which should take charge of the national revenue, encourage industry and promote trade and production by lending money at comparatively low rates of interest. The tentative character of these attempts is evidenced by frequent changes. There was first a business bureau, then a trade bureau, then commercial companies, and then exchange companies, these last being established in the principal cities and at the open ports, their personnel consisting of the three great families--Mitsui, Shimada and Ono--houses of ancient repute, as well as other wealthy merchants in Kioto, Osaka and elsewhere. These exchange companies were partnerships, though not strictly of the joint-stock kind. They formed the nucleus of banks in Japan, and their functions included, for the first time, the receiving of deposits and the lending of money to merchants and manufacturers. They had power to issue notes, and, at the same time, the government issued notes on its own account. Indeed, in this latter fact is to be found one of the motives for organizing the exchange companies, the idea being that if the state's notes were lent to the companies, the people would become familiarized with the use of such currency, and the companies would find them convenient capital. But this system was essentially unsound: the notes, alike of the treasury and of the companies, though nominally convertible, were not secured by any fixed stock of specie. Four years sufficed to prove the unpracticality of such an arrangement, and in 1872 the exchange companies were swept away, to be succeeded in July 1873 by the establishment of national banks on a system which combined some of the features of English banking with the general bases of American. Each bank had to pay into the treasury 60% of its capital in government notes. It was credited in return with interest-bearing bonds, which bonds were to be left in the treasury as security for the issue of bank-notes to an equal amount, the banks being required to keep in gold the remaining 40% of their capital as a fund for converting the notes, which conversion must always be effected on application. The elaborators of this programme were Ito, Inouye, Okuma and Shibusawa. They added a provision designed to prevent the establishment of too small banks, namely, that the capital of each bank must bear a fixed ratio to the population of its place of business. Evidently the main object of the treasury was gradually to replace its own fiat paper with convertible bank-notes. But experience quickly proved that the scheme was unworkable. The treasury notes had been issued in such large volume that sharp depreciation had ensued; gold could not be procured except at a heavy cost, and the balance of foreign trade being against Japan, some 300,000,000 _yen_ in specie flowed out of the country between 1872 and 1874.

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

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

Change of the Banking System.

Evidently the banking system must be changed. The government bowed to
necessity. They issued a revised code of banking regulations which
substituted treasury notes in the place of specie. Each bank was
thenceforth required to invest 80% of its capital in 6% state bonds,
and these being lodged with the treasury, the bank became competent to
issue an equal quantity of its own notes, forming with the remainder
of its capital a reserve of treasury notes for purposes of redemption.
This was a complete subversion of the government's original scheme.
But no alternative offered. Besides, the situation presented a new
feature. The hereditary pensions of the feudatories had been commuted
with bonds aggregating 174,000,000 _yen_. Were this large volume of
bonds issued at once, their heavy depreciation would be likely to
follow, and moreover their holders, unaccustomed to dealing with
financial problems, might dispose of the bonds and invest the proceeds
in hazardous enterprises. To devise some opportunity for the safe and
profitable employment of these bonds seemed, therefore, a pressing
necessity, and the newly organized national banks offered such an
opportunity. For bond-holders, combining to form a bank, continued to
draw from the treasury 6% on their bonds, while they acquired power to
issue a corresponding amount of notes which could be lent at
profitable rates. The programme worked well. Whereas, up to 1876, only
five banks were established under the original regulations, the number
under the new rule was 151 in 1879, their aggregate capital having
grown in the same interval from 2,000,000 _yen_ to 40,000,000 _yen_,
and their note issues from less than 1,000,000 to over 34,000,000.
Here, then, was a rapidly growing system resting wholly on state
credit. Something like a mania for bank-organizing declared itself,
and in 1878 the government deemed it necessary to legislate against
the establishment of any more national banks, and to limit to
34,000,000 _yen_ the aggregate note issues of those already in
existence.

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

Resumption of Specie Payments.

Up to 1881 fitful efforts had been made to strengthen the specie value
of fiat paper by throwing quantities of gold and silver upon the
market from time to time, and 23,000,000 _yen_ had been devoted to the
promotion of industries whose products, it was hoped, would go to
swell the list of exports, and thus draw specie to the country. But
these devices were now finally abandoned, and the government applied
itself steadfastly to reducing the volume of the fiduciary currency on
the one hand, and accumulating a specie reserve on the other. The
steps of the programme were simple. By cutting down administrative
expenditure; by transferring certain charges from the treasury to the
local communes; by suspending all grants in aid of provincial public
works and private enterprises, and by a moderate increase of the tax
on alcohol, an annual surplus of revenue, totalling 7,500,000 _yen_,
was secured. This was applied to reducing the volume of the notes in
circulation. At the same time, it was resolved that all officially
conducted industrial and agricultural works should be sold--since
their purpose of instruction and example seemed now to have been
sufficiently achieved--and the proceeds, together with various
securities (aggregating 26,000,000 _yen_ in face value) held by the
treasury, were applied to the purchase of specie. Had the government
entered the market openly as a seller of its own fiduciary notes, its
credit must have suffered. There were also ample reasons to doubt
whether any available stores of precious metal remained in the
country. In obedience to elementary economical laws, the cheap money
had steadily driven out the dear, and although the government mint at
Osaka, founded in 1871, had struck gold and silver coins worth
80,000,000 _yen_ between that date and 1881, the customs returns
showed that a great part of this metallic currency had flowed out of
the country. In these circumstances Japanese financiers decided that
only one course remained: the treasury must play the part of national
banker. Produce and manufactures destined for export must be purchased
by the state with fiduciary notes, and the metallic proceeds of their
sales abroad must be collected and stored in the treasury. This
programme required the establishment of consulates in the chief marts
of the Occident, and the organization of a great central bank--the
present Bank of Japan--as well as of a secondary bank--the present
Specie Bank of Yokohama--the former to conduct transactions with
native producers and manufacturers, the latter to finance the business
of exportation. The outcome of these various arrangements was that, by
the middle of 1885, the volume of fiduciary notes had been reduced to
119,000,000 _yen_, their depreciation had fallen to 3%, and the
metallic reserve of the treasury had increased to 45,000,000 _yen_.
The resumption of specie payments was then announced, and became, in
the autumn of that year, an accomplished fact. From the time when this
programme began to be effective, Japan entered a period of favourable
balance of trade. According to accepted economic theories, the
influence of an appreciating currency should be to encourage imports;
but the converse was seen in Japan's case, for from 1882 her exports
annually exceeded her imports, the maximum excess being reached in
1886, the very year after the resumption of specie payments.

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

Closing of the National Banks.

After the revision of the national bank regulations, semi-official
banking enterprise won such favour in public eyes that the government
found it necessary to impose limits. This conservative policy proved
an incentive to private banks and banking companies, so that, by the
year 1883, no less than 1093 banking institutions were in existence
throughout Japan with an aggregate capital of 900,000,000 yen. But
these were entirely lacking in arrangements for combination or for
equalizing rates of interest, and to correct such defects, no less
than ultimately to constitute the sole note-issuing institution, a
central bank (the Bank of Japan) was organized on the model of the
Bank of Belgium, with due regard to corresponding institutions in
other Western countries and to the conditions existing in Japan.
Established in 1882 with a capital of 4,000,000 yen, this bank has now
a capital of 30 millions, a security reserve of 206 millions, a
note-issue of 266 millions, a specie reserve of 160 millions, and
loans of 525 millions.

The banking machinery of the country being now complete, in a general
sense, steps were taken in 1883 for converting the national banks into
ordinary joint-stock concerns and for the redemption of all their
note-issues. Each national bank was required to deposit with the
treasury the government paper kept in its strong room as security for
its own notes, and further to take from its annual profits and hand to
the treasury a sum equal to 2½% of its notes in circulation. With
these funds the central bank was to purchase state bonds, devoting the
interest to redeeming the notes of the national banks. Formed with the
object of disturbing the money market as little as possible, this
programme encountered two obstacles. The first was that, in view of
the Bank of Japan's purchases, the market price of state bonds rose
rapidly, so that, whereas official financiers had not expected them to
reach par before 1897, they were quoted at a considerable premium in
1886. The second was that the treasury having in 1886 initiated the
policy of converting its 6% bonds into 5% consols, the former no
longer produced interest at the rate estimated for the purposes of the
banking scheme. The national banks thus found themselves in an
embarrassing situation and began to clamour for a revision of the
programme. But the government, seeing compensations for them in other
directions, adhered firmly to its scheme. Few problems have caused
greater controversy in modern Japan than this question of the ultimate
fate of the national banks. Not until 1896 could the diet be induced
to pass a bill providing for their dissolution at the close of their
charter terms, or their conversion into ordinary joint-stock concerns
without any note-issuing power, and not until 1899 did their notes
cease to be legal tender. Out of a total of 153 of these banks, 132
continued business as private institutions, and the rest were absorbed
or dissolved. Already (1890 and 1893) minute regulations had been
enacted bringing all the banks and banking institutions--except the
special banks to be presently described--within one system of
semi-annual balance-sheets and official auditing, while in the case of
savings banks the directors' responsibility was declared unlimited and
these banks were required to lodge security with the treasury for the
protection of their depositors.

Special Banks.

Just as the ordinary banks were all centred on the Bank of Japan[24]
and more or less connected with it, so in 1895, a group of special
institutions, called agricultural and commercial banks, were organized
and centred on a hypothec bank, the object of this system being to
supply cheap capital to farmers and manufacturers on the security of
real estate. The hypothec bank had its head office in Tokyo and was
authorized to obtain funds by issuing premium-bearing bonds, while an
agricultural and industrial bank was established in each prefecture
and received assistance from the hypothec bank. Two years later
(1900), an industrial bank--sometimes spoken of as the _crédit
mobilier_ of Japan--was brought into existence under official
auspices, its purpose being to lend money against bonds, debentures
and shares as well as to public corporations. These various
institutions, together with clearing houses, bankers' associations,
the Hokkaido colonial bank, the bank of Formosa, savings banks
(including a post-office savings bank), and a mint complete the
financial machinery of modern Japan.

Review of Banking Development.

Reviewing this chapter of Japan's material development, we find that
whereas, at the beginning of the Meiji era (1867), the nation did not
possess so much as one banking institution worthy of the name, forty
years later it had 2211 banks, with a paid-up capital of £40,000,000,
reserves of £12,000,000, and deposits of £147,000,000; and whereas
there was not one savings bank in 1867, there were 487 in 1906 with
deposits of over £50,000,000. The average yearly dividends of these
banks in the ten years ending 1906 varied between 9.1 and 9.9%.

Insurance.

Necessarily the movement of industrial expansion was accompanied by a
development of insurance business. The beginnings of this kind of
enterprise did not become visible, however, until 1881, and even at
that comparatively recent date no Japanese laws had yet been enacted
for the control of such operations. The commercial code, published in
March 1890, was the earliest legislation which met the need, and from
that time the number of insurance companies and the volume of their
transactions grew rapidly. In 1897, there were 35 companies with a
total paid-up capital of 7,000,000 _yen_ and policies aggregating
971,000,000 _yen_, and in 1906 the corresponding figures were 65
companies, 22,000,000 _yen_ paid up and policies of 4,149,000,000
_yen_. The premium reserves grew in the same period from 7,000,000 to
108,000,000. The net profits of these companies in 1906 were (in round
numbers) 10,000,000 _yen_.

Clearing Houses.

The origin of clearing houses preceded that of insurance companies in
Japan by only two years (1879). Osaka set the example, which was
quickly followed by Tokyo, Kobe, Yokohama, Kioto and Nagoya. In 1898
the bills handled at these institutions amounted to 1,186,000,000
_yen_, and in 1907 to 7,484,000,000 _yen_. Japanese clearing houses
are modelled after those of London and New York.

Bourses.

Exchanges existed in Japan as far back as the close of the 17th
century. At that time the income of the feudal chiefs consisted almost
entirely of rice, and as this was sold to brokers, the latter found it
convenient to meet at fixed times and places for conducting their
business. Originally their transactions were all for cash, but
afterwards they devised time bargains which ultimately developed into
a definite form of exchange. The reform of abuses incidental to this
system attracted the early attention of the Meiji government, and in
1893 a law was promulgated for the control of exchanges, which then
numbered 146. Under this law the minimum share capital of a bourse
constituted as a joint-stock company was fixed at 100,000 _yen_, and
the whole of its property became liable for failure on the part of its
brokers to implement their contracts. There were 51 bourses in 1908.

The Government and Economic Development.

Not less remarkable than this economic development was the large part
acted in it by officialdom. There were two reasons for this. One was
that a majority of the men gifted with originality and foresight were
drawn into the ranks of the administration by the great current of the
revolution; the other, that the feudal system had tended to check
rather than to encourage material development, since the limits of
each fief were also the limits of economical and industrial
enterprise. Ideas for combination and co-operation had been confined
to a few families, and there was nothing to suggest the organization
of companies nor any law to protect them if organized. Thus the
opening of the Meiji era found the Japanese nation wholly unqualified
for the commercial and manufacturing competition in which it was
thenceforth required to engage, and therefore upon those who had
brought the country out of its isolation there devolved the
responsibility of speedily preparing their fellow countrymen for the
new situation. To these leaders banking facilities seemed to be the
first need, and steps were accordingly taken in the manner already
described. But how to educate men of affairs at a moment's notice? How
to replace by a spirit of intelligent progress the ignorance and
conservatism of the hitherto despised traders and artisans? When the
first bank was organized, its two founders--men who had been urged,
nay almost compelled, by officialdom to make the essay--were obliged
to raise four-fifths of the capital themselves, the general public not
being willing to subscribe more than one-fifth--a petty sum of 500,000
yen--and when its staff commenced their duties, they had not the most
shadowy conception of what to do. That was a faithful reflection of
the condition of the business world at large. If the initiative of the
people themselves had been awaited, Japan's career must have been slow
indeed.

Only one course offered, namely, that the government itself should
organize a number of productive enterprises on modern lines, so that
they might serve as schools and also as models. Such, as already noted
under _Industries_, was the programme adopted. It provoked much
hostile criticism from foreign onlookers, who had learned to decry all
official incursions into trade and industry, but had not properly
appreciated the special conditions existing in Japan. The end
justified the means. At the outset of its administration we find the
Meiji government not only forming plans for the circulation of money,
building railways and organizing posts and telegraphs, but also
establishing dockyards, spinning mills, printing-houses, silk-reeling
filatures, paper-making factories and so forth, thus by example
encouraging these kinds of enterprise and by legislation providing for
their safe prosecution. Yet progress was slow. One by one and at long
intervals joint-stock companies came into existence, nor was it until
the resumption of specie payments in 1886 that a really effective
spirit of enterprise manifested itself among the people. Railways,
harbours, mines, spinning, weaving, paper-making, oil-refining,
brick-making, leather-tanning, glass-making and other industries
attracted eager attention, and whereas the capital subscribed for such
works aggregated only 50,000,000 _yen_ in 1886, it exceeded
1,000,000,000 _yen_ in 1906.

Adoption of the Gold Standard.

When specie payments were resumed in 1885, the notes issued by the
Bank of Japan were convertible into silver on demand, the silver
standard being thus definitely adopted, a complete reversal of the
system inaugurated at the establishment of the national banks on
Prince Ito's return from the United States. Japanese financiers
believed from the outset in gold monometallism. But, in the first
place, the country's stock of gold was soon driven out by her
depreciated fiat currency; and, in the second, not only were all other
Oriental nations silver-using, but also the Mexican silver dollar had
long been the unit of account in Far-Eastern trade. Thus Japan
ultimately drifted into silver monometallism, the silver _yen_
becoming her unit of currency. So soon, however, as the indemnity that
she received from China after the war of 1894-95 had placed her in
possession of a stock of gold, she determined to revert to the gold
standard. Mechanically speaking, the operation was very easy. Gold
having appreciated so that its value in terms of silver had exactly
doubled during the first 30 years of the Meiji era, nothing was
necessary except to double the denominations of the gold coins in
terms of _yen_, leaving the silver subsidiary coins unchanged. Thus
the old 5-_yen_ gold piece, weighing 2.22221 _momme_ of 900 fineness,
became a 10-_yen_ piece in the new currency, and a new 5-_yen_ piece
of half the weight was coined. No change whatever was required in the
reckonings of the people. The _yen_ continued to be their coin of
account, with a fixed sterling value of a small fraction over two
shillings, and the denominations of the gold coins were doubled. Gold,
however, is little seen in Japan; the whole duty of currency is done
by notes.

It is not to be supposed that all this economic and financial
development was unchequered by periods of depression and severe panic.
There were in fact six such seasons: in 1874, 1881, 1889, 1897, 1900
and 1907. But no year throughout the whole period failed to witness an
increase in the number of Japan's industrial and commercial companies,
and in the amount of capital thus invested.

State Revenue.

To obtain a comprehensive idea of Japan's state finance, the simplest
method is to set down the annual revenue at quinquennial periods,
commencing with the year 1878-1879, because it was not until 1876 that
the system of duly compiled and published budgets came into existence.

REVENUE (omitting fractions)

+--------+-----------+-------------+-------------+
| | Ordinary |Extraordinary|Total Revenue|
| Year.* | Revenue | Revenue | (millions |
| | (millions | (millions | of _yen_). |
| | of _yen_).| of _yen_). | |
+--------+-----------+-------------+-------------+
| 1878-9 | 53 | 9 | 62 |
| 1883-4 | 76 | 7 | 83 |
| 1888-9 | 74 | 18 | 92 |
| 1893-4 | 86 | 28 | 114 |
| 1898-9 | 133 | 87 | 220 |
| 1903-4 | 224 | 36 | 260 |
| 1908-9 | 476 | 144 | 620 |
+--------+-----------+-------------+-------------+

* The Japanese fiscal year is from April 1 to March 31.

The most striking feature of the above table is the rapid growth of
revenue during the last three periods. So signal was the growth that
the revenue may be said to have sextupled in the 15 years ended 1909.
This was the result of the two great wars in which Japan was involved,
that with China in 1894-95 and that with Russia in 1904-5. The details
will be presently shown.

Turning now to the expenditure and pursuing the same plan, we have the
following figures:--

EXPENDITURE (omitting fractions)

+--------+-------------+-------------+-------------+
| | Ordinary |Extraordinary| Total |
| Year. | Expenditures| Expenditures| Expenditures|
| | (millions | (millions | (millions |
| | of _yen_). | of _yen_). | of _yen_). |
+--------+-------------+-------------+-------------+
| 1878-9 | 56 | 5 | 61 |
| 1883-4 | 68 | 15 | 83 |
| 1888-9 | 66 | 15 | 81 |
| 1893-4 | 64 | 20 | 84 |
| 1898-9 | 119 | 101 | 220 |
| 1903-4 | 170 | 80 | 250 |
| 1908-9 | 427 | 193 | 620 |
+--------+-------------+-------------+-------------+

It may be here stated that, with three exceptions, the working of the
budget showed a surplus in every one of the 41 years between 1867 and
1908.

The sources from which revenue is obtained are as follow:--

ORDINARY REVENUE

+--------------------+---------+---------+---------+---------+
| | 1894-5. | 1898-9. | 1903-4. | 1908-9. |
| +---------+---------+---------+---------+
| |millions |millions |millions |millions |
| |of _yen_.|of _yen_.|of _yen_.|of _yen_.|
+--------------------+---------+---------+---------+---------+
| Taxes | 70.50 | 96.20 | 146.10 | 299.61 |
| Receipts from | | | | |
| stamps and Public| | | | |
| Undertakings | 14.75 | 33.00 | 96.87 | 164.66 |
| Various Receipts | 4.58 | 3.67 | 8.15 | 11.48 |
+--------------------+---------+---------+---------+---------+

It appears from the above that during 15 years the weight of taxation
increased fourfold. But a correction has to be applied, first, on
account of the tax on alcoholic liquors and, secondly, on account of
customs dues, neither of which can properly be called general imposts.
The former grew from 16 millions in 1894-1895 to 72 millions in
1908-1909, and the latter from 5¼ millions to 41½ millions. If these
increases be deducted, it is found that taxes, properly so called,
grew from 70.5 millions in 1894-1895 to 207.86 millions in 1908-1909,
an increase of somewhat less than three-fold. Otherwise stated, the
burden per unit of population in 1894-1895 was 3s. 6d., whereas in
1908-1909 it was 8s. 4d. To understand the principle of Japanese
taxation and the manner in which the above development took place, it
is necessary to glance briefly at the chief taxes separately.

Land Tax.

The land tax is the principal source of revenue. It was originally
fixed at 3% of the assessed value of the land, but in 1877 this ratio
was reduced to 2½%, on which basis the tax yielded from 37 to 38
million _yen_ annually. After the war with China (1894-1895) the
government proposed to increase this impost in order to obtain funds
for an extensive programme of useful public works and expanded
armaments (known subsequently as the "first _post bellum_ programme").
By that time the market value of agricultural land had largely
appreciated owing to improved communications, and urban land commanded
greatly enhanced prices. But the lower house of the diet, considering
itself guardian of the farmers' interests, refused to endorse any
increase of the tax. Not until 1889 could this resistance be overcome,
and then only on condition that the change should not be operative for
more than 5 years. The amended rates were 3.3% on rural lands and 5%
on urban building sites. Thus altered, the tax produced 46,000,000
_yen_, but at the end of the five-year period it would have reverted
to its old figure, had not war with Russia broken out. An increase was
then made so that the impost varied from 3% to 17½% according to the
class of land, and under this new system the tax yielded 85 millions.
Thus the exigencies of two wars had augmented it from 38 millions in
1889 to 85 millions in 1907.

Income Tax.

The income tax was introduced in 1887. It was on a graduated scale,
varying from 1% on incomes of not less than 300 _yen_, to 3% on
incomes of 30,000 _yen_ and upwards. At these rates the tax yielded an
insignificant revenue of about 2,000,000 _yen_. In 1899, a revision
was effected for the purposes of the first _post bellum_ programme.
This revision increased the number of classes from five to ten,
incomes of 300 _yen_ standing at the bottom and incomes of 100,000
_yen_ or upwards at the top, the minimum and maximum rates being 1%
and 5½%. The tax now produced approximately 8,000,000 _yen_. Finally
in 1904, when war broke out with Russia, these rates were again
revised, the minimum now becoming 2%, and the maximum 8.2%. Thus
revised, the tax yields a revenue of 27,000,000 _yen_.

Business Tax.

The business tax was instituted in 1896, after the war with China, and
the rates have remained unchanged. For the purposes of the tax all
kinds of business are divided into nine classes, and the tax is levied
on the amounts of sales (wholesale and retail), on rental value of
buildings, on number of employees and on amount of capital. The yield
from the tax grows steadily. It was only 4,500,000 _yen_ in 1897, but
it figured at 22,000,000 _yen_ in the budget for 1908-1909.

Tax on Alcoholic Liquors.

The above three imposts constitute the only direct taxes in Japan.
Among indirect taxes the most important is that upon alcoholic
liquors. It was inaugurated in 1871; doubled, roughly speaking, in
1878; still further increased thenceforth at intervals of about 3
years, until it is now approximately twenty times as heavy as it was
originally. The liquor taxed is mainly sake; the rate is about 50
_sen_ (one shilling) per gallon, and the annual yield is 72,000,000
_yen_.

Customs Duties.

In 1859, when Japan re-opened her ports to foreign commerce, the
customs dues were fixed on a basis of 10% _ad valorem_, but this was
almost immediately changed to a nominal 5% and a real 3%. The customs
then yielded a very petty return--not more than three or four million
_yen_--and the Japanese government had no discretionary power to alter
the rates. Strenuous efforts to change this system were at length
successful, and, in 1899, the tariff was divided into two sections,
conventional and statutory; the rates in the former being governed by
a treaty valid for 12 years; those in the latter being fixed at
Japan's will. Things remained thus until the war with Russia
compelled a revision of the statutory tariff. Under this system the
ratio of the duties to the value of the dutiable goods was about
15.65%. The customs yield a revenue of about 42,000,000 _yen_.

Other Taxes.

In addition to the above there are eleven taxes, some in existence
before the war of 1904-5, and some created for the purpose of carrying
on the war or to meet the expenses of a _post bellum_ programme.

Taxes in existence before 1904-1905:--

Yield
Name. (millions of _yen_).

Tax on soy 4
Tax on sugar 16¼
Mining tax 2
Tax on bourses 2
Tax on issue of bank-notes 1
Tonnage dues ½

Taxes created on account of the war (1904-5) or in its immediate
sequel:--

Yield
Name. (millions of _yen_).

Consumption tax on textile fabrics 19½
Tax on dealers in patent medicines ¼
Tax on communications 2(1/3)
Consumption tax on kerosene 1½
Succession tax 1½

Also, as shown above, the land tax was increased by 39 millions; the
income tax by 19 millions; the business tax by 15 millions; and the
tax on alcoholic liquors by 15 millions. On the whole, if taxes of
general incidence and those of special incidence be lumped together,
it appears that the burden swelled from 160,000,000 _yen_ before the
war to 320,000,000 after it.

State Monopolies and Manufactures.

The government of Japan carries on many manufacturing undertakings for
purposes of military and naval equipment, for ship-building, for the
construction of railway rolling stock, for the manufacture of
telegraph and light-house materials, for iron-founding and
steel-making, for printing, for paper-making and so forth. There are
48 of these institutions, giving employment to 108,000 male operatives
and 23,000 female, together with 63,000 labourers. But the financial
results do not appear independently in the general budget. Three other
government undertakings, however, constitute important budgetary
items: they are, the profits derived from the postal and telegraph
services, 39,000,000 _yen_; secondly, from forests, 13,000,000 _yen_;
and thirdly, from railways, 37,000,000 _yen_. The government further
exercises a monopoly of three important staples, tobacco, salt and
camphor. In each case the crude article is produced by private
individuals from whom it is taken over at a fair price by the
government, and, having been manufactured (if necessary), it is resold
by government agents at fixed prices. The tobacco monopoly yields a
profit of some 33,000,000 _yen_; the salt monopoly a profit of
12,000,000 _yen_, and the camphor monopoly a profit of 1,000,000
_yen_. Thus the ordinary revenue of the state consisted in 1908-1909
of:--

_Yen._

Proceeds of taxes 320,000,000
Proceeds of state enterprises (posts and
telegraphs, forests and railways) 89,000,000
Proceeds of monopolies 56,000,000
Sundries 11,000,000
-----------
Total 476,000,000

The ordinary expenditures of the nine departments of state
aggregated--in 1908-1909--427,000,000 _yen_, so that there was a
surplus revenue of 49,000,000 _yen_.

Extraordinary Expenditures.

Japanese budgets have long included an extraordinary section, so
called because it embodies outlays of a special and terminable
character as distinguished from ordinary and perpetually recurring
expenditures. The items in this extraordinary section possessed deep
interest in the years 1896 and 1907, because they disclosed the
special programmes mapped out by Japanese financiers and statesmen
after the wars with China and Russia. Both programmes had the same
bases--expansion of armaments and development of the country's
material resources. After her war with China, Japan received a plain
intimation that she must either fight again after a few years or
resign herself to a career of insignificance on the confines of the
Far East. No other interpretation could be assigned to the action of
Russia, Germany and France in requiring her to retrocede the territory
which she had acquired by right of conquest. Japan therefore made
provision for the doubling of her army and her navy, for the growth of
a mercantile marine qualified to supply a sufficiency of troop-ships,
and for the development of resources which should lighten the burden
of these outlays.

The war with Russia ensued nine years after these preparations had
begun, and Japan emerged victorious. It then seemed to the onlooking
nations that she would rest from her warlike efforts. On the contrary,
just as she had behaved after her war with China, so she now behaved
after her war with Russia--made arrangements to double her army and
navy and to develop her material resources. The government drafted for
the year 1907-1908 a budget with three salient features. First,
instead of proceeding to deal in a leisurely manner with the greatly
increased national debt, Japan's financiers made dispositions to pay
it off completely in the space of 30 years. Secondly, a total outlay
of 422,000,000 _yen_ was set down for improving and expanding the army
and the navy. Thirdly, expenditures aggregating 304,000,000 _yen_ were
estimated for productive purposes. All these outlays, included in the
extraordinary section of the budget, were spread over a series of
years commencing in 1907 and ending in 1913, so that the disbursements
would reach their maximum in the fiscal year 1908-1909 and would
thenceforth decline with growing rapidity. To finance this programme
three constant sources of annual revenue were provided, namely,
increased taxation, yielding some 30 millions yearly; domestic loans,
varying from 30 to 40 millions each year; and surpluses of ordinary
revenue amounting to from 45 to 75 millions. There were also some
exceptional and temporary assets: such as 100,000,000 _yen_ remaining
over from the war fund; 50 millions paid by Russia for the maintenance
of her officers and soldiers during their imprisonment in Japan;
occasional sales of state properties and so forth. But the backbone of
the scheme was the continuing revenue detailed above.

The house of representatives unanimously approved this programme. By
the bulk of the nation, however, it was regarded with something like
consternation, and a very short time sufficed to demonstrate its
impracticability. From the beginning of 1907 a cloud of commercial and
industrial depression settled down upon Japan, partly because of so
colossal a programme of taxes and expenditures, and partly owing to
excessive speculation during the year 1906 and to unfavourable
financial conditions abroad. To float domestic loans became a hopeless
task, and thus one of the three sources of extraordinary revenue
ceased to be available. There remained no alternative but to modify
the programme, and this was accomplished by extending the original
period of years so as correspondingly to reduce the annual outlays.
The nation, however, as represented by its leading men of affairs,
clamoured for still more drastic measures, and it became evident that
the government must study retrenchment, not expansion, eschewing above
all things any increase of the country's indebtedness. A change of
ministry took place, and the new cabinet drafted a programme on five
bases: first, that all expenditures should be brought within the
margin of actual visible revenue, loans being wholly abstained from;
secondly, that the estimates should not include any anticipated
surpluses of yearly revenue; thirdly, that appropriations of at least
50,000,000 _yen_ should be annually set aside to form a sinking fund,
the whole of the foreign debt being thus extinguished in 27 years;
fourthly, that the state railways should be placed in a separate
account, all their profits being devoted to extensions and repairs;
and fifthly, that the period for completing the _post bellum_
programme should be extended from 6 years to 11. This scheme had the
effect of restoring confidence in the soundness of the national
finances.

_National Debt._--When the fiefs were surrendered to the sovereign at
the beginning of the Meiji era, it was decided to provide for the
feudal nobles and the samurai by the payment of lump sums in
commutation, or by handing to them public bonds, the interest on which
should constitute a source of income. The result of this transaction
was that bonds having a total face value of 191,500,000 _yen_ were
issued, and ready-money payments were made aggregating 21,250,000
_yen_.[25] This was the foundation of Japan's national debt. Indeed,
these public bonds may be said to have represented the bulk of the
state's liabilities during the first 25 years of the Meiji period. The
government had also to take over the debts of the fiefs, amounting to
41,000,000 _yen_, of which 21,500,000 _yen_ were paid with
interest-bearing bonds, the remainder with ready money. If to the
above figures be added two foreign loans aggregating 16,500,000 _yen_
(completely repaid by the year 1897); a loan of 15,000,000 _yen_
incurred on account of the Satsuma revolt of 1877; loans of 33,000,000
_yen_ for public works, 13,000,000 _yen_ for naval construction, and
14,500,000 _yen_[26] in connexion with the fiat currency, we have a
total of 305,000,000 _yen_, being the whole national debt of Japan
during the first 28 years of her new era under Imperial
administration.

The second epoch dates from the war with China in 1894-95. The direct
expenditures on account of the war aggregated 200,000,000 _yen_, of
which 135,000,000 _yen_ were added to the national debt, the remainder
being defrayed with accumulations of surplus revenue, with a part of
the indemnity received from China, and with voluntary contributions
from patriotic subjects. As the immediate sequel of the war, the
government elaborated a large programme of armaments and public works.
The expenditure for these unproductive purposes, as well as for coast
fortifications, dockyards, and so on, came to 314,000,000 _yen_, and
the total of the productive expenditures included in the programme was
190,000,000 _yen_--namely, 120 millions for railways, telegraphs and
telephones; 20 millions for riparian improvements; 20 millions in aid
of industrial and agricultural banks and so forth--the whole programme
thus involving an outlay of 504,000,000 _yen_. To meet this large
figure, the Chinese indemnity, surpluses of annual revenue and other
assets, furnished 300 millions; and it was decided that the remaining
204 millions should be obtained by domestic loans, the programme to be
carried completely into operation--with trifling exceptions--by the
year 1905. In practice, however, it was found impossible to obtain
money at home without paying a high rate of interest. The government,
therefore, had recourse to the London market in 1899, raising a loan
of £10,000,000 at 4%, and selling the £100 bonds at 90. In 1902, it
was not expected that Japan would need any further immediate recourse
to foreign borrowing. According to her financiers' forecast at that
time, her national indebtedness would reach its maximum, namely,
575,000,000 _yen_, in the year 1903, and would thenceforward diminish
steadily. All Japan's domestic loans were by that time placed on a
uniform basis. They carried 5% interest, ran for a period of 5 years
without redemption, and were then to be redeemed within 50 years at
latest. The treasury had power to expedite the operation of redemption
according to financial convenience, but the sum expended on
amortization each year must receive the previous consent of the diet.
Within the limit of that sum redemption was effected either by
purchasing the stock of the loans in the open market or by drawing
lots to determine the bonds to be paid off. During the first two
periods (1867 to 1897) of the Meiji era, owing to the processes of
conversion, consolidation, &c., and to the various requirements of the
state's progress, twenty-two different kinds of national bonds were
issued; they aggregated 673,215,500 _yen_; 269,042,198 _yen_ of that
total had been paid off at the close of 1897, and the remainder was to
be redeemed by 1946, according to these programmes.

But at this point the empire became involved in war with Russia, and
the enormous resulting outlays caused a signal change in the financial
situation. Before peace was restored in the autumn of 1905, Japan had
been obliged to borrow 405,000,000 _yen_ at home and 1,054,000,000
abroad, so that she found herself in 1908 with a total debt of
2,276,000,000 _yen_, of which aggregate her domestic indebtedness
stood for 1,110,000,000 and her foreign borrowings amounted to
1,166,000,000. This meant that her debt had grown from 561,000,000
_yen_ in 1904 to 2,276,000,000 _yen_[27] in 1908; or from 11.3 _yen_
to 43.8 _yen_ per head of the population. Further, out of the grand
total, the sum actually spent on account of war and armaments
represented 1,357,000,000 _yen_. The debt carried interest varying
from 4 to 5%.

It will be observed that the country's indebtedness grew by
1,700,000,000 _yen_, in round numbers, owing to the war with Russia.
This added obligation the government resolved to discharge within the
space of 30 years, for which purpose the diet was asked to approve the
establishment of a national debt consolidation fund, which should be
kept distinct from the general accounts of revenue and expenditure,
and specially applied to payment of interest and redemption of
principal. The amount of this fund was never to fall below 110,000,000
_yen_ annually. Immediately after the war, the diet approved a cabinet
proposal for the nationalization of 17 private railways, at a cost of
500,000,000 _yen_, and this brought the state's debts to 2,776,000,000
_yen_ in all. The people becoming impatient of this large burden, a
scheme was finally adopted in 1908 for appropriating a sum of at least
50,000,000 _yen_ annually to the purpose of redemption.

_Local Finance._--Between 1878 and 1888 a system of local autonomy in
matters of finance was fully established. Under this system the total
expenditures of the various corporations in the last year of each
quinquennial period commencing from the fiscal year 1889-1890 were as
follow:--

Total Expenditure
Year. (millions of _yen_).

1889-1890 22
1893-1894 52
1898-1899 97
1903-1904[28] 158
1907-1908 167

In the same years the total indebtedness of the corporations was:--

Debts
Year. (millions of _yen_).

1890 ¾
1894 10
1899 32
1904 65
1907 89[29]

The chief purposes to which the proceeds of these loans were applied
are as follow:--

Millions of _yen_.

Education 5
Sanitation 12
Industries 13
Public works 52

Local corporations are not competent to incur unrestricted
indebtedness. The endorsement of the local assembly must be secured;
redemption must commence within 3 years after the date of issue and be
completed within 30 years; and, except in the case of very small
loans, the sanction of the minister of home affairs must be obtained.

_Wealth of Japan._--With reference to the wealth of Japan, there is no
official census. So far as can be estimated from statistics for the
year 1904-1905, the wealth of Japan proper, excluding Formosa,
Sakhalin and some rights in Manchuria, amounts to about 19,896,000,000
_yen_, the items of which are as follow:--

_Yen_ (10 _yen_ = £1).

Lands 12,301,000,000
Buildings 2,331,000,000
Furniture and fittings 1,080,000,000
Live stock 109,000,000
Railways, telegraphs and telephones 707,000,000
Shipping 376,000,000
Merchandise 873,000,000
Specie and bullion 310,000,000
Miscellaneous 1,809,000,000
--------------
Grand total 19,896,000,000

Early Education.

_Education._--There is no room to doubt that the literature and learning of China and Korea were transported to Japan in very ancient times, but tradition is the sole authority for current statements that in the 3rd century a Korean immigrant was appointed historiographer to the Imperial court of Japan and another learned man from the same country introduced the Japanese to the treasures of Chinese literature. About the end of the 6th century the Japanese court began to send civilians and religionists direct to China, there to study Confucianism and Buddhism, and among these travellers there were some who passed as much as 25 or 30 years beyond the sea. The knowledge acquired by these students was crystallized into a body of laws and ordinances based on the administrative and legal systems of the Sui dynasty in China, and in the middle of the 7th century the first Japanese school seems to have been established by the emperor Tenchi, followed some 50 years later by the first university. Nara was the site of the latter, and the subjects of study were ethics, law, history and mathematics.

Not until 794, the date of the transfer of the capital to Kioto, however, is there any evidence of educational organization on a considerable scale. A university was then opened in the capital, with affiliated colleges; and local schools were built and endowed by noble families, to whose scions admittance was restricted, but for general education one institution only appears to have been provided. In this Kioto university the curriculum included the Chinese classics, calligraphy, history, law, etiquette, arithmetic and composition; while in the affiliated colleges special subjects were taught, as medicine, herbalism, acupuncture, shampooing, divination, the almanac and languages. Admission was limited to youths of high social grade; the students aggregated some 400, from 13 to 16 years of age; the faculty included professors and teachers, who were known by the same titles (_hakase_ and _shi_) as those applied to their successors to-day; and the government supplied food and clothing as well as books. The family schools numbered five, and their patrons were the Wage, the Fujiwara, the Tachibana (one school each) and the Minamoto (two). At the one institution--opened in 828--where youths in general might receive instruction, the course embraced only calligraphy and the precepts of Buddhism and Confucianism.

Combination of Native and Foreign Element.

The above retrospect suggests that Japan, in those early days, borrowed her educational system and its subjects of study entirely from China. But closer scrutiny shows that the national factor was carefully preserved. The ethics of administration required a combination of two elements, _wakon_, or the soul of Japan, and _kwansai_, or the ability of China; so that, while adopting from Confucianism the doctrine of filial piety, the Japanese grafted on it a spirit of unswerving loyalty and patriotism; and while accepting Buddha's teaching as to three states of existence, they supplemented it by a belief that in the life beyond the grave the duty of guarding his country would devolve on every man. Great academic importance attached to proficiency in literary composition, which demanded close study of the ideographic script, endlessly perplexing in form and infinitely delicate in sense. To be able to compose and indite graceful couplets constituted a passport to high office as well as to the favour of great ladies, for women vied with men in this accomplishment. The early years of the 11th century saw, grouped about the empress Aki, a galaxy of female authors whose writings are still accounted their country's classics--Murasaki no Shikibu, Akazome Emon, Izumi Shikibu, Ise Taiyu and several lesser lights. To the first two Japan owes the _Genji monogatari_ and the _Eiga monogatari_, respectively, and from the Imperial court of those remote ages she inherited admirable models of painting, calligraphy, poetry, music, song and dance. But it is to be observed that all this refinement was limited virtually to the noble families residing in Kioto, and that the first object of education in that era was to fit men for office and for society.

Education in the Middle Ages.