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BUILDING A NATIONAL CURRENCY - JAPAN, 1868-1899

To show the development of Japan's monetary system in the early years of the Meiji period, particularly as reflected in the paper money emissions of the banks and government.

by Joseph E. Boling, ANA Life Member, joined ANA in 1974

Winner of the Howland Wood Award for Best-of-Show Exhibit - ANA Convention, 1995

The economic and political strengths of a nation are supported by and reflected in its currency system. A serious student will examine the history of the currency and finances of a nation to obtain insights into the national personality. The purpose of this exhibit is to provide such an examination for Japan from the time of the Meiji Restoration to the establishment of the second gold standard. The exhibit is presented as an essay on the historical development of the paper currency during that period, illustrated with examples of the notes and supplementary information about them. The links in the text refer the reader to the illustrative notes.

Rarities:
(These notes also appear in later references)
High-values of many of the early series - rarely seen outside Japan
25-ryo Tokyo Exchange Office note
5- and 10-yen shin-shihei notes
5- and 10-yen Saigo-satsu notes
5- and 10-yen revised silver certificates.

Oddities:
(These notes also appear in later references)
Osaka Exchange Office note with photo of company attached
Mitsui-sponsored notes with adhesive validation stamps
National Bank notes printed in USA that look like US nationals
Saigo-satsu notes made of canvas.

1868 - Early in 1868 the Meiji Restoration occurred, the return of political power to the Emperor of Japan by the last Shogun of the Tokugawa line. The exchange of power was relatively peaceful, but there were scattered military incidents throughout the year and the Emperor received the government with no financial resources. Squeezing several wealthy merchants and a few of the powerful clans produced some revenue, but expenses were several times higher than income; therefore the Cabinet (Dajokan) created paper money, which was first issued in May. The Cabinet notes closely resembled the paper money that had circulated before the restoration. Although nominally convertible into gold, there was no specie reserve available; the new notes faced considerable resistance in circulation and quickly depreciated. Toward the end of the year, as the government became more politically stable, confidence rose somewhat, but circulation remained confined to the major cities and the value of paper was only two-thirds that of coin. The coinage was a direct continuation of the pre-Meiji issues, both in design and denomination; silver and gold were cast and struck in rectangles and ovals that did not resemble coins as used in the West. The government, recognizing that "modern" coinage was desirable, began to investigate both the establishment of a mint and the adoption of a decimal monetary system. During this early period, local paper issues continued to circulate. Hansatsu (literally "clan notes") were circulated by clans, merchants, money-changers, agricultural cooperatives, and other issuers. Fukensatsu were issued by city and prefectural governments subordinate to the central government.

1869 - In order to encourage the development of commerce and to stimulate the circulation of Dajokan satsu, exchange companies (kawase kaisha) were established. These individual proprietorships were intended to operate as banks, and each firm issued its own currency, sometimes in several forms. In addition, the government loaned them large amounts of Dajokan satsu for release into circulation. The exchange companies were staffed by inexperienced men and were forced by the government to accept business risks that a well-managed bank would not have accepted. Furthermore, in September the government began to issue another series of notes (Civil Department notes, or Minbusho satsu). The new notes were in low denominations (readily usable in everyday commerce) and competed directly with the issues of the exchange companies. Thus, the exchange companies gradually weakened. Before they folded up, however, they provided an example to the financiers who formed the national banks a few years later; as the first joint stock companies in Japan, the exchange companies demonstrated the strength of the limited liability system for business organization.

1870-71 - During these years several significant events occurred in the financial development of Japan. The mint was founded in Osaka in 1870 (although production did not begin until the following year). Ordinances creating a new currency were issued; the primary unit was the gold yen, equal to the old ryo. Its two subsidiary units were the sen and the rin (1/100 and 1/1000 of a yen, respectively). (Until 1878, silver yen coins were legal tender only for treaty port transactions.) No notes reflecting the new currency were issued immediately because of the great difficulty the government was having in circulating the existing notes. In July 1871 the hansatsu in circulation were evaluated for redemption. Although redemption did not occur until later, all notes were either stamped by Finance Ministry inspectors and returned to circulation with a promise of eventual government sponsorship, or else they were rejected and had to compete for circulation on their merits (usually related to the reputation of the issuer).

The mint having achieved full operation, the old coinage had to be removed from circulation to provide specie. Rather then buy it with more inconvertible notes, the government asked the well-known and wealthy Mitsui Company to issue notes bearing the names of both Mitsui and the Imperial Treasury. Mitsui bore all the expenses of the issue and was responsible for redemption, but retained 20% of the issue as compensation. These notes were the first to use yen denominations. A similar issue was prepared in January 1872 for the Development Office, to finance the development of Hokkaido (the northernmost of Japan's four main islands). This time sen denominations were also used, the Hokkaido economy being underdeveloped compared to the rest of Japan. In this instance, however, the government office involved was responsible for eventual redemption of the notes and Mitsui's commission was considerably reduced.

1872 - Dajokan satsu and Minbusho satsu could be counterfeited rather easily, so the government contracted with the firm of Dondorf and Naumann in Frankfurt/Main, Germany, to lithograph a new series of notes. This series was printed in Germany and later in Japan and represented a major change from past methods of note manufacture. The notes were so different that the Japanese name for the series was shin-shihei ("new paper money"). They became the mainstay of the paper currency system for the next seven years. In 1872 all hansatsu valued at over five sen were exchanged for shin-shihei; in addition, all earlier issues of the Meiji government and its organs were redeemed with these notes between 1872 and 1879. In all, 121 million yen in shin-shihei were issued, including 62 million yen for replacement of other notes and 27 million yen for waging the Sei-nan War (see 1877). Although shin-shihei were also nominally convertible, there was still no specie reserve built up to handle them. However, by this time the government had gained the confidence of most people, and its issues were accepted. Furthermore, even though the amount of unbacked paper in circulation continued to rise, there was no accompanying inflation, partly because the monetization of the economy absorbed a large amount of currency and partly because of the capital requirements of the quickly developing industrial sector.

1873-76 - By 1873 there was only one exchange company remaining, the one in Yokohama. There was a desperate need for banks to finance industry and commerce. Following the model of the United States, a nationally chartered banking system was founded. Sixty percent of each bank's capital (in government notes) was to be deposited with the government, with the remainder held as gold for the redemption of the bank's own notes. Notes could be issued up to 150% of the reserve, or 60% of total capital. Because of the relatively low return on capital possible with this restricted issue, only four banks were founded, and only with some coercion from the government. Furthermore, as national banknotes were the only ones for which gold could be readily obtained, and the price of gold was rising in relation to silver, notes were redeemed at such a high rate that the banks could not afford to issue them. From a high of 1.4 million yen in circulation in 1874, the issue dropped to a mere 62,000 yen by mid-1876. Thus, the banks were not fulfilling their primary reason for existence. To correct this, the bank regulations were amended in 1876 to allow the capital deposited with the government to be any government bonds (rather than notes); to reduce the reserve requirement to 20% of capital (with the remaining 80% being the deposited bonds); to allow note issues up to four times the reserve held (or 80% of total capital); and to allow the reserve to be held in government (inconvertible) notes rather than in gold. The national banknotes thus became inconvertible also. Under these conditions, the number of banks leapt to over 140 by 1879 (when chartering was halted) and national banknotes in circulation increased to over 34 million yen in that year. In September 1876 the government commuted the pensions of the ex-samurai (who had already been deprived of their hereditary titles and land-holdings) into bonds bearing 6% interest. Large numbers of these bonds were used to capitalize the new banks, thus giving the displaced warriors a potentially better return and a position of moderate respectability as capitalists.

1877-81 - Some samurai, however, were not placated by this opportunity; the combined impact of losing their pensions and being prohibited from wearing swords was more than they could stomach. From January to September 1877 a group of these disaffected individuals waged civil war in Kyushu under the leadership of Saigo Takamori, a legendary and tragic figure in Japanese history. Saigo issued notes to finance the war that were nominally convertible, but as he had even less specie than the government, holders of these notes received only the promise, not the coin. Although the government was able to put down the rebellion (with a conscript army, itself a turning point for Japanese culture), the costs exhausted the treasury. Even the reserve stocks of shin-shihei had to be issued to cover the great expense. Now, finally, the vast amounts of inconvertible paper money in circulation began to have an impact on the economy. Government analysts, however, attributed the decrease in the market value of paper money to an increase in the price of silver, and attempted to combat the trend by selling government holdings of silver. This only increased their problem, because the silver available to back the note issues was thereby reduced. The introduction of the second series national bank notes and a new series of government notes (to replace the exhausted shin-shihei), all inconvertible, led to the following figures at the end of 1881: notes in circulation, 153 million yen; specie reserve, 12.7 million yen, or 8.3%; cost of one yen in silver, 1.70 yen in paper. In October 1881 a signal event occurred; Matsukata Masayoshi was appointed Finance Minister. Matsukata recognized that the cause of the depreciation of paper was the lack of a reserve for it (i.e., that it could not be converted to specie on demand). He also knew that the only way to remedy the situation was to accumulate such a reserve.

1881-85 - These were the years of the "Matsukata deflation." Government expenditures were severely curtailed and revenues increased; the surplus was divided between the removal of paper money from circulation and the purchase of silver. In addition to deflating the economy, Matsukata founded the Bank of Japan to act as sole note-issuer for the nation, handle treasury transactions, and provide financing for industry and commercial banks. The bank, modeled on the Bank of Belgium, opened in October 1882. It did not issue notes immediately, for Matsukata did not want it to do so until enough silver was accumulated to make them fully convertible. The National Bank Law was changed, however, to restrict national banknote issues to twenty years for each bank (ending in 1899 for the youngest banks). Finally, in 1885 the Bank of Japan issued convertible silver certificates that really were convertible! By the end of that year the following figures obtained: paper in circulation, 118 million yen; specie reserve, 42 million yen, or 35.7%; cost of one yen in silver, 1.001 yen in paper. Japan was finally on a solid metallic standard, eighteen years after the establishment of the Meiji government. Many marginal businesses, including banks, failed during the Matsukata deflation, but the finance minister considered the resulting monetary system worth the political and social costs incurred.

1885-95 - The establishment of note convertibility and the gradual phasing out of the national banknotes did not achieve all of the effects desired, because the Bank of Japan was able to offer only silver coin for its notes; Japan did not have a gold reserve. Throughout the last two decades of the 19th century, the international price of silver fell in relation to gold, and nations on a silver standard were handicapped in their foreign trade. Japan's foreign trade was significant, and she was suffering from her lack of gold. Matsukata knew what he needed, but had no source from which to obtain it. In 1895, however, a windfall presented itself. As a result of the Sino-Japanese War, Japan obtained an indemnity from China equivalent to over 38 million pounds sterling. Since China could not finance that amount, she had to borrow it in Europe, and Japan took delivery there for deposit in the London office of the Yokohama Specie Bank. She spent part of the indemnity for naval arms, but most of it was retained in gold as a reserve for the next step toward international financial parity.

1897-99 - In October 1897 the revised coinage law became effective, demonetizing silver except as minor coinage and making gold the legal standard of Japan. Gold certificates were prepared and issued beginning in 1899; thereafter, earlier notes of the Bank of Japan were also converted to gold when presented for coin. This simultaneous termination of the national banks' authority to issue notes and the demonetization of the government notes issued prior to 1885 meant that the currency was finally unified under one issuer--the Bank of Japan--on one standard--full gold convertibility. In light of the problems that had confronted Japan in 1868, this was a phenomenal achievement, and foretold yet greater achievements to come.

REFERENCES AND SOURCES CONSULTED

The Bank of Japan. Zuroku Nihon no Kahei ("Japanese Currency Illustrated"). Vol. VII: Kindai Heisei no Seiritsu ("Establishment of the Modern Monetary System"). Tokyo: Toyo Keizai Shinposha, 1973.

____. Same series. Vol. VIII: Kindai Dakan Seido no Kakuritsu to Doyo ("Establishment of the Modern Convertible Note System and its Problems"). 1975.

The Fuji Bank (Research Division). Banking in Modern Japan. 2nd ed. Tokyo: by the author, 1967.

Nihon Kaheisho Kyodo Kumiai (Japan Numismatic Dealers' Association [JNDA]). Nihon Kahei Katarogu: The Catalog of Japanese Coins and Banknotes. 1995 (28th) ed. Tokyo: by the author, 1994.

Ogawa Yoshinori and Kozono Hitoshi, eds. Paper Money of Japan. Vol. IVA of Paper Money of the 20th Century. St. Louis: International Bank Note Society, 1981.

Pick, Albert (Neil Shafer and Colin R. Bruce II, eds). Standard Catalog of World Paper Money. 7th edition. Iola, Wisconsin: Krause Publications, 1994 (vol 2) and 1995 (vol 1).