IN OUR day even a victorious war is followed by great financial difficulties, either because the state is obliged to liquidate its short-term debts and other obligations contracted during the hostilities or because many states are prone to allow themselves to be dragged into great social expenditure. Often both reasons operate. This has been the case in Japan; but there the post-war period has been a time of even greater difficulties than elsewhere for a third reason -- one peculiar to the Empire of the Rising Sun -- namely, that since 1895 each successive war won by that Empire, instead of assuring a period of peace, has brought in its train the anticipation or fear of a still greater war.

Thus, on the morrow of the Treaty of Shimonoseki (April 1895) Japan was forced by the intervention of Russia, backed by France and Germany, to renounce the continental territories ceded to her by China. To the irritation caused by this intervention were soon added the fears inspired by Russia's acquisition of Port Arthur and by the completion of the Trans-Siberian railway. The consequence was that Japan quintupled her ordinary budgets for the military services -- from 12,402,000 yen[i] in 1894 to 60,865,000 yen in 1903-04 -- and in addition, during the period between 1896 and 1904, devoted to these services extraordinary expenditure to the amount of 421,440,000 yen. This sum was considerably in excess of the 365,529,067 yen paid by China as war indemnity. Hence Japan's public debt rose from 295,807,000 yen in 1895 to 552,181,000 in 1903, while during the same period the existing taxes were increased and new taxation was created. The ordinary state revenues, which in 1894-95 did not exceed 89,700,000 yen, reached the figure of 221,200,000 in 1902-03.

The Treaty of Portsmouth was followed by apprehensions similar to those caused by the Treaty of Shimonoseki. In the course of the Portsmouth negotiations Russia had shown herself firmly resolved to accept no limitation of her naval power in the Far East. The Japanese were convinced that this attitude betrayed a hidden purpose of revanche; and they considered that a fresh war was the more to be feared in proportion as they themselves would be less prepared for it. Therefore they proceeded to make enormous extraordinary expenditures for their army and navy. Concurrently, the new expenditure entailed by Japan's new position in Korea and Manchuria had to be met; and in Japan itself the greater part of the railways exploited by private companies were bought up by the issue of 5 percent bonds. All this explains why nearly all the new taxes voted after hostilities began had to be maintained, even though they were very heavy and even though it had been expressly stipulated that they were to be levied only for the duration of the war.

The economy resulting from the conversion of the war-loans and the conviction that Russia had turned her eyes in other directions persuaded the rulers of Japan to think of alleviating the Japanese taxpayer's burdens. But this alleviation was carried out only on a small scale, being confined to certain items of direct taxation (the land tax, the business tax, the inheritance tax). As regards indirect taxation, the reductions of about 15 percent on the duties on sugar, textiles and salt were more than offset by the increase of the duties on alcohol and tobacco. Whereas the budget for 1902-03 (on the eve of the Russo-Japanese War) estimated the revenues at 297,341,000 yen, the budget for 1912-13 estimated them at 687,392,000 yen.

Toward the close of the year 1918 -- a time rife with prophecies -- I had heard it said in Paris that Japan would be one of the few belligerent countries that would find the post-war period easy. It was not denied that the Empire had made great sacrifices, that its budget had risen from 648 million yen in 1914-15 to 1,017 millions in 1918-19. But it was argued that nearly all the expenses of the war had been covered by the automatic increase of taxation, while the public debt had been reduced; to be sure, some war-loans had been floated, but the intensive operation of the sinking fund had withdrawn from circulation bonds representing a sum exceeding the aggregate of the new loans. It was pointed out that such an achievement, rare in history, of a great war carried through without increase either of taxation or of the public debt, was to be attributed to the "boom," which followed 1914. It was added that even if the causes which had brought about this "golden age" should cease to operate,[ii] Japan had nevertheless had time both to renew and to extend her industries and to accumulate capital. She therefore emerged from the war as an economic power of the first order. And Imperial Russia's collapse seemed to obviate the necessity of new armaments.

All these forecasts, like so many others enunciated during the Peace Conference, were belied by the events. The post-war years were marked by great financial difficulties for Japan and these have persisted up to the present day. Here one must distinguish between the decade from 1919 to 1928 and the years 1929-1931.

THE 1919-1928 DECADE

Ordinary expenditure doubled during the decade 1919-1928, rising from 502 million yen to 1,184 millions. Extraordinary expenditure, which in 1919 stood at 669 millions, was never reduced perceptibly in the following years of peace; even in 1928-29 it amounted to 630 millions. The total budget of expenditure amounted to 1,172 millions for 1919-20, to 1,521 millions for 1923-24 and to 1,814 millions for 1928-29. This makes, for the decade in question, an increase of public expenditure of over 50 percent.

The external public debt meanwhile remained at about the same figure: 1,446 millions in 1929-30 as against 1,424 millions in 1920-21. On the other hand, the internal debt increased formidably: 4,512 millions as against 1,819 millions. Thus, the total public debt has risen from 3,244 to 5,959 millions -- an increase of over 80 percent.

These facts show clearly that the increase in expenditure was met almost entirely by new debts; and one need not be an experienced financier to see that such methods in a period of peace are not in keeping with the principles of sound finance.

The resulting manifestly unsound financial situation must be attributed on the one hand to mistakes on the part of the government, and on the other hand to a series of unfavorable circumstances -- chiefly diplomatic complications, the earthquake of 1923, and a prolonged economic crisis. Let us examine these four points in succession.

The government's chief mistakes grew out of its attempt to accomplish too much and on too grand a scale. The army and navy, education, industry, communications, harbors, waterworks, the postal, telegraph and telephone services -- all were to be brought up to the level of perfection. The war period had, as it were, intoxicated both government and people. They forgot that especially in finance it is necessary, as Gambetta put it, "to arrange the questions in their proper order." They also forgot (like many other governments) that there exists a sure and automatic means of effecting economies, namely, the reduction of prices. If the budget of Great Britain was reduced from 1,618 millions sterling in 1919-20 to 790 millions in 1924-25, this was rendered possible largely by the fact that during the interval the index-number fell from 310 in 1920 to 166 in 1924. In Japan, on the contrary, prices rose between the years 1918 and 1921; and although since 1921 they have gradually fallen, they remained for a long time at a much higher figure than during the war. The index-number, which was 194 in 1917-18, reached 343 in 1920-21 and was still at 273 and 225 in 1924-25 and 1927-28.

Turning to the unfavorable circumstances which beset Japanese finances, we notice first that for Japan the morrow of the Peace of Versailles resembled that of the Treaty of Shimonoseki. The United States, China and Soviet Russia demanded that Japan renounce the territories and privileges which she had acquired by her victories. Lengthy negotiations ensued, and it was only after the Washington Conference that the questions touching China and the Pacific were settled; the settlement of the Sakhalin question with Russia took even longer. During all these years Japan felt the necessity of reinforcing her military position, the more so since she could no longer count on her alliance with England.

The Washington Conventions forestalled the possibility of an immediate conflict and brought about a reduction of Japan's expenditure. This relief came from the agreement to limit the size and number of capital ships and aircraft carriers. But the arrangements at Washington failed to clear up the situation entirely. Public opinion in Japan, much embittered at first by the renunciation of nearly all the fruits of victory, was not really calmed down until the recent Naval Treaty of London.

All this explains how it came about that for the year 1921-22 Japan's military expenditure was nearly double that of the year 1918-19 and why even in 1928-29 it was maintained at a higher level than during the last year of the war, although it absorbed a smaller proportion of the budget. The following table, taken from the last annual supplement of the Asahi, shows the trend of military expenditure from the last year of the war up to 1930.

Year Military expenditure Percent
(in dollars) of the budget
1918-19 183,993,000 36
1919-20 268,344,000 46
1920-21 364,880,000 48
1921-22 365,284,000 49
1922-23 302,401,000 42
1923-24 249,536,000 33
1924-25 227,597,000 28
1925-26 221,904,000 29
1926-27 217,125,000 27
1927-28 245,820,000 28
1928-29 258,619,000 29
1929-30 244,514,000 29

The terrible earthquake of September 1923 is still fresh in the memory of all. The devastation it wrought was completed by fires; that which ravaged the capital seems to have been the greatest in history.[iii] The wealth destroyed by the earthquake and by fire has been estimated at 5,506 million yen. Nothing reflects more credit on Japan than the method and rapidity with which Tokyo and Yokohama were rebuilt and other losses repaired. But this work of reconstruction entailed heavy sacrifices, both immediate and indirect. The government, the municipalities of Tokyo and Yokohama, and the provincial authorities of Tokyo and Kanagawa were obliged to disburse a total of 1,800 million yen.

The public treasury found itself unable to resort exclusively to the 5 percent treasury bonds, which in the post-war years were its chief instruments of credit, and was forced to apply to foreign capital. The situation of the world's money-market at that time imposed infinitely more onerous conditions than in the past. Whereas Japan's last pre-war loans had been issued at 95 and bore 4 percent interest, the two big loans of 1924 were issued at New York at 82½ and 87½, although they bore interest at 6½ and 6 percent respectively.

The repercussion of the catastrophe on the yield of taxation was considerably less than had at first been feared, in part because the regions affected were centers of consumption rather than of production. Nevertheless, for the fiscal year 1923-24 the public revenues fell short of the estimates by 130 million yen and during the four following fiscal years it was found necessary to suspend the collection of certain direct taxes in the devastated regions.

The "Japanese Financial Year Book" for 1926 pointed out that the effects of the earthquake were no longer perceptible. But this satisfaction was premature. At the time of the disaster, in addition to a provisional moratorium, rendered necessary by the fact that 74 out of the 84 banking offices in Tokyo had been burned down, large facilities were decreed for the rediscounting of "earthquake drafts," i.e., bills payable in the devastated regions. These bills were estimated at two billion yen; a part of them were never paid, and even in 1927 they bore so heavily upon the credit establishments that they constituted one of the principal causes of the crisis of that year. Thus the indirect burdens due to the 1923 earthquake, while they cannot be estimated with precision, were certainly very considerable and were prolonged over a number of years.

Japan's unprecedented prosperity during the war was due to transient circumstances and necessarily ceased with the passing of those circumstances. It would have been prudent for Japanese economy to reduce sail in anticipation of this event. But the Japanese people, like their government, were intoxicated by prosperity. Encouraged by the fact that everything seemed to continue to prosper during the year following the armistice, the industrial and commercial world increased the impetus already given to all enterprises; and the Japanese banks, which have long showed a tendency (at once their strength and their weakness) to place themselves at the head of enterprises, failed to put a sufficient check upon them. Meanwhile conditions became as unfavorable as they had previously been propitious. European and American competition were not long in reappearing. The protectionist spirit and fiscal necessities led the British Dominions to raise their tariffs. The United States followed suit, besides rigorously closing its doors to Oriental immigration. China was in the throes of civil war. And to cap these misfortunes, silver, the rise in which had been of such advantage to the Japanese export trade in Asia, began rapidly to depreciate.

That Japanese economy, as a whole, succeeded in meeting the storm shows that it rests upon much more solid foundations than its detractors would have us believe. It is, nevertheless, equally true that the years which we are here studying were years of uninterrupted difficulties. They were also marked by two crises. The first occurred two years after the armistice and affected particularly the iron and shipbuilding industries. Energetic measures prevented the crisis from becoming general. Nevertheless, its effects, combined with the disasters of the earthquake, made themselves felt over a number of years. It was not till 1926 that the number of workmen employed in these industries rose again to the 1921 figure. Nor was this the end of the era of difficulties.

In the spring of 1927 the fall of the Suzuki consortium and the revelation of the fact that all "earthquake bills" had not been paid sufficed to precipitate a veritable bank panic. Thirty banks, including the Bank of Formosa and the Bank of Peers, closed their doors; from the other banks deposits were withdrawn wholesale. To put a stop to this panic, the state was obliged to guarantee the discounting of commercial bills to the amount of 777 million yen. This measure caused the fall of the Wakatsuki cabinet, but it proved efficacious. The public regained confidence; sixteen of the banks were enabled to resume business; and the emissions of the Bank of Japan, which in April 1927 had reached the unprecedented figure of 2,659 million yen, fell by the end of the year to 1,683 millions. The crisis, properly speaking, was ended. But the situation resulting from the over-expansion of business during the years 1917-1920 was not yet completely normal. And as we shall see later on, Japanese economy was about to enter upon a new period of depression.

In crises like those just described, there could be no question of a return to the policy of relieving the burdens of taxation, which had been eagerly expected before the war. In fact, the reorganization of Japan's fiscal system aimed at a more equal distribution of burdens, not at reducing them. The few taxes that were abolished were of little importance in themselves and were replaced by others. In addition, there was a heavy increase of customs duties; the tariff assumed a clearly protective character and a law passed in 1924 laid a duty of 100 percent on 120 luxury articles. The following table shows the trend of the revenue situation during the decade (the figures are in yen):

Ordinary Revenues Extraordinary Revenues Totals
1919-20 1,063,120,190 745,512,294 1,808,633,204
1924-25 1,438,640,171 688,751,153 2,127,391,324
1928-29 1,505,012,997 500,678,107 2,005,691,104

THE YEARS 1929--1931

It has been shown how from 1920 to 1929 the Japanese public debt increased by 2,715 million yen, in other words, that to balance the budget it was found necessary to borrow on an average 271 millions per annum. Everyone felt that such a situation could not last; and as there could be no question of increasing taxation, which was already excessive, everyone realized the necessity of entering upon a period of retrenchment. In 1929 the Tanaka cabinet adopted this policy, but in a timid manner; and public opinion was much disquieted to see the new budget forecasting a large deficit and new loans amounting to 172 million yen. The cabinet was therefore forced to retire. At the beginning of July 1929 the Minseito Party returned to power, with the late Mr. Hamaguchi as Prime Minister and Mr. Inouye as Finance Minister. Their program can be summed up in two principal points: a return to the gold standard, and a policy of retrenchment.

The exportation of gold and silver had been prohibited by ministerial decree in September 1917. The result of this measure was practically to suspend the convertibility of Japanese banknotes. This result made itself felt soon after the conclusion of peace. The measure was denounced as playing havoc with the rate of exchange and as being responsible for the maintenance of prices at an artificial level. And in truth, whereas 100 yen at par are equivalent to $49.84, in the years between 1919 and 1928 their value fluctuated between $52.00 (1919) and $38.63 (1925). In 1928 it stood at $46.75. As for prices, the index-number continued to stand as high in 1925 as it was in 1921; and though it fell later, it remained considerably higher than in Europe.

These incessant fluctuations of the rate of exchange disturbed the country's economic life and encouraged speculation. Hence the business world, which at first had been opposed to the raising of the aforesaid prohibition, in view of the protection afforded by a high rate of exchange, finally demanded the return to free exportation. As for the rise in prices, it weighed not only upon consumers but also on employers, who found themselves unable to cut down their pay-rolls. The state suffered even more acutely than private individuals, because the fluctuations in the rate of exchange created additional burdens in paying the service of the public debt, and because the rise in prices constituted an obstacle to the policy of retrenchment. From the moral standpoint it was a humiliation for both government and citizens to see that, while all the other great states had returned to the gold standard, Japan continued to have "an anomalous currency."

Under these conditions public opinion greeted with satisfaction the taking over of the Ministry of Finance by Mr. Inouye, who by speeches and pen had long been the champion of financial reform. And in truth, the new minister carried out the return to the gold standard with great skill. Not content with the gold reserve of the Bank of Japan, which exceeded a billion yen, he took advantage of the exceptionally favorable commercial balance in 1929 to accumulate funds in London and New York amounting to $50,000,000. And it was not till after the ground had been carefully prepared that a decree was issued on January 11, 1930, whereby the free exportation of gold was once more permitted.

The two principal aims of this important reform were immediately attained. The yen regained its nominal value without difficulty. The fall in prices was no less rapid; in June 1931 prices were at exactly the same level as in May 1916.

Notwithstanding these apparently splendid results, a portion of public opinion considered the measure as premature. And as time went on bitter criticisms were heard. We shall examine them later when we deal with the abandonment of the gold standard in December 1931.

The policy of retrenchment initiated by Mr. Inouye had to be pursued by three means: first, no new bonds for the general account were to be issued, and the loans already planned for the special accounts were to be reduced; second, no new enterprises were to be undertaken; and third, expenditure was to be rigorously curtailed. This government was, no doubt, in earnest. Whether in the end they would have been able to balance their budget solely by reducing expenses was always a debatable question and soon became a platonic one. A policy of retrenchment requires time. It must be pursued through a series of budgets. Now, before a year had elapsed, Japan was plunged into an economic crisis more virulent perhaps than the one raging in Europe.[iv]

Attacked from all sides, Japan's foreign trade fell off 30.9 percent during 1930 -- a greater decline than was experienced by the trade of any other country in the world. The diminution was even greater in Japanese exports alone -- 31.6 percent. Three-fifths of this loss was in the export of silk and textiles, but a number of other articles were affected. There was a general slump in prices.

Notwithstanding the stupendous power of resistance shown by the country, such a crisis was bound to have its repercussion on public finance, for two reasons -- one general, the other peculiar to Japan. Every crisis causes a falling-off in revenue from taxation and especially from those taxes which apply to consumption and circulation. Japan could not hope to escape this law. But the crisis has not only affected her revenue; it has also increased her expenditure. The Japanese Empire is a paternalistic state; except for brief intervals, production has always developed under government care. It was but natural, therefore, and in harmony with national tradition, that in the present crisis the Treasury should come to the aid of the classes chiefly affected. This aid took the form of plans for stabilizing the prices of silk and rice, bonuses on exportation, state guarantees for bank advances and even direct loans to whole classes of citizens. These measures have entailed sacrifices on the part of the public treasury.

But we shall understand the last phase of Japanese finance better by studying the budgets appertaining thereto:

BUDGET OF 1929-30[v]

Revenue (in yen): Estimated Realized Difference
Ordinary 1,504,706,757 1,481,143,304 --23,563,453
Extraordinary 176,354,177 345,301,447 + 168,947,270
____________ ____________ ____________
  Totals 1,681,060,934 1,826,444,751 +145,383,817
Expenditure (in yen):
Ordinary 1,223,689,070 1,212,726,860 -- 10,962,110
Extraordinary 457,371,864 523,590,195 +66,218,331
____________ ____________ ____________
  Totals 1,681,060,934 1,736,317,055 +55,256,121

These results were satisfactory in appearance only. The expedition of troops to China and other charges caused expenditure to exceed the estimates very considerably, while the yield of the principal taxes showed a falling-off, though not a very great one. The apparent surplus of revenue was due to new loans or to the remainder of the loans of the previous year. Nevertheless, this budget marked a step forward in the sense that, in comparison with the preceding year, it showed a reduction of 78½ millions on the total expenditure.

As regards the budget of 1930-31, actual results are not yet to hand. According to an article in the Transpacific of July 2, 1931, the revenues of that fiscal year had in April last reached 1,259,687,000 yen, or 249,687,000 less than the estimates; nearly all taxes on consumption and circulation, as well as the revenues from state domains and state enterprises, were falling off. Expenditure, in spite of a reduction of 126,001,000 yen, still amounted to 1,429,487,000. Thus, there was a deficit of 171 millions, covered almost entirely by Treasury bills. On the other hand, the Government anticipated that in the May-July quarter revenue would exceed expenditure by 132 millions. This would reduce the ultimate deficit to 37 millions only, which could be covered by the remainder of the "earthquake" loan. Yet it must be admitted that if the fiscal year does not show as large a deficit as was feared, this was due to care in reducing expenditure; expenses amounted to 1,589,487,000 yen as against 1,681,060,934 of the previous year.

It is more than ordinarily difficult to forecast the results of the current fiscal year (budget of 1931-32), because since April last (which date marks the commencement of the new fiscal year) the economic crisis has already forced the government to make repeated retrenchments in the budget of expenditure. The situation has been complicated further by the political crisis between China and Japan, which has necessarily entailed considerable expense.

Leaving aside the financial repercussion of events in Manchuria, in regard to which some time must elapse before we can be enlightened, and confining ourselves to the period ending September 30, 1931, we may sum up the situation as follows: The budget for 1931-32 was submitted to the Imperial Diet on January 22, 1931. The Minister of Finance, in a long speech, emphasized the fact that the government's financial situation both as to revenue and as to expenditure was dominated by the economic situation of the country. The index-number had fallen 27.5 percent in the eighteen months since June 1929, and the prices of the staple articles of export and import had undergone a veritable collapse, in consequence of which the customs, excise and income-tax receipts and revenue in general had fallen off considerably. The total amount of this falling-off was estimated at 149 millions. The aggregate revenue was estimated at 1,428 millions -- the lowest on record since the budget of 1917. At the same time, the fear lest unemployment should spread forced the government to make certain special expenditures. Thus, public railway works, estimated at first at 56 millions, had reached 92 millions. It was further decided to give advances amounting to 95 millions to the classes most keenly affected by the crisis, namely, small traders, agriculturists and fishermen. In order to balance the budget without having recourse to credit on a large scale, it was proposed to contract certain small loans, destined for public works, and to press the policy of retrenchment. Mr. Inouye announced a number of economies, amounting to 129 millions. In addition, he reduced to a minimum the sums originally estimated for naval repairs and limited the tax reductions already promised. By these means the aggregate expenditure was brought down to 1,410 millions -- the lowest figure Japan has known since 1922, and 400 millions lower than the budget of 1927-28.

In January 1931 it was thought that these sacrifices would be sufficient and, combined with some small loans, would even yield a small surplus. But on the one hand, supplementary estimates brought up the expenditure to 1,488 millions, while on the other hand, the rapid aggravation of the crisis had an immediate repercussion on public revenue. It soon became evident that the estimated surplus would be replaced by a deficit, which by the end of spring was put at 60 millions at least, with a prospect of reaching an even higher figure.

Everyone was agreed as to the necessity of rigorous economies but everyone in his heart wished to maintain the credits which affected himself or his caste. There was constant newspaper talk of reducing expenditure. The political parties and the press elaborated plans of economies on a grand scale. The Government proposed measures to the same end. But the economies actually realized amounted only to a few millions.

A single instance will suffice to illustrate what happened. The reduction of the salaries of public servants had been demanded since 1929; it was especially justified since 1930 by the fall in prices. Nevertheless, when it was finally decided to put it into force from June 1, 1931, it was found necessary to make so many concessions that out of 710,277 public functionaries only 45,613 were affected by the reduction and the amount saved did not reach 10 million yen. The project of amalgamating certain ministries and services and the proposed restriction of military expenditure also met with lively opposition.[vi]

These remarks must not be understood as disguised criticism of the Japanese people, whose patriotism is unsurpassed by that of any other nation, nor of Mr. Inouye, who had succeeded in reducing public expenditure from 1,736,000,000 yen in 1929-30 to 1,488,000,000 in 1931-32 and to whom much praise is due for that achievement, even though his adversaries attribute it solely to the fall in prices. If there is any criticism it would have to be addressed to both political parties which have governed Japan since the war and which have failed to arrest the country on its course down the slippery incline of what Vilfredo Pareto called la finanza allegra -- "merry finance."


Nevertheless, the months passed and autumn brought in its train events of which I shall speak directly and which were not of a nature to redeem the situation. The drafting of the new budget was delayed because in view of the intensity of the economic crisis it was impossible to foresee with any precision where the falling-off of revenue would stop. When at last the budget was drawn up it placed expenditure at 1,479,900,000 yen and revenue at 1,307,800,000 yen, leaving a deficit of 172,100,000 yen. This was to be redressed by the following measures: increase of taxation, 30,930,000 yen; increase of customs duties, 9,140,000 yen; and various internal loans, 132,030,000 yen.

The new budget was made known on December 8. One week later, the Wakatsuki Cabinet was a thing of the past and its place was taken by one from the Seiyukai Party. Yet there was no connection between the two events. The ministerial crisis was precipitated by disagreements which for some time past had made themselves felt in the Cabinet. The summons to Mr. Inukai to form the new Cabinet was dictated almost entirely by monetary considerations. Not that the new budget did not supply the Opposition with weapons against the Government. It was easy to remind the Minseito Party of its electoral platform of 1929. In spite of their slogan "No loans!" they had already contracted loans of more than 100 millions during 1931, and although the public debt had passed the six billion figure, they were planning to issue still larger loans. The slogan "No loans!" was, in its turn, abandoned at a time when public revenue had fallen off by 20 percent and when the existing taxation already bore too heavily upon all classes of society.

Yet these criticisms were not a sufficient ground for appealing to an Opposition that was in acknowledged minority in the Diet, inasmuch as the Seiyukai Party had no alternative budget policy to suggest. On the other hand, however, it could put forward a program radically different from that of the late Government in the monetary field, because for some time past it had been strenuously advocating the departure from the gold standard. This sufficed to open to the Party the road to office.

I have already explained above with what facility the return to the gold standard was accomplished and how rapidly it had produced the two results expected of it, namely, exchange at par and a fall in prices. But in the chant of triumph there were from the very start some discordant notes. As a matter of fact deflation, however prudently carried out, must necessarily have its victims; that, indeed, is one of the reasons why inflation should be avoided at all costs. Furthermore, in the case at hand, the times which followed hard upon the return to the free exportation of gold were a period of acute crisis. From that moment there was no lack of critics to declare that the reform was premature and that prices were falling quite enough without it. And it was pointed out that under the free exportation of gold considerable quantities of the precious metal had left the country and that the gold reserve was sinking.

In spite of all this, it was generally thought that the advantages of the reform outweighed its disadvantages and that the gold reserve was adequate, since it covered more than two-thirds of the fiduciary circulation. In a word, the gold standard did not seem to be in danger. But from the end of September public opinion began to be seriously uneasy. More than once the foreign press announced that Japan was about to follow the example of Great Britain and so many other countries. The Minseito Government took certain steps to control the export of gold and twice advanced the discount rate. But on the question of principle Mr. Inouye showed himself inflexible. He held that the situation presented a different aspect in Japan than in England (in Japan there are no big short-term deposits that might be withdrawn overnight), that the balance of trade was in equilibrium, and that the suspension of the gold standard would upset the country's economic life. He succeeded in persuading the business world of Japan to share his point of view, as is shown by a resolution adopted at a meeting on November 7, at which the principal banks were represented. And the yen remained very nearly at par.

Nevertheless, Japanese public opinion became more and more nervous. Mr. Adachi, Minister of the Interior, openly preached the necessity of forming a National Government after the pattern of the new MacDonald Cabinet in Great Britain. When his resignation forced the Government to retire, Prince Saionji, last survivor of the Elder Statesmen of Japan, advised the Emperor to call the Seiyukai Party to power. The new official Cabinet was at once formed, with Mr. Inukai as Prime Minister and Mr. Takahashi as Minister of Finance.[vii] This Cabinet's first official act, on December 13, was to prohibit the exportation of gold. In addition, the inconvertibility of bank-notes was immediately proclaimed.

This should suffice to make it clear that it was the currency policy that lay at the bottom of the change of Cabinet. That recourse was had to the minority to take over the government of the country in spite of serious foreign complications and the practical impossibility of proceeding to an immediate dissolution of the Diet, shows that a considerable section of public opinion favored a return to the embargo on gold exportation. What were the reasons that lay behind the development of this sentiment?

The situation was already bad in consequence of the steadily increasing economic depression, aggravated on the one hand by the poorest rice harvest in thirteen years and on the other by the Chinese boycott, which dealt a heavy blow not only to the export trade but also to the Japanese merchant marine. Prices crashed. In October alone there was a fall of 2.7 percent, which brought the index-number down to 55 percent of the average prices of the years 1921-24. As for the foreign trade, the returns for October were the lowest since August 1917 for imports and the lowest since October 1915 for exports.

In times of acute distress faith in economic principles is apt to be shaken. A death-blow seemed to have been dealt to economic orthodoxy by the suspension of the gold standard in Great Britain. The repercussion of this measure was very great in Japan. In Japanese eyes London has always appeared in the light of an economic Mecca; the reform realized in 1925 by Mr. Winston Churchill had greatly contributed toward Japan's return to the gold standard. Great Britain's suspension of the gold standard had an even greater effect, in the contrary sense, because the temporary boom which followed the return to an inflation policy by Great Britain and others that imitated her manifested itself partly at Japan's expense. Japan, one-tenth of whose merchant tonnage was already lying idle, saw the British merchant marine offering freights in depreciated sterling; she saw Lancashire exports supplanting her own goods in the Middle Eastern and Far Eastern markets, and certain Canadian and Swedish industries (such as the paper industry) competing with her own even in Japan itself.

Another preponderant factor was the escape of gold. The gold reserve, which had already become reduced from 1071 millions in January 1930 to 825 millions in the summer of 1931 was shrinking visibly. On the day when the free export of gold was suspended, it had sunk to 520 millions and an important bank was on the point of exporting another 30 millions. Now a reserve of 500 millions is generally considered in Japan as the minimum -- as the "safety level," below which it must not be permitted to go.[viii]

What hopes do the Japanese found upon the decree of December 13? Well, about the same as those hopes manifested in England -- the restoration of economic activity and, above all, the relief of their two main industries, silk and textiles.

Government circles anticipate that the price of raw silk in yen will rise in proportion to the depreciation of the yen, and this will be an encouragement not only to the agricultural element so intimately bound up with this industry, but also to the capitalists and working-classes engaged therein. Similar advantages are expected for the cotton industry, the merchant marine and all branches of production in general.

The Transpacific of December 17, 1931 points out that the immediate effects of the embargo seem to be satisfactory but hastens to add: "Whether a policy of inflation is in the long run beneficial to any country is open to much doubt." That is also my opinion.

Forced circulation may perhaps be a necessary evil; it is never a remedy. The suspension of the gold standard may bring temporary relief; but in the long run it generates numberless evils. Even at the end of 1931 people in Japan had begun to be aware of this. To be sure, the shares of steamship companies and textile industries advanced considerably and silk prices remained firm, despite their heavy fall in the United States. On the other hand, the yen followed the pound sterling in its drop. This depreciation affected all salaries and generally speaking all persons having a fixed income. It also was disquieting for the equilibrium of the budget. The new Government apparently intends to hold to the budget submitted on December 8, with the proviso that the new taxes will be replaced by a reduction of the sinking fund. But at the present rates of exchange it would seem difficult to hope that expenditure will remain at the figures of the estimates. The service of the foreign debt alone will absorb 30 percent more yen than heretofore; the same will be the case with all purchases effected abroad, and home prices in their turn will surely rise. Recourse to credit, also, will be more costly.

At the beginning of 1932, as this article is being finished, Japan's financial situation is much more difficult than it was a twelvemonth earlier. A huge effort will be necessary to balance the budget and to stabilize the national currency in one way or another. But it is not the first time that Japan finds herself in a straitened financial position. This is the fourth, at least, since the days of the Great Reform in 1868. The history of the past sixty years permits the hope that the Japanese people will once again show their financial patriotism, and that once again they will surmount the difficulties that beset them.

[i] Except where noted all figures in this article are in yen. The par value of the yen is just under half a dollar, i.e., $.4984.

[ii] During the war the belligerents had ceased their exportations to Japan and had utilized the Japanese merchant marine. Simultaneously, the monopoly of trade in Asia had been abandoned to Japan and had become all the more profitable, as the rise in the price of silver had increased the purchasing power of countries in which the silver standard prevailed, notably China.

[iii] The Tokyo fire covered 33.4 square miles, as compared with 12.1 square miles at San Francisco in 1906, 8.5 at Chicago in 1870 and 1.7 at London in 1666.

[iv] In addition to the general causes operating throughout the world, this crisis had a series of special causes. The first was the crisis in the United States, Japan's best customer, where there was a falling-off in the demand for silk. Another was the depreciation of silver, affecting China, Japan's next best customer. This depreciation acted in China both as a protective tariff and as a bonus on exports; Chinese industry was thereby enabled to produce cotton goods more cheaply than the Japanese looms, and the American market found it more profitable to turn to China for raw silk. A third cause is traceable to the high fiscal tariffs adopted by the British Dominions. The Gandhist home-industry agitation in India further reduced Japan's export trade in textiles.

[v] From the "Japanese Financial Year Book" for 1930.

[vi] Thus, the military chiefs agreed to the suppression of four army divisions, but demanded that the credits liberated be spent on the renewal of armament. The final estimates provided for a reduction of 1,247,000 yen for the navy and an increase of 805,000 yen for the army.

[vii] This statesman, who is of advanced age, enjoys great authority and possesses great financial experience. Like Mr. Inouye, he has served as president of the Yokohama Specie Bank and as governor of the Bank of Japan. He was Prime Minister in 1921-2 and was created a Viscount but renounced the peerage in favor of his son. He is familiar with the foreign money-markets, for it was he who as Financial Agent negotiated a part of the big loans of 1905 and 1906.

[viii] Still another reason is given in the leading article of the London Times of December 14: "Large financial and commercial interests were reputed to have indulged in heavy speculation in dollars in anticipation of the fall of the yen. Mr. Inouye's shipments of gold to America converted their hopes of profit into fears of heavy loss. Their attacks upon Mr. Inouye were supported by the industrialists."

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  • A. ANDREADES, Professor of Economics at the University of Athens; author of "History of the Bank of England;" recently lecturer at the University of Tokio
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