The credit of these paper notes was at first exceedingly bad. In Tokio and Osaka, the price of the new paper money was at one time more than 60 per cent below the specie, while in other localities it could not be circulated. This was mainly due to the fact that the various kinds of paper money issued by different Daimios had already much depreciated in value, there having been even cases where they were disowned by the governments which had issued them. Moreover, the new government was not as yet established on a firm footing, while the paper money was issued with neither the security for conversion nor within reasonable limit. It is not at all strange that the general public placed little confidence in the new paper currency.
In view of such a state of things, the gov ernment endeavored to facilitate the circulation of the paper currency by every available means. Expostulations and threatenings were resorted to and then an order to pay taxes in the paper money was issued. It was even proclaimed a person who would take premium in the ex change of paper with specie should be fined or imprisoned. Despite all these measures, the government could not keep up the price of paper on par with specie. So in December 1868, the government was obliged to make public recog nition of the difference in price of paper and specie. This, however, only had the effect of still lowering the price of paper, and the gov ernment withdrew the measure in April of the following year. In May of the same year the government shortened the period of circulation of the paper notes to five from the original 13 years, and pledged to regard them, if they re mained in circulation after the expiration of that period, as government bonds bearing 6 per cent interest, besides announcing to the public the means of redemption and the amount of issue. These measures, however, were not satisfactorily carried out. But as the prestige of the new government gradually came to be fully established, the credit of the paper money increased, and about 1872 the people even came to prefer it because of the convenience of hand ling. In fact its price became even higher than specie.
The Over-Issue of Paper Money Owing to the Rebellion of 1877.— Matters were progress ing favorably, when in 1877 a rebellion broke out in the southwestern provinces of the empire. In order to defray the expenses of this civil war, the government was obliged to issue 27,000,000 yen of paper notes. Thus the amount of the paper money in circulation suddenly in creased, until in January 1879 it reached the maximum amount of some 120,830.000 yen.
• The Issue of Reserve Paper though these paper notes were issued by the government with the intention of withdrawing them after a fixed period, yet practically they became a sort of permanent debt; and besides them the government provided itself with re serve paper notes, which were issued whenever it found itself in want of money, withdrawing them as soon as revenues were obtaj.ned. This extraordinary issue of reserve paper money gradually increased in amount, so that after 1878 the average yearly issue reached 20,000,000 yen.
The National Bank Notes.— Besides the kinds of inconvertible notes, mentioned above, there was another kind of inconverti ble paper, namely, the national bank notes.
When in 1872 the government pledged to redeem paper currency in five instead of 13 years as originally fixed, it adopted a scheme of establishing national banks with power to issue convertible notes, these notes to be issued on the strength of the govern ment bonds deposited in the Treasury Depart ment. With this object in view the National Bank Regulations, modeled largely after the system then in vogue in the United States, were proclaimed. According to these regulations, a national bank was to have a capital of at least 50,000 yen, and was first to bring to the gov ernment paper money equal in amount to six tenths of its capital, for which the government was to deliver in exchange the same amount of the Kinsatsu-Exchange bonds bearing 6 per cent interest, and these the bank was again to take to the government to be deposited as security for the same amount of the convertible bank notes to be delivered; four-tenths of the capital was to be in specie and kept as reserve for the conversion of these notes. The govern ment intended to retire all the government paper money hitherto issued in exchange for these notes, but unfortunately that intention could not be carried out. For the specie was getting daily more scarce so that as soon as the con vertible bank notes were issued, so much de mand was made on the banks for exchange, that these notes never obtained any extensive circulation. Thus only four national banks were established, which issued some 2,000,000 yen convertible notes between them. In 1876 the government issued some 174,000,000 yen of the Hereditary Pension bonds to take the place of the annual pensions of the Daimio and Samurai classes, hitherto paid in rice. The government intended that these bonds should be made the capital of national banks and that those banks should be authorized to issue notes. In this way, it was believed that the Samurai would obtain a means of livelihood, while the economic market would be supplied with the much needed capital in the form of bank notes. With these ends in view, in August 1876, the government made certain amendments in the National Bank Regnlations, so that it now became possible to establish a national hank with power to issue notes without specie reserve at all. To he par ticular, the total amount of notes which the national banks might issue was limited to 34, 000,000 yen; a hank might place as deposits in the government treasury any kind of govern ment bonds hearing interest at 4 per cent and upward, to the amount equaling eight-tenths of its capital, in order to he able to issue bank notes equal to the amount of that deposit; at the same time the required conversion reserve for the notes issued was reduced to but two tenths of the capital, and moreover this might be in any kind of currency. Thus the national bank notes were changed from being convert ible in specie, into being convertible in currency; and since the currency of the time was incon vertible government paper money, these bank notes, too, became another kind of inconvertible paper money.