The establishment of national banks having thus become quite easy, many were soon estab lished, and in April 1880 the notes issued by them reached the maximum amount of 34,420, 000 yen.
In these ways, the amount of inconvertible paper money in circulation rose step by step, until it reached its highest point in January 1880, as may be seen from the figures given below: The Policy of the Government Toward Inconvertible Paper Money About 1879. One result of such over-issue of inconvertible paper money was the difference in price of sil ver and paper, which began to manifest itself at the beginning of 1877. At the close of that year the ratio between silver and paper became as much or more than 1 yen and 21 sen of paper to 1 yen of silver. The general public began to pay attention to the disposal of the paper money. The government, too, recognized the necessity of taking measures to redeem the government bonds and paper money, and in August 1877 drew up a plan aimed at the redemption of the paper money within seven years, publishing it in July of the following year.
An opinion, however, prevailed both among the authorities and the general public that the differences in the value of paper and silver were due not to the depreciation of paper, but to the appreciation of silver, and the govern ment made efforts to prevent the rise of the price of silver rather than to redeem the paper money. Thus, when in March 1879, the dif ference between silver and paper became 1 yen and 26 sen of paper to 1 yen of silver, the gov ernment induced the First, Second, Mitsui and Specie banks to sell out silver coin. The meas ure was unsuccessful in so far as it temporarily checked the rise of the price of silver, but no sooner was the sale of silver coin suspended than the paper money further depreciated. As it was, the government abandoned The meas ure in September 1880.
The government also opened a place for transacting the exchange of Mexican dollars at Yokohama with the purpose of facilitating the sale and purchase of silver and of preventing thereby the rise of the price of silver. Further in February 1880, the government established the Yokohama Specie Bank, contributing one third of its capital, with the object of inviting people to invest hoarded coins, so that these coins might be supplied to the financial market. The Specie Bank was, moreover, to engage In foreign exchange in order to facilitate monetary circulation between japan and foreign countries.
All these measnres, taken with the object of checking the rise of the price of silver, 'having failed, the government ultimately resolved to set itself to the task of redeeming paper money in earnest. In September 1880, the government doubled the rate of tax on sake, so that the increased revenue to the amount of 5,000,000 yen a year might be set apart as a redemption fund. Again, the government extended the
spheres of local taxation, correspondingly light ening the burden of the central government, and at the same time the government expendi tures were much curtailed, the surplus obtained in all these ways being also added to the re demption fund. Besides all these, the govern ment decided gradually to transfer by sale to private hands the government •factories, which had been established for the encouragement of industry; stopped making loans to companies and individuals out of the reserve fund in the Treasury; and every yen thus gained went to increase further the amount of the redemption fund.
Yet the depreciation of paper did not stop. In April 1881, 1 yen silver brought on an average 1 yen 80 sen of paper, this being the lowest point ever reached in the depreciation of paper money.
The Effects of the Over-Issue of Incon vertible Paper Money on the Finance of Japan.— Before 1877, the over-issue of incon vertible notes resulted only in the excess of im ports over exports and the efflux of specie from the country, but after that year, as the amount of inconvertible notes issued suddenly increased, not only a great depreciation of paper and a faster and greater efflux of specie followed, but prices rose with abnormal rapidity. This was especially the case with the price of rice, which rose by 98 per cent in 1880 and 1881 compared with that in 1877. The rate of interest also rose by more than 4 per cent on an average in those days, it being possible to buy government bonds bearing 7 per cent interest at a price more than 30 yen lower than their face value. The bad effect of such a state of things was felt in various directions. The revenue of the govern ment was practically reduced to one-half in value of what it had been, and the people who lived on fixed incomes suffered greatly owing to the sudden and considerable depreciation of their incomes. The rise of the price of rice swelled the incomes of farmers, who constituted a great majority of the inhabitants of the empire, with the result that they contracted habits of luxury. The imports exceeded the exports more and more and gold and silver left the country in ever-increasing quantity. As for the industrial and mercantile classes, they were simply bewildered at the sudden and frequent fluctuations of prices and instead of engaging in honest business, hoped and struggled to reap profit by speculation. In fact the financial market of those days was apparently in a very prosperous condition, hut it was actually on the brink of ruin. This may he judged from the fact that whereas the export trade of the country increased 62 per cent in the five years between 1872 and 1876. it increased by only 28 per cent in the same length of time between 1877 and 1881.