It goes without saying that such a central bank should possess the sole privilege of issuing convertible bank notes. But in those days Japan did not possess an adequate specie reserve and the difference of paper and silver in value was exceedingly great. For these reasons the gov ernment withheld from the bank the privilege of issuing convertible notes for some time. In return, with the view of making the establish.. ment of the bank easy; the government under took to take one-half of the entire capital of the bank and also permitted the bank to give 2 per cent more dividends to private shareholders than the government received. In spite of such favorable conditions, the task of inducing the people to invest their money in the. bank's shares was not an easy one.
Disposal of the National Banks.— Having thus succeeded in gaining the first step in the direction of the adjustment of paper — namely, the establishment of a central bank, the government now faced the task of dispos ing of national bank notes.
Since the national banks had been chartered for 20 years, and that term had not expired, they could not be abolished at once. On the other hand, however, should they be left as they were and abolished at the expiration of the term there was a fear that not only these banks but the country would greatly suffer.
In view of these circumstances the plan adopted by the government was as follows: (1) After the expiration of the term of 20 years each national bank be permitted to continue business, if it so desired, as a private institu tion. (2) Each bank to deposit with the Bank of Japan a reserve fund for the redemption of notes, money equal in amount to one-fourth the amount of notes issued by that bank •and also make a deposit in the same way of a pot don of its profit every half year, the amount to equal 25 per cent per anniim of the amount of the notes issued by it. The Bank of Japan to buy government bonds with that fund in order to spend the interest 'accruing therefrom .for the redemption of notes. If after the ex piration of the term of the bank, there yet re Main notes unredeemed, that fund be employed for the redemption of such remaining portion of the notes. (3) The Bank of Japan to trans act the business of redeeming national bank notes according to the above method and to ex change national bank notes with currency any time the demand is made.
In May 1883, the National Bank Regulations were properly amended and the disposal of the national bank notes was immediately com menced. As described, the accumulation of specie was begun simultaneously with the re tion of the government paper money and the government set itself to the task of dis posing of the national bank notes as soon as the establishment of a central bank was accom plished. Thus the time for carrying out the conversion of paper money now approached.
The amount of the reserve specie at the end of 1885 was more than 42,000,000 yen. Of this amount more than 13,000,000 yen were in gold.
When this amount was estimated at the current price of silver at that time, the total amount of the reserve specie increased from over 42,000,000 yen to 45,000,000 yen. In consequence, the per centage of the reserve specie was in reality 59 to the amount of the government paper money in circulation, and 37.9 to the aggregate amount of the government paper money and bank notes.
A great difficulty was experienced in accumu latinif specie on account of the disadvantageous position in which the country found itself with regard to the treaty with foreign countries. By that treaty Japan was entirely circumscribed in the exercise of the power to revise its tariff system, being unable to impose any customs duty on imported foreign articles other than the 5 per cent duty fixed in the treaty. If Japan had been at liberty to increase its customs duty, the gov ernment might have increased its revenue and obtained a source of 'accumulating specie. Be sides, it would have made the trade relation with foreign countries advantageous to Japan and given facilities for attractingspecie from foreign countries. As, however, was un able to do all these things, a great difficulty was experienced in attracting specie from foreign countries, as in so doing Japan had only to rely upon the means of discounting foreign bills of exchange.
As the amount' of paper 'money in 'circula tion decreased and that of the reserve •specie increased, the difference of paper and silver in price gradually became less, until at the .end of 1885 it almost disappeared.
The gradual disappearance of the difference in price of paper money and silver brought about various effects upon the financial' condi tion of Japan. Prices gradually fell to their normal standard. The fall of price of rice was especially noticeable. In 1884 • it fell to nearly one-half of what it was in 1881. Interest also fell to its normal rate of about 10 per cent which ruled before 'the over-issue of incon vertible notes, while government bonds were quoted at a prise approximate to their face value. But closely following on the heels of these results there came a severe depression of trade and industry which culminated in 1883 and 1884. The fall of the price of rice told most heavily upon farmers, who had contracted habits of luxury -during the years of its' high quotation, for practically their incomes now fell off by nearly one-half, while their burden in the shape of land-tax was• •doubled. voices of complaint against the government's financial pOlicy resounded throughout the country, and the authorities had great difficulty in satisfying local officials, who sympathized with the farm ers and came up to the metropolis one after another to lay their complaint before the Cen tral government. Convinced that the redemp tion of paper money was of utmost importance to the state finance, the government was deaf against all complaints and resolutely pursued its policy.