Episode 79 – Dr. Steven Ericson (Dartmouth)

Originally published on November 20, 2018

[This transcript has been edited for clarity.]

Tristan Grunow: This is the Meiji at 150 Podcast. I’m Tristan Grunow. On this episode, I’m talking with Dr. Steven Ericson, Associate Professor of History at Dartmouth College. Dr. Ericson is the author, most recently, of “Orthodox Finance and the Dictates of Practical Expediency: Influences on Matsukata Masayoshi and the Financial Reform of 1881-1885,” published in volume 71 of Monumenta Nipponica in 2016. Dr. Ericson, thank you so much for talking with me today.

Steven Ericson: Oh, my pleasure.

TG: You’ve written in the past about railways, and the relationship between private industry and the state. And more recently, I understand you’ve been working on the Matsukata Deflation. And so, when talking about the modernization and industrialization of Japan in the Meiji period, we so often focus on the built forms: the railways, the lighthouses, the telegraphs, but maybe forget that this must have cost money. So, could you talk about the fiscal condition of the state, and how they were able to balance all of this building and the budgets at the same time?

SE: Yes. So, the main sources of revenue… tax revenue was the fixed land tax. That accounted for something like ⅘ of government revenue? And then you had a number of indirect taxes: consumer taxes, and the most important of those was the sake brewery tax, which was equal to all of the other indirect taxes combined. So as far as the revenue stream, those were the main sources. You know, there’s a little bit from tariffs, from customs, but of course, those are fixed at a very low level under the unequal commercial treaties imposed by the Western powers, fixed at more or less 5% of the value of imports and exports as well.

But the main way the government made up for deficits or shortfalls was to print money (laughter). They basically printed fiat or inconvertible money, so in the case of government notes, government paper money was from 1872, and then in the case of the national banks (these private banks that were charted by the government), it was from 1876 they were issuing irredeemable notes. And so, they were not backed by gold or silver, which was actually flowing out of the country because of chronic trade deficits. In fact, almost every year of the 1870s, Japan ran a trade deficit other than the deflationary year of 1876. It was the one year where there wasn’t a positive trade balance, but then went right back to [a] negative balance.

You have the government and these banks printing money to pay for projects, to, in the case of the government, make up budget deficits. The government also printed so-called “supplemental notes,” which were meant to be just temporary, but whenever there was a shortfall in revenue, they would issue these. But basically, the government kept them on the books, and it wasn’t until Matsukata became the finance minister that the government moved to retire those supplemental notes. So, those are the main ways that the government paid for all these nation-building projects.

They faced some real difficulties there, but the critical period comes when the government settles the cost of suppressing the Satsuma Rebellion (so the last and greatest samurai rebellion), and that happens in 1878, the year after the rebellion was actually quashed. So, the government and national banks issued a huge amount of additional inconvertible notes, and that eventually sets off by 1879: just runaway inflation, currency depreciation.

In 1880/81, basically for the most part under Matsukata’s predecessor Sano Tsunetami (who’s a finance minister briefly: 1880-1881), the government embarks on austerity, it embarks on retrenchment and increasing taxes. All the things that we associate with the Matsukata Reform began under Sano, and then Matsukata intends to continue these policies. And the one thing that he does follow up on is establishing a convertible currency, stabilizing the currency, and so, from 1882 to mid-1883, he actually contracts this bloated money supply at a frenetic pace. He retires all of those supplemental notes that had been issued to cover budget deficits, and then he begins to retire regular government notes (you know, fiat notes).

As a result of this drastic currency contraction, there’s a pretty serious deflation and depression in Japan. And beginning in 1883, (this I argue in my new book, a book manuscript) Matsukata begins to turn toward more positive policies, expansionary policies, and he proposes plans to promote exports, to borrow not only domestically but overseas. He tries to sell government bonds in England and Germany. Those collapse because of a failure to negotiate an exchange rate between the silver that Japan was going to pay on the principle in interest on the bonds, and the gold [standards] that England and Germany were on. They couldn’t agree on an exchange rate because silver was just depreciating rapidly in the middle-late 1880s and on.

And so, Matsukata begins to move away from a deflationary policy quite early, and this is very different from the widely accepted view of the Matsukata Reform, where the emphasis usually in most textbooks [is on how] he slashed spending, he hiked taxes and thereby, restored [the] value of currency and stabilized the finances and so on. That’s not the case (laughter). He actually increased spending during the Matsukata Reform at the beginning of the reform. Instead of asking ministries to cut their budgets, he asked them to freeze them for three years, and then they could make an increase beginning in 1885, he said. But in fact, because the yen would appreciate during that time as he carried out his currency reform, it actually meant a real increase in spending (the freezing of budgets). Beyond that though, Matsukata was forced to basically approve additions to budgets because of various unexpected happenings, including a cholera epidemic, and in the case of the depression that hit Japan as a result of his currency contractions, (and there were various peasant rebellions as a result of that), there was spending to deal with that problem. And then you also have the military demanding expanded budgets.

What’s usually maintained is that Matsukata increased taxes. Well, he did. He doubled the sake tax, but that was not for currency reform or financial reform but rather, for armaments build-up, to meet the demands especially of the navy. This was in the aftermath of the major anti-Japanese uprisings in Korea in the first half of the 1880s. And in fact, even though he doubled the sake tax, instituted a number of other the indirect taxes as a result of the depression that he largely caused by his currency contraction, taxes actually dropped and stagnated for the rest of the Matsukata Reform.

In the case of the sake tax, farmers who brewed some commercial sake, but especially larger brewers of sake were very hard hit by this increase in both the tax and the licensing fees. And what you have is a drop in demand during the depression for sake, and the production of sake actually does not recover until after the turn of the century. It doesn’t recover the level in the early 1880s, and you have a spike in tax evasion of sake brewers and also the increase in homebrewing (moonshine). Increases of that, which is not taxed until later.

So, what I’m presenting is a somewhat different view from a widely held one that the Matsukata Reform represented a successful example of an orthodox financial stabilization program. I’m arguing that other than the currency reform, which was quite orthodox in terms of mid-19th century European economic liberalism (you want to have a hard currency that’s backed by specie and stabilize your currency). That, Matsukata certainly carried out, and he, eventually in 1886, put Japan on a de facto silver standard, where both the old inconvertible government notes and new notes issued by the Bank of Japan… there was a preliminary issue in 1885, but from 1886, you have these new convertible Bank of Japan notes. They’re all redeemable in silver after 1886, and the government, over time, retires all of the inconvertible government notes (the fiat notes), and replaces them with Bank of Japan notes.

But other than that, Matsukata’s policies were actually quite unorthodox (laughter). His policies actually resemble heterodox critiques of IMF-style orthodoxy in recent decades. We have this Washington Consensus for former Soviet bloc nations, and other transitioning and developing nations. As a commission for loans, they have to carry out an increase in taxes, and they have to privatize state industries, and they have to retrench on spending and so forth. You know, all the things that we think Matsukata carried out. In fact, most of his policies deviated from or differed from those approaches. He actually called for a greater role for the state, which is not what either liberal or neoliberal economic orthodoxy would want. He increased spending, he moved to borrow in order to carry out his financial reform, and he had also relied on local intellectual traditions rather than just borrow ideas from the West or from the kind of orthodoxy that prevailed either in the 19th century or the more recent one too if you’re comparing [this] to what’s happened in recent decades.

TG: As you mentioned, one of these narratives of the Matsukata Deflation that we see in the textbooks is this painful retrenchment, but one that’s necessary. But as you mentioned, it does cause a depression in the countryside, it leads to peasant revolts.

SE: Yes.

TG: I’m curious especially on how this impacts not only the economy, but the relationship between the government and the business sector. I mean, another of these received narratives of the Meiji period [is that] it’s all about this collaboration between state and business in order to promote industry (the shokusan kōgyō policies). It’s this close working and close relationship between the two that allows Japan to industrialize, and you get these model factories that the state sets up like the railways, the Tomioka Silk Mill, all these other model industries the government can then sell off as a way to spur the growth of private capital. Is that what’s happening? Is there a change to this during the 1870s or maybe, do we need to complicate that whole narrative as well?

SE: Yes. So, [in] the 1870s, certainly, there is this partnership between the government and private enterprise. The government is subsidizing various industries (shipping in particular). It provides subsidies to Mitsubishi, and the state itself is heavily involved, as you say, in model factories. You know, the usual view is that they weren’t particularly successful, right? These state enterprises. They may have been important for introducing technology and certain ideas about industry, but they really, for the most part, didn’t become profitable or successful until they passed into private hands ([that] is the normal view). And for the most part, I think that’s true.

Many of the textile firms that the government set up were just not appropriate for Japan, and there’s an interesting difference between cotton spinning and silk reeling I think. So, the Tomioka Silk Reeling Mill was actually too large, too big and sophisticated for private entrepreneurs to copy mainly because they would tend to establish mills on a smaller scale, and have more hybrid technology using wood and so forth for the reeling equipment and so on. And so, the Tomioka Mill just did not serve as a really good model.

And in the case of cotton spinning, it was almost the opposite: the government mills were too small to capture economies of scale. And there, you can really make a strong case that private initiative was much more important than the state in cotton spinning, which of course became the leading sector of industrialization as we move into the late 1880s-1890s with those company booms. In the case of the Sakai Cotton Spinning Mill – there are a couple of mills that the government set up – again, they were too small, and the model for pretty much all successful cotton spinning companies in the Meiji period was the Osaka Spinning Company, founded by Shibusawa Eiichi, who is, as Peter Duus very nicely puts it, the Johnny Appleseed of Meiji business, Meiji capitalism, who helped found 500 joint stock companies. But that Osaka spinning mill was much larger, and it [was] much more efficient and could capture those economies of scale. And that became the prototype or the model for the really successful companies like Kanegafuchi and so on.

But the usual view is that once we get to the Matsukata Reform, we have privatization, the sell-off of these government enterprises, almost all of them pass into private hands other than railroads (the government hangs onto those) and then of course, arsenals, telegraphs; there are some other sectors that the government retains. But it sells off pretty much all of the non-military factories and mines to the private sector, so “we have a shift towards a more laissez-faire economy” is the argument you often here.

I think Chalmers Johnson, in his book MITI and the Japanese Miracle, argues that Japan moved more or less in a laissez-faire direction under Matsukata, and that, I’m questioning. I’m saying that the government remained pretty actively involved in the economy. It did not move in a non-interventionist direction: [the] government continued to provide subsidies. Maybe it was more indirect involvement, but indirect involvement was critical, particularly at the time of say, the 1890 Financial Crisis – Japan’s first modern financial crisis. The government played a huge role in preventing private railroads from folding. They provided a couple million yen in subsidies, and had the Bank of Japan extend loans on the security of railroad stocks, which was a huge boon to the railroad companies and railway stockholders. And the Bank of Japan also lent money to holders of stock in the Nihon Yūsen Kaisha (the shipping company that spun off of Mitsubishi). It also lent money to the Kanegafuchi Cotton Spinning Company, to various other banks and so on (which it was not supposed to do; Bank of Japan was supposed to be a purely commercial bank, but there’s another case where Matsukata diverged from orthodoxy). Instead of choosing the British model (the Bank of England) as the model for his bank, he chose the National Bank of Belgium, where the state was much more heavily involved in supervising the bank. And he moved in [an] even more statist direction by looking to the Reichsbank in terms of note issue (a much more flexible note issue along German lines), and then with this industrial financing, which went against the bank’s own rules (laughter), just went ahead and we’re lending money to at least the holders of stock in various private companies.

But I also argue that even the direct involvement of the government is still pretty significant through the Meiji period. It’s not like the government totally withdrew from direct involvement in the economy, and you have these arsenals, both naval and army munitions works, you also have railroad workshops, and these continued to be major centres for the diffusion of technology and even personnel to private railways makers and munitions makers that some of the government workers would move into the private sector. They would also share their technology.

And when we get into the 1890s, there’s a kind of re-entry of the government into the industrial sector, where you have the Yawata Steel Works (the first integrated steel works in Japan) as a government enterprise, and it finally begins operation in 1901. The government in the 1890s steps up the construction of state railways and eventually, in 1906/1907 buys out the major private railroads. So, there’s a pretty significant state involvement in the economy. Now, on the question of the privatization under Matsukata, it’s true that most of these factories and mines that the government had established and run were handed over to the private sector under Matsukata, but most of them were not sold until very late in his financial reform. It’s really not until 1884/85 that most of these are handed over, after his currency contraction had pretty much run its course, currency deflation. So, that’s another way in which he departs from a more current IMF orthodoxy, where privatization has to happen quickly and right away as you move into financial stabilization.

And what I found is the common view understanding is that the vast majority of these enterprises were losing money, so that it was not just a desire to promote private enterprise, but it was also a desire to cut losses of the sale of these enterprises. In fact, [out of] the ten enterprises that the Ministry of Public Works, the Industry Ministry sold, only two were actually running in the red when they were sold. Most of them were actually making some money, and the other thing is when we get into the Matsukata Reform, the government continues to pour money into railroads and mines. And so, the government spending on industry actually increased in the first three years of the Matsukata Reform compared to the previous four years. From 1877 to 1880, industrial spending actually dropped during those years, so in a sense, the real retrenchment in industrial spending took place before the Matsukata Reform. Although after 1884, you do see a pretty significant drop in spending as the government moves more or less in a direction of indirect support of private enterprise, though still having a hand, as I say, in major sectors.

Initially, the government tries to unload its factories, so many of them were running in the red: those run by the Home Ministry, some of the textile mills and so on. But only, I think, two enterprises were sold in the early 1880s, and it really wasn’t until the mid-1880s that you begin to have more accelerated sale. And because there were just so few takers for these factories, initially, the government set very strict conditions for the sale. They wanted to get a good price for their enterprises. It was not a fire sale, bargain-based sale from the beginning. But beginning in 1884, they basically relaxed the requirements, so the buyers of these government enterprises didn’t have to pay the full investment that the government had made, and it was a much easier payment schedule. And the government was looking not so much to recoup its investment as it was to find buyers who could run the enterprises. So they were often leased to private businessmen, and then after they had shown that they could run them, they would finalize the sale, and then the final phase of this divestiture program was the sale of the most profitable mines.

The government even sold its hugely profitable coal and metal mines. That began in 1888 with the sale of the Miike coal mines to Mitsui, and there’s a kind of fishy story there that Mitsui out[bid] Mitsubishi by 2000 yen, I think, and the total price for Miike was equal to the price of all the other enterprises sold by the government. The Miike coal mines became the dorubako (the dollar box) of Mitsui. It basically financed its expansion into all sorts of sectors, and Mitsubishi, licking its wounds after losing out for the big prize, in 1896 (which is the culmination of that whole government enterprise sale program) bought the very rich Sado and Ikuno gold and silver mines from the government. So, even those were sold off to the private sector.

Now those enterprises (especially the gold and silver mines) had been handed over to the imperial household. This was part of an effort to consolidate the financial independence of the imperial household before the opening of the Diet, or the Parliament could mess with things. And so, they would have a secure source of funding (the imperial household), but ultimately, it was decided you just had to invest so much money in updating the mines, and you have to compete for labour with private mines, let’s just get rid of them. So, they eventually sold those two to Mitsubishi.

But the other thing that Matsukata did during his reform was he convinced the government to pass a peers’ hereditary law (Estate Law, I guess it is). And so, they basically gave big chunks of stock in state subsidized companies, private companies to the peers, to the newly established aristocracy including himself (laughter), basically enriched himself as well. They got stocks in the NYK, in the Japan Railway Company and various banks (Yokohama Specie Bank and so forth). And he also had huge blocks of stock in the Bank of Japan, the Yokohama Specie Bank, the NYK Shipping Company, handed over to the imperial household too.

So in a sense, the imperial household became almost like an investment arm of the state, and it went on to buy stocks in a sugar manufacturing company and various other private industries. And so, you have the imperial household and the peers (the new nobility) as proxy investors for the state, you might say. So, here’s another kind of indirect involvement of the government in the private sector.

TG: You mentioned Shibusawa Eiichi as Japan’s Johnny Appleseed. I mean, we can also think of Iwasaki Yatarō at the Mitsubishi firm, or the Mitsui firm, and these big companies that were active even prior to 1868. These are often seen as one structural reason for Japan’s rapid industrialization following 1868 along with what you’ve been describing as people like Matsukata with very sophisticated economic thought, vibrant commercial economy, all of these things that are said to be setting up Japan very well structurally for rapid growth. Even as Bob Bellah says it: “Protestant ethic within Japan,” that positioned Japan so well to modernize rapidly. Is this still a valid narrative? Can we complicate this narrative a bit now? Or how has this idea changed?

SE: Yes I think that overall, it’s still valid. You know, there are important carryovers from the Tokugawa period, so certainly, domain monopolies, and Satsuma and other domains provide a precursor to state enterprises, you might say, in the Meiji period. John Sagers at Linfield College wrote about the Confucian origins of Meiji capitalism, and focusing especially on those Satsuma leaders like Matsukata who very much drew on their experience of mercantilism and domain monopolies from the Tokugawa period.

And you have a number of preconditions that really lay the groundwork for industrialization after 1868. Just to name a few of them, you have the rise of a money economy, you have a proto-national market emerging, in large part because of the alternate attendance system, where the daimyō had to spend every other year in Edo and to pay for these grand processions and their whole set of residences in Ed, they had market their local products in Osaka and Edo. And so, you begin to have a kind of standardization of prices and so forth as a result of that. You have pretty sophisticated financial systems emerging in part to support this alternate attendance system, and in the countryside, Thomas Smith, for example, talked about the dynamism of rural industry, of rural manufacturing in the late Tokugawa period (so sericulture (raising silkworms), and paper-making and weaving and so on), and that these kind of cottage industries were a breeding ground for the sorts of skills that could be readily applied, for the most part, to modern industry, particularly textile as the leading sector of [the] Meiji period.

So, there’s a number of ways in which one could argue that the Tokugawa really paved the way for modern economic growth, and this is an argument that Sydney Crawcour (you know, that Australian historian of Japan [who] wrote several articles on the pre-conditions in the Tokugawa period) very much emphasized that viewpoint. But I think we underestimate the obstacles that had to be overcome and so, Henry Rosovsky actually has this wonderful article in a book he edited way back in 1966 called Industrialization in Two Systems, and the article he wrote was about Japan’s transition to modern economic growth. He emphasized the obstacles (laughter), the various things that had to be hurdled for modern economic growth to begin. And he mentioned for instance, certainly, the semi-autonomous domains, which meant that although you may have a proto-national market emerging, there’s still all these divisions within Japan, not a unified transportation network necessarily, although we’re moving in that direction in the Tokugawa. And also, you have just the agrarian orientation of the ruling class, which saw agriculture as the foundation of the nation, and that thinking didn’t go away overnight. It took a while for government leaders to recognize the importance of industry. The Iwakura Mission from 1871 to 1873 was a real eye-opener for some of the more conservative government leaders who were just amazed at what they saw in the West. One member of the mission said: “Nothing grows from the ground. Black smoke rises from everywhere!” It sounds like an environmental nightmare, but (laughter) this is really impressive. Industry was the way to go.

On the other point you raised which is how rapid industrialization was in Japan, I think we also over-emphasize the rapidity of that industrialization. It really took Japan several decades to achieve industrialization on a broad front. I mean, you get the beginnings of modern industry in the Meiji period, but at the time of the Matsukata Reform (the first half of the 1880s) of the total labour force in Japan, only 2% were in modern industries. And traditional industries like sake brewing, hand weaving accounted for over a quarter of the labour force, and agriculture and forestry accounted for the rest of the 70+% of the working population. And the point emphasized by, for instance, Nakamura Takafusa (the leading economic historian of Japan) is that the traditional industries continued to be vibrant well into the 20th century (until even the 1920s). It’s really not until World War I that manufacturing industry accounted for more than half of industrial output, that the majority of industrial output in the Meiji period was coming from the traditional sector.

I think we sometimes forget that the biggest manufacturing industry for much of the Meiji period was sake brewing. (Laughter) That was nationwide and the biggest source of tax revenue for the government after the land tax. So, those kinds of traditional industries remained very important, and it’s probably not until maybe even World War I that we could talk about industrial revolution, Japan going into industrial overdrive. Although, some would counter by saying that the Meiji period was absolutely crucial: when you have the establishment of a legal financial communication infrastructure, you have major breakthroughs in industries such as textiles as well as steel and chemicals. That all comes in the Meiji period.

So [those were] important foundations, but I would still argue that you really see just the beginnings of industrialization in Meiji. And it’s probably not until World War I that you could really speak of an industrialization, a kind of self-sustaining industrialization that doesn’t rely on the output of agriculture to sustain it, which was the Meiji model: agriculture as the pillar of industrialization. It’s not until the 1920s [that] agriculture hits a plateau, but modern industry takes off as we get into the World War I and interwar periods.

TG: The Meiji at 150 Podcast is hosted by Tristan Grunow at the University of British Columbia in Vancouver, Canada. This podcast would not be possible without the cooperation of the UBC Centre for Japanese Research and the technical assistance of the UBC Faculty of Arts ISIT. Find out more about the Meiji at 150 Project, including the Meiji at 150 Lecture Series, Digital Teaching Resource and Workshop Series by visiting our website: meijiat150.arts.ubc.ca. Thank you for listening.


*Citation for this episode:

Steven Ericson, interview with Tristan Grunow, The Meiji at 150 Podcast, podcast audio, November 20, 2018. https://meijiat150.podbean.com/e/episode-79-dr-steven-ericson-dartmouth/.

The Meiji at 150 Podcast is hosted, produced, and edited by Tristan Grunow, with editorial assistance from Joshua Linkous. Transcripts by Kelly Chan.