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Japanese Government Loan Issues on the London Capital Market: 1870-1913.

Reviewed by Ranald Michie

The least impressive aspect of this book is its title, which is as off-putting as it is possible to be. It conjures up such a narrow and specialized topic that only the most dedicated of financial historians would contemplate reading it. In fact, it might be wondered how such a subject could fill 300 pages, and be published without subsidy. However, all that is an illusion, for this book is a real treat. The research has been conducted in six countries - Britain, France, Germany, United States, Hong Kong, Japan - and the secondary reading is equally diverse. As a result the reader is presented with a meticulous and authoritative account that makes a major contribution to the understanding of international finance before the First World War, and one that takes into account the perspective of both the borrower and the lender.

The first two chapters give an excellent overview of the way foreign government loans were handled in the London capital market between 1870 and 1913. (A complete list is given in Appendix A). In particular, a distinction is drawn between loans to mature borrowers, with a good record of payment, and a country without any credit rating. The loans of the former sold themselves, were competed for by all the major finance houses and were issued on fine terms at low cost. In contrast, the latter had to be aggressively sold and only attracted interest from the smaller and less established intermediaries, who demanded attractive terms for investors and generous remuneration for themselves. What Suzuki also reveals is the growing competition in London for whatever business there was as the territory of the once dominant merchant banks was invaded by both domestic and overseas deposit banks and stockbroking firms. Here, Suzuki needs to make greater distinction between the various overseas banks, distinguishing more clearly between those with London head offices and those whose center lay elsewhere. One group was already in London while the other had to be attracted there.

The next five chapters present a detailed analysis of Japanese government borrowing abroad, and the use it made of the London capital market. In 1870, when the first loan for [pounds]1 million was issued, Japan was a doubtful borrower, and was turned down by the likes of Rothschilds. Only by paying both a high rate of interest on its loans and offering generous commission to the less experienced firms that handled the issues, was the Japanese government able to borrow at all in London, and not at all anywhere else. By the 1890s this position had already changed, especially after Japan joined the gold standard in 1897 and so removed exchange rate instability as a factor discouraging investor interest. By then a group of City financial firms, like Parrs Bank and the stockbrokers Panmure Gordon, along with the Hong Kong and Shanghai Bank, were handling Japanese loans at low rates of commission, while much less inducement had to be offered to investors to entice them to subscribe. With the Anglo-Japanese treaty of 1902, and the subsequent large-scale borrowing needed to finance the Russo-Japanese war, Japan was able to command the attention of both the Rothschilds and the Barings while the issues were, generally, oversubscribed in the market.

By the early twentieth century, Japan, as a long-established borrower, was able to have loans issued not only in London but also in New York and Germany. After 1905, with the easing of tension between Japan and Russia, Paris became an increasingly important center for Japanese borrowing because of the attractive rates offered there. No longer was Japan the supplicant seeking an opening for it could now shop around for the best terms in all the world's financial markets. The one major criticism of the section of this book I would make is the view that the raising of the Japanese loans in New York in 1904-05 represented that city's emergence as an international financial center. On Suzuki's own evidence, New York was soon abandoned in favor of Paris for Japanese loans once that center's commitment to Russian borrowing ceased to be a barrier. Interestingly, as early as 1907 it appeared that virtually none of the Japanese bonds issued in New York in 1904 were still held in the United States, but had gravitated to Britain and Continental Europe.

Finally, there are two concluding chapters. One addresses the question of municipal and corporate loans. Though interesting in itself in terms of the information it contains, there is nothing like that same command of the material as with government loans. In contrast, the chapter on the effects of the government loans is most interesting. In it Suzuki shows how the Bank of Japan used London as a base from which to manage Japan's external monetary affairs, emphasizing further the dominance of the City of London in the world's financial affairs before 1914. Suzuki also suggests that Britain's lending to Japan was of significant benefit to the British economy both through the stability imparted by the presence of Japanese deposits in London and the large export orders that flowed to British industry. Curiously, what is missing from the study is any detailed assessment of what the loans meant for the Japanese economy, considering the fact that most were used for military expenditure.

Altogether, this is a thoroughly satisfactory study of an important episode in financial history. Furthermore, the way the subject is treated should make this book have a wider appeal beyond those interested in Anglo-Japanese financial flows. In particular, it reveals a great deal about the mechanisms of international capital markets in the late nineteenth/early twentieth centuries, and the changing balance of power between borrowers and the financial institutions that served them. At the very least readers with an interest in the subject should read chapters 1, 2 and 9 for the enlightenment they provide on the reality of international financial relationships.

Ranald Michie is reader in economic history at the University of Durham, England. He is the author of numerous books and articles on financial history, including The City of London: Continuity and Change since 1850 (1992).
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Author:Michie, Ranald
Publication:Business History Review
Article Type:Book Review
Date:Jun 22, 1995
Words:1020
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