What Hindered the Capitalization of “Tokugawa Japan” (Feb 6, 2010)

In capitalism, what speaks is money. However, we rarely hear the term Moneyism, unlike Capitalism. This suggests that what is truly decisive in capitalism is not merely money, but capital.

How about the market economy, then? This is an economy of exchange mediated by money—essentially, a system in which various goods and resources are bought and sold.

Here, one is reminded of Fernand Braudel’s three-layer model:

Capitalism

Market economy

Material Life

Economic historian Osamu Saito notes* :

“If we use this schema to organize the observations in this chapter, we can say that what Japan and Western Europe shared was that Smithian growth occurred in the middle layer. However, significant differences are observed in the bottom and top layers.”*

Borrowing this perspective, we might say that what divided the paths of Western Europe and Tokugawa Japan toward capitalism was the presence—or absence—of that top layer. Put simply, the question becomes whether capital existed or not.

So then, how was capital formed in early modern Western Europe?

The first source was foreign trade. Whether through privileged merchants backed by royal authority (such as the East and West India Companies) or through adventurers chasing sudden fortunes, in an age where transportation and communication costs were immense, merely bringing exotic foreign goods into one’s community could yield enormous profits when sold to monarchs and aristocrats. Slightly more astute merchants could profit by repeatedly exploiting the price differences between domestic and foreign markets, particularly in precious metals, simply by crossing borders.

Through foreign trade, monetary wealth accumulated among certain strata of society. Yet, precious metals and monetary wealth by themselves do not generate new value or wealth just by being hoarded. Some may have engaged in speculative foreign trade again (high risk, high return), but once individuals had already secured their fortunes, they tended to adopt a more conservative stance in managing them. If possible, they preferred secure investments with high interest and guaranteed principal. This became the second source: finance or financial investment.

The Republic of the Netherlands** in the early modern period followed both of these steps. In the 17th century, while fighting its war of independence from the Spanish Habsburgs, the Dutch built extraordinary competitiveness in intra-European trade, especially in the Baltic region. Through this, they amassed money. Inside this decentralized, aristocratic-republican state, the market economy was vibrant. The massive trade surpluses were transmitted down to the citizen level through market economic activity. In the Netherlands, everyone—from cats to ladles, as the saying goes—scrambled to find safe and profitable investments. Dutch capital frequently flowed into England.

Then came England’s Glorious Revolution (1688–1689), in which, through the twists of history, the Dutch Stadtholder (in effect, king) became the new monarch of England. Thus, a personal union between England and the Dutch Republic was formed. This allowed the Dutch to counterbalance the military ambitions of France using English military power. However, even England could not easily match France militarily.

At this juncture, the Dutch funding system—already tested in the Republic—was introduced into England. This included converting short-term government loans for military budgets into longer-term government bonds. The latest financial and credit technologies from Amsterdam were adopted. Five years after the Glorious Revolution, the Bank of England was established, solidifying England’s transformation into a fiscal-military state. The founding of the Bank of England served multiple purposes: securing military funding for the government, easing monetary policy through the issuance of banknotes, and offering safe and profitable investment opportunities (government bonds) to investors. This marked the emergence of the world’s first financial capitalist state.

Meanwhile, what was Tokugawa Japan doing during the Glorious Revolution? It was Genroku 2 (1689), the time when the haiku poet Bashō traveled the “Narrow Road to the Deep North.” Japan was enjoying its own version of high growth, driven by a 17th-century population boom that boosted domestic demand. Having long since effectively withdrawn from international trade, Japan lacked any significant accumulation of private financial capital through foreign trade.

Moreover, unlike the 19th century, Tokugawa Japan did not face a national security crisis that would have necessitated military budget expansion, the rebuilding of centralized governance, or a shift from Tokugawa clan-based household finances to a full-fledged national fiscal system. On the contrary, this allowed a certain refinement—or even civilization—to advance within the archipelago. Compared to the West, inequality of wealth was less severe, and peace persisted for over two centuries. In this context, a kind of “miniature garden” state was cultivated.

When Westerners began arriving in droves in the mid-19th century, they were struck by the remarkable urban conditions of places like Edo City. This stood in stark contrast to the squalid urban environments of the West, exemplified by London’s Great Stink of 1858.

Tokugawa Japan was thus following a path of early modernity that diverged significantly from that of Western Europe. What alternate modern historical trajectory might have emerged on this archipelago? That is a topic for future consideration.

References:

• “The Term ‘Capitalism’ ”: Drown in a sea of books
  
• “The Glorious Revolution = Emergence of the Anglo-Dutch Complex”: Drown in a sea of books
  
  

Notes:

*   Mari’o Oshima (Ed.), Comparative History of Land Scarcity and the Industrious Revolution, 2009, Minerva Shobo, p.363
** Toshiaki Tamaki, The Birth of Modern Europe: From the Netherlands to England, 2009, Kodansha Sensho Metier

※This article is an English translation of the following Japanese article.
徳川国家の資本主義化を妨げたもの: 本に溺れたい　2010.2.6.