Discussion Papers In Economics
And Business

Speed of the price and efficiency of the concession
the treaty port market in Japan’s industrialization
Masaki Nakabayashi

Discussion Paper 08-14

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANSpeed of the price and efficiency of the concession
the treaty port market in Japan’s industrialization
Masaki Nakabayashi

Discussion Paper 08-14
March 2008

この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANSpeed of the price and efficiency of the concession
the treaty port market in Japan’s industrialization∗
Masaki Nakabayashi†
Osaka University
March, 2008.

Abstract
Even after modern economic growth began in the Western world, the international
market, which consists of a number of national and regional markets, has been more orless inefficient with respect to information. To calm this inefficiency, economic institutions have taken important roles. In addition, players in a society whose institutions
are superior have earned information rent in the international market. The treaty port inJapan that was imposed by Western powers worked as such an efficient institution, and aJapanese export industry took advantage of it at the beginning of Japan’s industrialization.
This designed market provided useful information with the export industry in the inland,as, say, stock markets do with various industries in modern economic societies.
Key words: institutions, efficient market, exchange rate and prices, treaty port, development.
JEL: O19, N75, L11.

∗

The author is thankful to Kaoru Sugihara for his kind support to this study, and he appreciates helpful comments from Gareth Austin, Toshihiro Matsumura, Dan Sasaki, Kaliappa Kalirajan, Tomoko Hashino, Tetsushi
Sonobe, Naofumi Nakamura, Shinya Handa, Hiroshi Osada, Debin Ma, Kenneth Pomernaz, Janet Hunter, Pierrevan der Eng, Patrick K. O’Brien, Masato Shizume, Mariko Hatase, and other participants of the Global Economic
History Network Conference at Osaka (December 16, 2004), and seminars at University of Tokyo, at Foundation
for Advanced Studies on International Development, the Bank of Japan, and at London School of Economics.
†
Corresponding address: Graduate School of Economics, Osaka University, Machikaneyama 1-7, 560-0043
Osaka, Japan. e-mail: masaki.nakabayashi@gmail.com/ masaki@econ.osaka-u.ac.jp

I. Introduction: efficient markets and economic development
A. Efficiency with respect to information set
In the ideal world without asymmetry of information, “efficiency” literally means “efficiency”
of resource allocation, the result being reached through the market mechanism. The process
this result obtains does not matter.
However, the real world with asymmetry of information is always on the move toward amore efficient resource allocation. Going on this process, players who have more information
make more money, and societies with less asymmetry of information develop faster.
In other words, we need to focus on the process rather than the result, and on information
rather than resources, in order to understand the economic development, which took place inthe real world.
We assume here that a market is efficient with respect to information set if the market
suffices the conditions mentioned below:
In general terms, the ideal is a market in which prices provide accurate signals
for resource allocation: that is, a market in which firms can make productioninvestment decisions, and investors can choose among the securities that represent
ownership of firms’ activities under the assumption that security prices at any time
“fully reflect” all available information. A market in which prices always “fullyreflect” available information is called “efficient.” 1
In such a market, players acquire “normal returns.” However, prices in markets of the realworld do not “fully reflect” “all available information.” Hence, in the real world, players who
have more information could acquire abnormal returns.
This holds for national economies, too. The international market consisting of a numberof local economies has not been perfectly efficient with respect to information. Because of
the general existence of information asymmetry, institutions have affected the performance ofeach economy. The modern institutions developed in the Western world have been successful
cases.
Indeed a widely shared idea about economic development is that market mechanism basedon Western culture is essential, and empirical works have showed some evidence for this.2 But,
how can the Western style of market mechanism be maintained in the non-Western world? The
modern civil law system and other governance mechanisms could be important instruments.
Also, international “public goods” such as the mechanism of free trade and the international
financial system established by the British empire seem to have prompted the development ofareas incorporated into the empire.3 On the other hand, institutions which are not consistent
with market mechanism could be “barriers” to economic development.
However, those institutions which enhance market mechanism had been formed as theWestern economies had developed, and did not exist from the very beginning in the Western
1

Fama (1970), p. 383.
Hall and Jones (1999). Acemoglu and Robinson (2000). Hayashi and Prescott (2005).
3
O’Brien (2002), pp. 4-64.
2

1

world. Neither did they exist in non-Western economies at the exactly moment when they
started to develop under the Western influence. Those economies progressed Westernization
only gradually, in the face of competition with challenge from the Western world. It is relevant to note here that they did not have an “efficient” market inland at the time when theyencountered the international market. We need to know what kind of instruments processed
information and induced more efficient resource allocation at the beginning of modern development, in order to understand how the industrialization began.
The “treaty ports” in Asia offer an interesting case in this context. East Asian countries
were forced to establish treaty ports as channels of free trade and allow Western merchants
to settle there in the last half of 19th century. Those countries increased international tradethrough those channels.
This paper focuses on the role of a treaty port of Japan in the late 19th century because
it had an institutional mix which allows us to test the importance of efficiency with respect
to information set. Obviously Japan has been one of the most successful “Westernized” nonWestern economies since it was incorporated into the global market by the imposed free tradein 1859 and started modern economic development in the mid 1880s. In Japan, however, themodern legal system was established as late as in the 1890s, while free trade boosted Japan’s
growth as soon as Japan opened its ports to foreign trade.4 Hence the free trade of Japan
from the 1860s to the 1880s gives an interesting example, where free trade worked well for
economic growth at a time when Western institutions had not been introduced within Japan.
How could free trade based on market mechanism work efficiently in the country, which had
been ruled by Samurais for several centuries?
As a result of the commercial treaties signed between Japan and Western countries, free
trade was completely guaranteed in the treaty ports, and transactions within the treaty port
were governed by the courts of the Western consuls if the defendants were Western. All international trades were conducted within the treaty ports, so that the efficiency by Westernization
there was critical to the growth of trades.

B. Industrialization and international trade
Another reason for studying the treaty port relates to the importance of international tradeitself at the beginning of the modern economic development. The long-held view that traditional industry first grows in response to local or regional demand, and gradually develops intomodern factory has been challenged for some time. One influential criticism of this view canbe found in the literature on proto-industrialization. According to this literature, the primarydemand for proto-industry generally came from outside the region where the industry was located, and in fact it frequently came from abroad.5 In some cases, it was not just the demand
but the supply of raw material that came from outside the region.6 The emphasis on demandand supply from outside the region echoes the findings of the more recent literature on the
4

Huber (1971), Bernhofen and Brown (2005).
Mendels (1972).
6
Hudson (1986).
52

industrial revolution in England. The principal demand for the English cotton industry during
the period of the industrial revolution was foreign, while its raw material, raw cotton, cameentirely from overseas.7 Simple messages from these arguments are that both the demand forthe product and the procurement of raw material could come from outside but that they need
to be linked to the regional market for the development of a modern industry.
It is easy to see that regional and inter-regional markets can be potentially complementary
to each other. In order for the proto-industry to develop into the modern industry, however, theboth markets have to be coordinated, that is, the price changes must be adjusted simultaneously
in both markets. This does not occur easily. Given that the transaction costs, for example thecost of acquiring information about the price in the respective factor market, can be high, thosemarkets are not necessarily arbitraged at the same time. If they are not organized well and ifthey are not arbitraged simultaneously, it may affect the growth and development of the protoindustry. Indeed the paths of “proto-industry” regions had not been monotone. In the case ofEurope, some regions were de-industrialized, while others were industrialized within a shortspace of time after proto-industries had grown.8 Among the possible reasons for the different
outcomes seems to be the coordination failure of potentially complementary markets. In otherwords, if there is an efficient instrument to synchronize related markets, it could accelerate thedevelopment of the modern industry.

C. Coordination supported by the treaty port
The hypothesis of this paper is that the treaty port of Yokohama took this coordinating role inlate 19th century Japan, resulting in the development of the silk reeling industry. The Japanesemodern silk reeling industry emerged in the mid-1880s and thereafter the exports of raw silk to
the U.S. rose dramatically. The Japanese share in the U.S. raw silk market exceeded 50 percent
in the late 1880s, 60 percent in the late 1900s, 70 percent in the 1910s, and 80 percent in the
1920s.9 Indeed it was in the mid-1880s that the Japanese economy started modern economic
growth.10 The development of the modern silk reeling industry was the first experience inJapan of a strong export industry leading economic development, a pattern later followed bymany other manufacturing industries.
As soon as Japan began to trade with Western countries under commercial treaties in 1859,
traditional hand-reeled raw silk (Hanks) was exported to Europe, especially to France.11 However, it had lost its competitive edge over Chinese traditional raw silk during the 1870s, andhad further suffered the adverse effects of the depression in France in the mid-1880s. By contrast, the development of the American modern silk fabric industry since the late 1870s createda new international demand. This change in the structure of international demand urged theJapanese silk reeling industry to modernize itself, since the American modern fabric industry,in contrast to the French traditional one, demanded machine-reeled raw silk (Filature) as raw
7

Crafts (1985), pp. 2-3, 141-152.
Ogilvie and Cerman, eds (1996).
9
Nakabayashi (2003), pp. 473-477, Appendix: Table 5-1, 5-2.
10
Minami (1994).
11
Nakabayashi (2003), pp. 473-483, Appendix: Table 6-1, 6-2.
83

material, and it would therefore be necessary to produce what was in demand in the U.S. if
Japan was to switch its export destination.
At the same time, the development of the modern silk reeling industry required an efficient
market of cocoon, its raw material. Railway lines were constructed in Eastern Japan from the1880s to the 1900s, and it promoted the convergence of local cocoon markets. This convergence prompted the reorganization of sericulture, where farmers, who had been engaged bothin sericulture and in hand reeling of raw silk, stopped the latter and came to supply cocoon to
the modern silk reeling manufacturers.
Interestingly, this reorganization of sericulture progressed in the mid-1880s, at a time wheninternational demand shifted from France to the U.S. There are several factors that helped
boost modern industrial development at this critical moment. One of them was the fallingexchange rate in the mid-1880s. The value of the Yen was linked to that of silver in thosedays, hence the falling price of silver in the mid-1880s meant the devaluation of the Yen.
The conventional view of the effects of falling exchange rate has been that Yen’s fall depressed the price of Japanese commodities in the international market, thereby contributing to
the growth of exports. This view assumes that there was a significant delay in the arbitrageof the product market. The reasoning behind this view is not difficult to see: the adjustmentof price in the product market is usually substantially delayed after the exchange rate change
occurs in the financial market. This view supposes that the product market is not efficientenough to immediately arbitrage price of the product market in accordance with exchange rate
fluctuations. If it had been true, however, we should also expect a delay in the inflow of information about the structural change of international market since the change of relative prices
of Filature to the US and Hanks to France in the international market could not be immediately reflected in the product market within Japan, in which case the knowledge that modernsilk reeling should replace traditional silk reeling would not be rapidly transmitted. Therefore,
if the market had not been efficient enough, traditional raw silk manufacturers should haveincreased its exports by taking advantage of its devaluated price. Thus the reorganization of
the silk reeling industry should have been delayed rather than prompted by the falling valueof silver.
Nothing is further from what actually happened. The devaluation was immediately arbitraged by an increase of the product price, so that the price of Japanese raw silk in the New
York market even rose in the mid-1880s. Of course, it did not mean that the entire Japanesemarket was efficient. The arbitrage of prices for non-tradable goods, for example, was delayed
for about a few years. But, as far as the product of the modern silk reeling manufacturer isconcerned, its price in the international market did not fall, and his real income, equivalently
his income compared with the domestic price level, rose during the fall of the exchange rate.
Therefore, reflecting the structural change of international market, the price of Filature rose
more than that of Hanks, and the falling exchange rate increased the real income of the modernsilk reeling manufacturers, which prompted the reorganization of sericulture.
Why did such a thing happen? The answer is simple. The market in the treaty port of
Yokohama was super efficient, while the Japanese domestic market was not necessarily so.
By the prescription of the treaty, all trades with foreign countries were conducted within thetreaty ports, each of which consisted of a very small area. Therefore, any information about
4foreign trade tended to be shared by every player right away, so that the commodity price
was adjusted to the change of exchange rate immediately. The domestic market was generally
less efficient. However, the construction of railways integrated local cocoon markets, hence
made the cocoon market more efficient. Both the integration of the market for raw materials
and the changing international market were successfully communicated through the efficient
treaty port market. Thus sericultural farmers near the trunk lines abolished hand silk reelingand began to supply cocoons to modern silk reeling manufacturers, responding to the increaseof relative price of Filature to Hanks at Yokohama.
As Sugihara pointed out, East Asia increased the amount of trade since the 1880s andsuccessfully utilized resources within the region after it was incorporated into the system offree trade, created and dominated by Western countries.12 While the most important reason
behind this success was the capabilities East Asians possessed themselves, it can be suggested
that there was another factor that boosted its development, at least in Japan; the treaty portsystem was extremely efficient in contrast to the domestic market; hence it prompted exportoriented development.
In Section II, the structural change of the international market and the rise of modern silkreeling industry will be discussed. Section III compares the informational efficiency of raw
silk market with that of exchange rate at the Yokohama market. Section IV shows that theefficiency of raw silk price was at least comparable with the exchange rate. In Section V,
we’ll go back to discussion of the historical role of treaty port, “imposed efficiency.”

II. International market and the rise of silk reeling industry
A. Japanese silk reeling industry in the changing international market
Before the middle 1880s, most of Japanese raw silk was exported to France, first by the wayof the U.K. in the early 1860s and directly from the late 1860s. Japanese exports of raw silkincreased from 548 tons in 1860 to 1,253 tons in 1862. However, it almost stopped growing
around 1863, and stayed between 400 tons and 1,100 tons during the 1860s and the 1870s,13
when the total raw silk imports into France increased. And this trend became even stronger inthe 1870s, when the price level generally fell in the Western world. While imports to France
from China rapidly increased from 800 tons in 1870 to 2,670 tons in 1880, imports from Japan,
which was 400 tons in 1870, rose only to 840 tons in 1880. In fact, the comparative advantage
of Japanese traditional raw silk over Chinese one was being lost during the 1870s, when theprice level was decreasing,14 Especially, the fall of price and stagnation for a few years after
1882 severely affected sericultural farmers who were engaged in hand reeling.15
12

Sugihara (1996).
Nakabayashi (2003), pp. 470-473, Appendix; Table 4-1, 4-2. About the statistics of production and exportof raw silk, see Nakabayashi (2003), pp. 461-463, Appendix: Table 1. An overview is also given by Hunter(2003), pp. 31-49.
14
Nakabayashi (2006).
15
Nakabayashi (2003). The financial crisis in 1882 heavily affected the trade of raw silk in Europe (“Commercial history and review of 1882.” The Economist, no. 2,061, Feb 24, 1883, p. 26.), and then French economy
13

5

Meanwhile, the price of Filature (machine reeled raw silk) in the New York market rose
relative to that of Hanks (hand reeled raw silk) in the Lyon market in the 1880s, because thedemand from American silk fabric industry for Filature exhibited a strong growth (Figure 1).
The silk fabric industry in Lyon highly developed in the early 19th century and it retained
the feature of “flexible specialization” as an industry for luxurious fashions using hand looms
until the 1900s.16 Thus, France needed various kinds of raw silk as raw materials for the silk
fabric industry, ranging from Italian Filature of high quality to Asian hand reeled raw silk of
low quality.
The American fabric industry, by contrast, began to produce goods for mass consumptionin earnest in the late 1870s. As power throwing machines and power looms rapidly prevailed,the factory system equipped for mass production was established.17 The American silk fabric industry kept up with the fashion in New York, as the French counterpart worked with thefashion in Paris. The American modern silk fabric industry, however, responded to new modesof fashion by creating a basic combination of colors and textures, which could be manufactured by the factory system. It was thus not necessary to resort to the putting-out system, withthe use of hand-weavers, as was the case in France.18 In addition, the industry pursued “theuniformity of goods” for mass consumption,19 and low-skilled male workers were replaced byunskilled female workers.20 Therefore, the American silk fabric manufacturers did not value
hand-reeled Hanks, which was not suitable for power throwing machines and power looms,
and actively sought less expensive Filature with even threads.21

B. Reorganization of sericulture and distribution of rentThis increase of demand for Filature with even threads led to a sharp rise of its relative pricein 1885-1886 (Figure 1). It shows there was a gap between the sharply increasing demandentered the depression until 1886 (Levy-Leboyer and Bourguignon (1990), pp. 1-13.). The silk fabric industry
in Lyon was also stagnant during the depression (Bouvier (1960), pp. 235-249.).
16
Duran (1913), pp. 72-77. Rawlley (1919), pp. 66-73. Piore and Sable (1984), pp. 28-35. Cottereau (1997).
Federico (1997), p. 77. In France, there were 100,000 handlooms and 18,230 power looms in 1880, and 56,000
handlooms and 30,000 power looms in 1900. Federico (1994), p. 474.
17
Wyckoff (1879), pp. 8, 29-30. In the U.S., there were 5,321 power looms and 3,153 handlooms in 1880, and44,257 power looms and 173 handlooms in 1900. The Department of the Interior, Report on the manufacturers
in the United States at the tenth Census (June 1, 1880), Washington DC: Government Printing Office, 1883, pp.
928-929. The Department of the Interior, Census Office, Twelfth Census of the United States, taken in the year
1900, manufacturers part 3, special reports on selected industries, Washington DC: Government Printing Office,
1902, p. 206.
18
Wyckoff (1879), pp. 8-9. D. George Dery, “Silk: a fabric of general use.” The American silk journal, vol.
37, no. 8, Aug 1918, p. 40.
19
Wyckoff (1879), p. 8.
20
The Department of Labor, Report on condition of woman and child wage-earners in the United States, vol.
9: history of women in industry in the United States, Washington DC, Government Printing Office, 1910, p.
10. Mason (1910), pp. 130-131. Clark (1929), pp. 210-215. Matsui (1930), pp. 131-153. On differentiationof wages between female and male workers in the American silk fabric industry in the 1900s, see Aldrich andAlbelda (1980), pp. 329-340.
21
Wyckoff (1879), pp. 25-27. Wyckoff (1883), p. 18.

6

and the supply, which meant an opportunity for suppliers to acquire some rent. This gap was
accurately found in the Yokohama market. The behavior of prices in New York and Lyon
meant a sharp rise in the relative price of Filature to Hanks in 1885-1886. Accordingly, priceof Filature relative to Hanks in the Yokohama market rose (Figure 2).
Grasping the increase of demand in the U.S., the modern silk reeling industry developed in
Suwa County of Nagano Prefecture in Central Japan from the mid-1880s. Though respective
reeling factories were equipped with only a few dozens of basins,22 the silk reeling manufacturers organized cooperatives and established re-reeling factories. They cooperatively re-reeled
raw silk, systematically inspected its quality, put the chop (trademark) of the cooperative on
it, and shipped it to Yokohama. They guaranteed a particular quality by putting their chops, toacquire the quality premium. In 1884, exports of raw silk from Japan to the U.S. exceeded exports to France, and production and exports of Filature increased rapidly since.23 The Japaneseshare of the U.S. raw silk market reached over 50 percent in 1887.24 The opportunity to takerent clearly prompted the rapid development of the modern silk reeling industry.
Meanwhile, sericultural farmers, engaged in hand reeling, suffered from the French depression and the deflationary policy by the government, which coincided it.25 They thenstopped hand-reeling, and began to supply cocoons as raw materials for the modern silk reeling industry. Interestingly, a considerable portion of rent from a sharp increase of demand for
Filature was shared by sericultural farmers. In the mid-1880s, the supply of cocoons became
more profitable than the supply of traditional raw silk after hand reeling, and the gap in profits
between the supply of cocoons and the hand reeling became significant enough to be widely
noticed for about 1885-1886 (Figure 3). This rent encouraged sericultural farmers to switch
quickly from hand reeling to the supply of cocoons in the areas where the modern silk reeling
manufacturers could reach and buy cocoons.26 The development of the modern silk reelingindustry coincided with the reorganization.
This reorganization appears to have been accelerated by two conditions. The first was
obviously the rent from the gap between the prices of Filature and Hanks in the international
market or, more correctly, the relative price of Filature to Hanks in the international market
being immediately reflected in the Yokohama market. Otherwise, the Japanese silk reeling
manufacturers and sericultural farmers would not have recognized the structural change of theinternational market, and would have failed to acquire the rent from the change. Hence thereorganization would have been delayed. The second condition was the fall in the price of22

One basin was operated by one reeling worker.
Filature amounted to 31 percent of total export of raw silk in 1880, and 50 percent in 1889. Nakabayashi(2003), pp. 96-97.
24
Nakabayashi (2003).
25
The Japanese government had adopted deflationary policy, that is, decreasing base money and increasingtax, for the transfer of income to the government sector. Patrick (1965), pp. 202-205.
26
In Chubu/Nishi Kanto area, which is neighboring to Nagano Prefecture, the production of cocoons dropped
to 32,165 kiloliter and the production of raw silk dropped to 728 tons in 1885 affected by the French depression.
In 1889, though the production of raw silk recovered to 60,388 kiloliter, which was 188 percent of the productionin 1885, the production of raw silk was 1,182 ton, 162 percent of the production in 1885.Nakabayashi (2003).
The reorganization began in this area and farmers came to supply cocoons to the silk reeling manufacturers
outside of their region.
23

7

silver in the international market. Japan was effectively under the silver standard from 1871 to
1897, and thus the fall in the price of silver meant the fall of the exchange rate against the U.S.
and European countries, most of which were under the gold standard by that time. This fallof the exchange rate resulted in inflation, led by tradable goods represented by raw silk. It is
important to recognize, however, that the main effect of the falling Yen was not a depreciatedprice of Japanese raw silk in the international market, which has been asserted by those who
hold conventional views. In fact the fall of Yen was immediately arbitraged by a rise of raw
silk price in the treaty port of Yokohama. The positive effect of falling Yen, therefore, was theprice of raw silk sharply rising against the non-tradable goods in the Japanese domestic market,
which meant the increase in the real income of silk reeling manufacturers and sericultural
farmers.
In addition, this super efficiency of the treaty port market, which brought about the immediate arbitrage, was necessary for the first condition that the relative price in the international
market was simultaneously reflected in the Yokohama market to be met. The next section
deals with this issue.

C. Integration of cocoon markets
Exactly after the late 1880s, local cocoon markets in Eastern Japan converged at a remarkablespeed(Figure 4). The rise of modern silk reeling industry entailed the integration of cocoon
markets. It was related to a unique aspect of Japanese sericulture. In Italy, silk reeling factories were dispersed and silk reeling manufacturers procured cocoons from markets close by.
In Japan, by contrast, silk reeling factories were concentrated in areas such as Suwa, while sericulture prevailed across the whole of Eastern Japan. In other words, the Japanese silk reelingindustry was based on the mass procurement of material and on the mass production of raw
silk, while the Italian counterpart retained a more moderate rural industry.27 This had been thecase in Japan since the late 1880s, when the modern silk reeling industry began to develop.
A necessary condition for the integration of local cocoon markets was the construction oftrunk lines by a private company, Japan Railways Ltd., and the government in Eastern Japan
since the 1880s. The integration there did not mean that the trunk lines of Japan Railways andthe National Railways connected local markets themselves. Rather, local markets of cocoons
were linked to silk reeling districts outside their regions. Links to Suwa County of Nagano
Prefecture were especially important. In every section of Japan Railways Line and the National Railways Line of Eastern Japan, except for Nagano, shipment of cocoons exceeded
their arrival, and this trade gap expanded in the 1900s. The trunk lines became channels forcocoons to flow from rural areas to Suwa.28
Those distribution channels shaped the geographical structure of sericulture. In the early
1880s, facing with the depression of France, production of cocoons and raw silk decreased in
all areas. Since the mid 1880s, however, production of raw silk had exceeded that of cocoonsin Nagano Prefecture, while production of cocoons had surpassed that of raw silk in growth27
28

Federico (1997).
Nakabayashi (2003), pp. 124-134.

8

in other areas, which came to be specialized in the supply of material rather than modern silkreeling.29 Building railways clearly progressed the integration and specialization of Japanesesericulture.

III. Efficient pricing of raw silk at Yokohama
A. Structure of the treaty port
The treaties of friendship and commerce with the US, the UK, France, Russia and Netherlandsprescribed that Japan opened Yokohama and other four ports as treaty ports where free trades
were guaranteed, and gave those four countries consular jurisdiction there. Those extraterritorial privileges had been effective until 1899, when the new treaties with the Western countries
came into effect. Free trades were conducted under the Western legal system within the treaty
ports. Impersonal exchanges in a price mechanism governed by the Western legal system was
implanted into the treaty ports. Almost all of raw silk exports were traded in one of five ports,
Yokohama.
In addition, the treaties prohibited foreign people from practicing business outside the concessions, and their property rights were protected by their consuls only within the concessions.
Therefore they needed to trade with Japanese merchants who were specialized in selling exports to them or buying imports from them within the concessions. Those Japanese exporters
and importers had channels to inside of the domestic market of Japan. All of the Western
trading companies, Japanese exporters, and Japanese importers gathered in a very small spaceinside the concession of Yokohama and all trades were conducted there.
Silk reeling manufacturers shipped and consigned their products to Japanese exporters,
and the Japanese exporters in turn sold them to Western trading companies on behalf of thesilk reeling manufacturers. The price of exported raw silk was decided by the dealing between
the Japanese exporters and the Western trading companies in confined space at Yokohama.
Another important point is that the relevant players were relatively few in number. The tenlargest Japanese exporters and the ten largest Western trading companies dealt with 90 percent
of all raw silk to be exported.30 They had, however, no long-term relationship with each other.
The trade between them was always a spot trade.
To sum up, the number of players was small, the place where they gathered was very small,they dealt with almost all raw silk exported from Japan, and all transactions were spot trades
under the governance of the Western legal system. Those factors constituted a perfect market
from the view point of information symmetry. In other words, any information about the raw
silk trade were very quickly shared among all the players. The raw silk market of Yokohama
was extremely efficient under the treaty port system. This artificially super efficient market
mechanism played a significant role in the trade of raw silk.
29
30

Nakabayashi (2003).
Ikawa (1991).

9B. An example of efficiency: perfect arbitrage of exchange rate by a commodity market
Protection of property rights under the Western legal system and the geographically dense
structure of Yokohama realized a very efficient commodity market. In the context of contemporary international trades and international finance, financial market is generally much
more efficient than commodity markets, so that the arbitrage of changes in exchange rates bycommodity prices takes considerable time. If exchange rate of a currency falls against othercurrencies, the relative prices of commodities exported from the country in international markets fall for a while, so that the depreciation of a country’s currency stimulates exports fromthe country. However, such thing never happened in the late 19th century Yokohama, because
commodity market artificially created by Western powers enormously efficient.
The Japanese Yen was pegged to the value of the specific amount of silver until October,
1897, when Japan moved to the gold standard. It meant in the late 19th century when theinternational silver price fell down, the Yen depreciated against currencies pegged on gold
accordingly. The first sharp falling was in 1885-1886 (Appendix Figure 1). However, price ofJapanese raw silk in terms of the US dollar did not fall. Rather, the raw silk price arbitraged
the falling exchange rate within a week, to keep its relative price in the international market
stable (Figure 5).
Instead of providing fall of relative price of Japanese commodities in international markets,the efficient Yokohama market realized export-led inflation in Japanese domestic market immediately. The Japanese economy experienced the inflation affected by a fall in the exchange
rate in the late 19th century, and the price of Filature led consumer prices with the lag of a few
years (Figure 6).31 This export-led inflation increased real income of silk manufacturers andcocoon growing farmers, thus accelerated mobilization of resources into the sector.
On the other hand, efficiency of international banking of Yokohama was not so efficientas the commodity market was. When raw silk exports boomed, export documentary bills fellin short, and the exchange rate appreciated accordingly. This inefficiency of internationalbanking had not been resolved until the early 1900s, when Yokohama exchange market was
fixed in the network of international finance centered at London (For a discussion in detail,see Appendix).

C. Speed and efficiency
how fast was the market adjusted? From January 1880 to September 1897 when Japan moved
from the silver standard to the gold standard, autoregressions of the return of the raw silk priceand the exchange rate at Yokohama by weekly data are as follows:
31

Policy makers in those days correctly recognized that the falling exchange rate caused the increase of real
income for the silk reeling. Noshomusho (Ministry of Agriculture and Commerce), “Hon nen no kiito soba ni
jikka kyoka no betsu ari” (There is a difference between real price and nominal price in the raw silk quotationsof this year), Noshoko koho (Bulletin on agriculture, commerce, and manufacturing), no. 18, August 15, 1886,
pp. 682-684.

10

(1)

YF
YF
∆PtY F = 0 − 0.262∆Pt−1− 0.110∗∗ ∆Pt−2
∗∗
0.297

7.910

−3.193YF
YF
YF− 0.026∆Pt−3 − 0.021∆Pt−4− 0.040∆Pt−5,−0.745−0.613−1.192and(2)∆Et = −0.133 − 0.133∗∗ ∆Et−1 + 0.092∆Et−2∗∗−1.6082.738−4.014+ 0.070∆Et−3 + 0.036∆Et−4 − 0.038∆Et−5 ,
∗
2.093

1.066

−1.141

where PtY F is the price of Filature at Yokohama and Et is the exchange rate at time at thetth week, ∆PtY F = ln(PtY F ) − ln(PtY F ), and ∆Et = ln(Et ) − ln(Et−1 ). The ∗∗ and ∗stand for 1 5 percent significance respectively.32 In both of above equations the first orderand the second order of differences are significant. This shows that public information of any
event was reflected on both of the exchange rate and the raw silk price within three weeks,
and efficiency of the raw silk price with public information set was comparable to that of theexchange rate.

IV. Benefit from efficient market
A. Rent from the New York market
This efficiency of the Yokohama commodity market was the channel to catch up with rent
taking opportunities in international markets. Grenger’s causality between the raw silk prices
in the Yokohama market and the New York market from 1881 to 1885 in monthly data isshown by33
YF
YF
YF
YF
∆PtY F = −0.005 − 0.222∆Pt−1+ 0.039∆Pt−2+ 0.010∆Pt−3− 0.105∆Pt−4(3)−0.9570.244
0.061−0.714
NF
NF
NF
NF− 0.465∆Pt−1 + 0.122∆Pt−2 − 1.783∆Pt−3 − 0.444∗ ∆Pt−4,−0.0840.613−0.346−2.336−1.563

and
(4)

YF
YF
YF
YF
∆PtN F = −0.002 + 0.363∆Pt−1+ 0.321∆Pt−2+ 0.132∆Pt−3− 0.016∆Pt−4∗∗∗−0.539

3.107

2.428
0.999
−0.128NF
NF
NF
NF− 0.499∗∗ ∆Pt−1 + 0.168∆Pt−2 + 0.043∆Pt−3 − 1.499∆Pt−4,−3.3481.027
0.007−0.235where PtY F and PtN F stand for prices of Filature at the tth month at Yokohama and New
York respectively. While the New York prices strongly depended on past few-week prices
32

Akaike Information Criterion is −5, 617.930 for (1) and −5, 617.830 for (2).
The number of samples is 55, Adjusted R2 is 0.124, and F value is 1.974 for (3), and 55, 0.299, and3.933∗∗ for (4).
33

11

at Yokohama, the Yokohama prices also partially depended on few-week past prices at New
York.
However, the causality changed after 1885. The results from 1885 to 1903 is,34
(5)

YF
YF
YF
YF
∆PtY F = −0.003 − 0.182∗∗ ∆Pt−1− 0.037∆Pt−2− 0.052∆Pt−3+ 0.020∆Pt−4−0.647−0.474−0.656
0.263
NF
NF
NF
NF
+ 0.188∆Pt−1 + 0.016∆Pt−2 + 0.050∆Pt−3 + 0.004∆Pt−4
,
1.702
0.146
0.469
0.039
−2.467

and
(6)

YF
YF
YF
YF
∆PtN F = −0.002 + 0.163∆Pt−1+ 0.135∆Pt−2+ 0.112∆Pt−3− 0.001∆Pt−4∗∗∗∗∗−0.605

3.309

2.601
2.133
−0.014
NF
NF
NF
NF− 0.038∆Pt−1 − 0.094∆Pt−2 + 0.038∆Pt−3 + 0.148∆Pt−4,−0.520−1.2910.532
2.129∗

where the Yokohama prices did not depend on the past New York prices at all while the New
York prices still did on the past Yokohama prices. That is the Yokohama market came to leadthe New York market since the late 1880s. In other words, the prices at the Yokohama market
reflected any public information at the New York market within a week. It is this “fastness” of
the Yokohama market that gave Japanese silk reeling industry opportunities to acquire rent at
the New York market, before other markets did.

B. Response to prices
However, even if prices at Yokohama reflected rent taking opportunities at New York sufficiently fast, it should not provided real opportunities with Japanese silk reeling industry
unless production and shipment could respond to the prices sufficiently fast. Let us inquire theGrenger’s causality between prices of Filature at Yokohama and its arrivals to Yokohama by
weekly data from 1888 to 1903.35

(7)

F
F
F
F
∆AYt F = 0.007 − 0.327∗∗ ∆AYt−1+ 0.010∆AYt−2+ 0.076∆AYt−3− 0.017∆AYt−4
∗
0.363

0.247
1.979
−0.476YF
YF
YF
YF+ 1.325∆Pt−1 + 0.179∆Pt−2 − 0.137∆Pt−3 − 0.562∆Pt−4,
2.309∗∗
0.309−0.237−0.986−8.824F
F
F
F∆PtY F = 0.001 − 0.008∆AYt−1+ 0.001∆AYt−2− 0.005∆AYt−3− 0.006∆AYt−4

(8)

0.715

0.124
−0.894−1.129YF
YF
YF
YF− 0.117∗∗ ∆Pt−1 − 0.033∆Pt−2 − 0.023∆Pt−3 − 0.065∆Pt−4,−3.211−0.902−0.611−1.752−1.566

where AYt F stands for the amount of arrivals of Filature at Yokohama at tth week.
34

The number of samples is 212, the adjusted R2 is 0.000, and the F value is for 1.008 for (5), and 212,
0.078, and 3.228∗∗ for (6).
35
The number of samples is 753, the Adjusted R2 is 0.103, and the F value is 11.824∗∗ for (7), and 753,
0.012, and 2.166∗ for (8).

12

On the other hand, Grenger’s causality between arrivals and stocks of Filature at Yokohama is36
(9)

F
F
F
F
∆AYt F = 0.007 − 0.320∗∗ ∆AYt−1+ 0.019∆AYt−2+ 0.061∆AYt−3− 0.017∆AYt−4
0.401

0.464
1.494
−0.448YF
YF
YF
YF+ 0.094∆St−1 − 0.119∆St−2 + 0.106∆St−3 − 0.133∆St−4,
1.107−1.4311.296−1.686−8.390

and
(10)

F
F
F
F
∆StY F = 0.002 + 0.079∆AYt−1+ 0.113∆AYt−2+ 0.067∆AYt−3+ 0.009∆AYt−4
∗∗
∗∗
∗∗
0.217

4.613

6.125
3.643
0.536
YF
YF
YF
YF
+ 0.133∆St−1 + 0.062∆St−2 + 0.030∆St−3 + 0.025∆St−4,
3.490∗∗
1.641
0.813
0.710

where StY F stands for the amount of Filature’s stock at Yokohama at the tth week.
These results show that the arrivals of Filature at Yokohama followed its prices at Yokohama while it did not responded to the changes of stocks. This indicates that silk reeling
manufacturers responded to prices themselves at Yokohama, not to the rested stock there. A
straight forward price mechanism worked there.
However, this simple logic did not hold for raw silk hand-reeled by peasants. Let us track
the behavior of a traditional raw silk, Re-reeled. The Re-reeled silk was raw silk hand-reeled
and then reeled again and inspected. The threads of Re-reeled was relatively even comparedwith ordinary raw silk called Hanks, so that it was also demanded by the US market from the1880s to 1890s.
The Grenger’s causality between arrivals and prices of Re-reeled, which was hand-reeledat peasants’ houses is ass follows:37

(11)

R
R
R
R
∆AYt R = −0.036 − 0.439∗∗ ∆AYt−1− 0.025∆AYt−2+ 0.066∆AYt−3+ 0.062∆AYt−4−1.28211.645−0.617
1.644
1.684
YR
YR
YR
YR
− 0.266∆Pt−1 − 0.003∆Pt−2 + 0.417∆Pt−3 − 0.015∆Pt−4,
0.452−0.005
0.670
0.025

and
(12)

R
R
R
R
∆PtY R = 00.2 + 0.006∆AYt−1+ 0.005∆AYt−2+ 0.002∆AYt−3+ 0.001∆AYt−4
∗
0.918

2.480

1.785

0.607

0.617

YR
YR
YR
YR
− 0.347∗∗ ∆Pt−1− 0.214∗∗ ∆Pt−2− 0.114∗∗ ∆Pt−3− 0.027∆Pt−4,−9.248−5.310−2.8170.482

where AYt R and PtY R stands for the amount of arrivals and prices of Re-reeled at Yokohama at
tth week.
The Grenger’s causality between arrivals and stocks of Re-reeled is,38
The number of samples is 753, the adjusted R2 is 0.104, and the F value is 11.876∗∗for (9), and 754, 0.128,
and 14.876∗∗ for (10).
37
The number of samples is 714, the adjusted R2 is 0.173, and the F value is 19.617∗∗ for (11), and 714,
0.107, 11.726∗∗ for (12).
38
The number of samples is 719, the adjusted R2 is 0.180, and the F value is 20.720∗∗ for (13), and 719,
0.161, 18.337∗∗ for (14).
36

13

(13)

R
R
R
R
∆AYt R = −0.034 − 0.434∗∗ ∆AYt−1− 0.011∆AYt−2+ 0.054∆AYt−3+ 0.054∆AYt−4−1.230−0.265
1.289
1.420
YR
YR
YR
YR
+ 0.101∆St−1 − 0.183∆St−2 + 0.298∆St−3 + 0.007∆St−4,
0.714−1.3122.209∗
0.055−11.461

and
(14)

R
R
R
R
∆StY R = −0.004 + 0.026∆AYt−1+ 0.069∆AYt−2+ 0.053∆AYt−3+ 0.021∆AYt−4∗∗∗∗∗∗∗−0.545

2.620

6.355
4.706
2.046
YR
YR
YR
YR
+ 0.031∆St−1 + 0.143∆St−2 + 0.127∆St−3 + 0.078
∆St−4
,
0.806
3.834∗∗
3.514∗∗
2.180∗

where StY R stands for the stock amount of Re-reeled at Yokohama at the tth week.
The results above can be summarized that the arrival of Re-reeled at Yokohama neverfollowed its prices at Yokohama, while it followed its stocks at Yokohama. Indicated is that
hand-reeling peasants did not respond to efficient prices at Yokohama at least immediately.
Thus they arguably fail to catch opportunities to take rent by fast responding to international
market.

C. Imposed efficiency of the commodity market and created efficiency offinancial market
Because there was a strong demand for Filature with even threads in the US, and because thesilk reeling industry in the world could not immediately adjust to this changing condition, there
existed an opportunity to acquire some rent by producing such a Filature in the mid 1880s.
This opportunity was exploited by the Japanese manufacturers, who could take advantage ofthe extremely efficient market of treaty port where prices gave the relevant information (Figure
1 and 2). The sooner they acquired the information, the more rent they could got. Information
about the international market was efficiently processed in that market, and was shown to
manufacturers. The supply of Filature indeed quickly responded to prices at Yokohama thatreflected information at New York, and this is why they did not fail to catch up the rent-taking
opportunities.
However, while Re-reeled silk that was hand-reeled by peasants was also demanded in the
US market from the 1880s to the 1890s, supply of the traditional raw silk did not responded
to prices at Yokohama. This indicated that peasants could not acquire a rent-taking opportunity when they produced their cocoon into hand-reeled silk and shipped it to Yokohama bythemselves.
Quick responses to prices by silk reeling manufacturers were shown as their cocoon purchasing activity. Once prices at Yokohama rose, they borrowed large amount of money quickly
and then went cocoon growing areas for purchasing. In other words, the raw silk market at
Yokohama could affect raw silk production only if it was accompanied by an efficient financial market. By the early 1880s, the modern financial market had been created by developed
under the strong support from the government. The modern silk reeling industry was oneof industries that massively utilized this created modern financial market. Peasants economy
14was, however, almost isolated from the modern financial market from the 1880s to the 1890s.
Therefore, selling their cocoon to silk reeling reeling manufacturers as raw material was virtually the best way to access rent taking opportunities in the international market, through silkreeling manufacturers’s purchasing activity that quickly responded to prices at the Yokohama
market, which correctly reflected relevant information in the New York market.

V. Conclusion: imposed efficiency
A. Factory industry with high-performing financial market
Given infrastructures such as trunk roads, rail roads, and telecom built by the government,
the efficient treaty market imposed by Western powers with the efficient financial market created by the government accelerated modernization of silk reeling industry of Japan, that is,industrialization of Japan. Prices at Yokohama reflected relevant information from New Yorksufficiently fast, and silk reeling manufacturers could exploited opportunities to acquire rent
from shortage of Filature of even threads in the US, by utilizing financial market to efficiently
mobilize resources.
However, for traditional silk reeling, which lacked a channel to access the financial market,
could not take advantage of the efficient Yokohama market.
The structural change of sericulture proceeded very rapidly in the 1880s, mainly because
machine-reeled Filature was strongly demanded by the US market then, but also because peasants who grew cocoon and hand-reeled raw silk could not responded to information reflectedon prices because they lacked access to the financial market. Both of high relative price ofFilature against hand-reeled raw silk in the US market and inability of under-financed peasanteconomy to respond to the US market prompted change of industrial organization of sericulture.
For a peasant economy with dysfunctional financial market, the most liquid resource islabor that obeys to the order of the master of family, not money. Because of lack of financing,a peasant economy does not necessarily show a “rational” behavior from a neoclassical view
given a perfect financial market, rather behave as if it has some “unique” moral economy
that is a little different to a neoclassical market economy. On the other hand, different fromfinancing, family labor can be easily mobilized by the master of family. Therefore, a peasantfamily seems to fully optimize its family labor allocation while it does not necessarily seemto do that in the relation with outside world of family economy. When such behaviors were
aggregated, appeared a situation where supply of hand-reeled raw silk to Yokohama market
did not respond to its prices at Yokohama, even in the 1880s when the US market demanded
high-quality hand-reeled raw silk.

B. Coordination failure avoided by the treaty port
It is worth noting that all relevant factors discussed above, that is, the rise of modern silkreeling industry, reorganization of the sericulture, and the integration of local cocoon markets
15coincided with the period, the mid-1880s, when the structure of international market changedin earnest. Each phenomenon was not particularly surprising, but it is impressive that theirsimultaneous emergence was well coordinated. The Japanese raw silk reached the 50 percent
share in the US market within the space of a few years. For this marvelous experiment tomaterialize, an excellent processing of information in the treaty market, the crossroad of silk
trade, was critical.
North and Thomas (1973) emphasized the importance of institutions, which enables the“invisible hand” to work. They argued that in order for the market, which is close to perfection
assumed by Adam Smith, to work, institution matters, and that if an institution does not work
properly, the rent-seeking behavior could bias the direction of growth. The market, however, isalways imperfect, and there exists an opportunity to seek rent everywhere, even in the modern
economy. Indeed, rent-seeking behavior always determines the direction of development, notonly in unsuccessful economies, but also in successful ones. The difference between them liesin that rent-seekers are properly coordinated in the latter.39 In other words, in order to avoid
coordination failure, there needs to be some place where the rent is efficiently allocated. As
Hudson (1986) pointed out, a well organized regional community could satisfy this necessity,
while proto-industrial areas without such a function might lead to coordination failure andunderdevelopment.

C. Junction of information and multiple paths
In the case of Japan, a well established institution of the treaty port took this role. Rent
generated by the sharp increase of demand for Filature was accurately reflected in the relative
price at the real market of Yokohama, and silk reeling manufacturers and sericultural farmers
responded to it, hence the reorganization of sericulture proceeded at a speed which made it
possible for them to exploit some rent. While this super efficient mechanism of treaty port
was imposed by Westerners, it probably worked better than they had expected.
However, it was not the only possible outcome. China was also forced to accept the institutional framework of potentially “efficient” treaty ports. But mainly because of problems
in the political system, the government’s efforts to develop the inland, hence the ports, did
not play the role of connecting international business opportunities with inland development.
Instead, it was Chinese merchants that exploited the establishment of new institutions. They
connected those “efficient” treaty ports in East Asia with each other, formed strong networks
among them, and dominated local and regional trades. This mercantile development in China
was another important outcome, together with the industrial development in Japan, arisingfrom the establishment of treaty ports in East Asia in the 19th century.

39

Aoki (2001).

16

Appendix: Arbitrage of exchange rate by raw silk price
It is straightforward to deduce that the Yokohama market with the structure above could bevery efficient with respect to information. However, the existing literature have assumed otherwise.
Japanese currency had been under the silver standard until October 1897. In the mid 1880s,
when the modern silk reeling developed, and again in the mid 1890s, the foreign exchange rate
fell sharply, as the silver price in the London market dropped (Appendix Figure 1).
Given this fact, Researchers have previously assumed that this weak Yen in the mid 1880s
and in the mid 1890s devalued the price of Japanese exports in the Western world under thegold standard. The fall in the middle decades is especially important for the understanding of
how it effected the rise of modern industries after 1887. They have reasoned that the falling
price of silver depressed the relative price of Japanese exports in the international market,
and this prompted the growth of Japanese exports, which in turn inspired modern economic
growth. They have assumed that the arbitrage by the price in the market of real commodities
was delayed for a considerable period after a change in the foreign exchange market took
place.40
In order for this view to hold, it is necessary that the Yokohama market had to be sufficiently inefficient that the adjustment of raw silk price there was considerably delayed, andthat the Japanese raw silk became cheaper for a while. However, they have not presented any
quantitative evidence based on data of the price of exports and exchange rate to prove thishypothesis of “the lower relative price caused by the falling exchange rate”.
In the long term, this hypothesis obviously does not hold. For instance, the terms of trade
had improved from the 1880s to the 1890s, while it deteriorated in the 1900s when Japan wasunder the gold standard.41 Moreover, the world prices of raw silk converged during the period
from the late 1860s to the late 1930s, which meant the prices of raw silk from Japan and China,both of which were under the silver standard, did not deviate from the international price inthe 1880s and the 1890s, when the silver price sharply dropped.42 Those pieces of evidenceshow that the export price was adjusted to the change in the foreign exchange market in thelong term.
Therefore, what remains to be clarified is whether or not the change in the foreign exchange
market was adjusted by the change of the price of exports, in the short term. If it was delayed,
the hypothesis that falling exchange rate depressed the relative price of exports from Japan canbe thought of as true. If, on the other hand, adjustment was sufficiently rapid, the hypothesis
can be considered as fault, and the only effect of the change in the exchange rate would
have been the inflation led by exportable goods in the domestic market.43 Since raw silk
was the most important export of Japan, amounting to about 30 percent of its total export, anexamination of the short-term effect of exchange rate on the price of raw silk is essential for
40

Nugent (1973), pp. 1122-1129. Nakamura (1983), pp. 29-31.
Shinohara (1961), pp. 275-351. Yamazawa and Yamamoto (1979), pp. 85-89. Japan joined the gold
standard in October 1897.
42
Ma (1996), pp. 347-352.
43
Nugent (1973), p. 1113.
41

17

the understanding not only of the development of the modern silk reeling industry but also of
the beginning of modern economic growth of Japan.
Now suppose Et : the foreign exchange rate of Japanese Yen against the US dollar (dollar
par 100 Yen) in time t; PtY F (Et ): the price of Japanese Filature, machine reeled raw silk asa function of Et ; PtY F U S : the price of Filature in terms of the US dollar, independent of Et .
Then, Ptr (Et ): the relative price of Japanese raw silk in the international market, is defined asfollows:(15)

Ptr (Et ) = Et PtY F (Et )/PtY F U S .

And et (Et ): the exchange rate elasticity of Ptr (Et ) as a function of Ptr (Et ), is defined asfollows:(16)∂PtY F (Et )et (Et ) =
∂Et



Et
PtY F (Et )When Et changes, the direction of change of Ptr (Et ) can be shown from (15) as follows,
(17)






∂Ptr (Et )∂PtY F (Et )YF= Pt (Et ) + Et
PtY F U S = (1 + et ) PtY F (Et ) PtY F U S .
∂Et∂Et

Therefore, if and only if arbitrage of change of Et PtY F (Et ) is sufficiently slow, or equivalently, the value of (17) is negative, thus,(18)− 1 < et ,then the direction of change of Ptr (Et ) coincides with the direction of change of Et . That is,
the relative price of Japanese raw silk in the international market Ptr also decreases when Et
decreases, and thus does hold the hypothesis of “the lower relative price caused by the fallingexchange rate.”
If et > 0, then PtY F would fall when Et falls. The hypothesis of “the lower relative pricecaused by the falling exchange rate,” however, does not think about such a dumping. Thus, inorder for the hypothesis to hold, et must satisfy(19)− 1 < et < 0.

Now we show whether (19) holds or not, by using the weekly data of price of raw silk andexchange rate.
The trend of the foreign exchange rate from January 1880 to September 1897, when Japanwas under the silver standard, can be classified into nine periods as below. Japan entered thegold standard in October 1897, and the relationship between the foreign exchange rate andthe price of raw silk during the period from October 1897 to December 1903 is examined tocompare with the term under the silver standard.
18

1. January 1880 to December 1880: the period of sharp fluctuating.
2. January 1881 to December 1881: the period of stability. Because trade of raw silk
was almost stopped by the dispute about Niazukarisho (Trading and Inspection Houseof Raw Silk in Yokohama),44 this period should be separated from the period before andafter.
3. January 1882 to December 1884: the period of stability.
4. January 1885 to August 1886: the period of falling trend.
5. September 1886 to March 1890: the period of stability.
6. April 1890 to December 12: sharply fluctuating (because of the introduction of the
U.S. Sherman Silver Purchase Act).
7. January 1891 to December 1893: falling.
8. January 1894 to September 1897: fluctuating.
9. October 1897 to December 1903: stable under the gold standard.
Appendix Table 1 shows elasticity et given by regression of ln(PtY F ) to ln(Et ). During
the 1st, 6th, and 8th periods, when the exchange rate was sharply fluctuating, the price of raw
silk and the exchange rate were not correlated. Also in the 2nd period, when the raw silk trade
was almost stopped, there was no correlation between them.
On the other hand, in the 4th and the 7th periods, when the exchange rate was falling,et < −1. Thus, (17) and (18) did not hold when the exchange rate fell, which means thechange in the foreign exchange market was followed by the price of raw silk within a week.
The super efficient Yokohama market arbitraged the change of exchange rate right away.
Therefore, the hypothesis of “the lower relative price caused by the lowering exchange
rate” no longer holds, and the only effect from the fall of the foreign exchange rate in the 1880s
was the inflation led by export commodities. This effect was important for the reorganizationof sericulture.
In addition, et should satisfy et = −1 in case of perfect arbitrage. Thus et < −1 meansthat PtY F even “overshot.”Why did the commodity price overshoot? On Appendix Table1, both in the 3rd and 5th
periods, when the exchange rate was stable, and in the 10th and 11th periods when the exchange rate was stable under the gold standard, 0 < et , which does not satisfy (18) at all.
The positive sign means that PtY F and Et moved in the same direction. It came from anotherspecial feature of Yokohama market in two periods. Whereas exchange rate was efficient in
44

The trade association of Japanese exporters, backed by the Japanese government, required that all tradeof raw silk be dealt in “Niazukarisho,” a Conditioning House established by the association. Western trading
companies and consuls of Western countries opposed to that because they thought it violated the principle of free
trade under the trade. Eventually, the opposition by Western trading companies succeeded and Niazukarisho wasabolished.

19

terms of information, international financial market was not efficient enough in terms of real
allocation of resources.
That is, when the trade of raw silk is active, the amount of trade increases and the pricerises. Moreover, since raw silk occupied a considerable part of Japanese export and the shipping of it showed a sharp rise seasonally in the Summer and Fall, the demand for drawing
documentary bills for exports expanded sharply, straining the capacity of foreign exchangebanks at Yokohama. The inefficient Yokohama financial market was not fit for absorbing
such a rapid increase of demand for drawing documentary bills Thus, when the silver pricein the international market was stable, the exchange rate rose with the raw silk price. Thisphenomenon was seen in the 3rd period (January 1882 to December 1884) and the 5th period(September 1886 to March 1890), as shown in Figure 5.
The fall of foreign exchange rate was immediately adjusted by the rise of raw silk price,
and a new equilibrium was soon reached. We can find such a dynamic adjustment taking place,for instance, during the 4th period, moving equilibrium points from the area on the right sideof Figure 6, prevalent in the 3rd period, to the left side which prevailed in the 5th period. In
contrast to the assumption behind the conventional views, the arbitrage by the price of goods
was sufficiently fast, because of the efficiency in the price mechanism of the real market within
the treaty port.
On the other hand, the foreign exchange market was not efficient enough to arbitrage
the rapid increase of trades as fast. In fact arbitrage in the international financial market was
slower than that in the market of real exports. This inefficiency was gradually overcome by thedevelopment the international financial network, centered on London, and the participation of
the Yokohama Specie Bank, which was a large foreign exchange bank invested by the Japanese
government, in that network.45 Appendix Table 2 shows a regression of the exchange rate to
the raw silk price, where β1 shows the tightness of foreign exchange when the raw silk businessis buoyant. The β1 became smaller after Japan entered the gold standard in October 1897 thanit had been in the 1880, which indicates that the global adjustment of the financial market had
been working faster.

45

Saul (1960). Ishii (1994).

20

References
Acemoglu, Daron and James A. Robinson, “Political losers as a barrier to economic development,” The American Economic Review, May 2000, 90 (2), 126–130.
Aoki, Masahiko, Toward a Comparative Institutional Analysis, Cambridge, MA: The MIT
Press, 2001.
Bernhofen, Daniel M. and John C. Brown, “An empirical assessment of the comparativeadvantage gains from trade: evidence from Japan,” The American Economic Review,
March 2005, 95 (1), 208–225.
Bouvier, Jean, Le Krach de L’union Générale 1878 1885, Paris: Presses Universitaires deFrance, 1960.
Cottereau, Alain, “The fate of collective manufactures in the industrial world: the silk industries of Lyons and London, 1800-1850,” in Charles F. Sable and Jonathan Zeitlin,eds., World of possibilities: flexibility and mass production in western industrialization,
Cambridge University Press Cambridge 1997, pp. 75–152.
Crafts, N. F. R., British economic growth during the industrial revolution, Oxford: Oxford
University Press, 1985.
Duran, Leo, Raw silk: a practical hand-book for the buyer, New York: Silk Publishing
Company, 1913.
Fama, Eugene F., “Efficient capital markets: a review of theory and empirical work,” Thejournal of Finance, May 1970, 25 (2), 383–417.
Federico, Giovanni, Il filo d’oro: L’industria mondiale della seta dalla restaurazione alla
grande crisi, Venezia: Marsilio, 1994.
, An economic history of the silk industry, 1830-1930, Cambridge: Cambridge University
Press, 1997.
Hall, Robert E. and Charles I. Jones, “Why do some countries produce so much more output
per worker than others?,” The Quarterly Journal of Economics, February 1999, 114 (1),
83–116.
Hayashi, Fumio and Edward C. Prescott, “The depressing effect of agriculture: institutions
on the prewar Japanese economy,” January 2005. Interfaces for Advanced Economic
Analysis, Discussion Paper No. 056, Kyoto University.
Huber, Richard J, “Effect on prices of Japan’s entry into world commerce after 1858,” The
Journal of Political Economy, May/June 1971, 79 (3), 614–628.
Hudson, Pat, The genesis of industrial capital: a study of the West Riding wool textile industry
c.1750-1850, Cambridge: Cambridge University Press, 1986.
21

Hunter, Janet, Women and the labour market in Japan’s industrializing economy: the textile
industry before the Pacific War, London: Routledge, 2003.
Ikawa, Katsuhiko, “1880 nendai no kiitourikomisho: kiitourikomikiji shuukei kekka kara
(Exporters of raw silk in the 1880s: data of trades on newspapers),” Yokohama kaiko
shiryo kan kiyo (Yokohama Archives of History review), March 1991, 9, 50–71.
Ishii, Kanji, “Japanese trade and the Yokohama Spiecie Bank,” in Olive Chekcland, Shizuya
Nishimura, and Norio Tamaki, eds., Pacific Banking, 1859-1959, St. Martin’s Press London 1994.
Levy-Leboyer, Maurice and Francois Bourguignon, The French economy in the nineteenth
century: an essay in econometric analysis, Cambridge: Cambridge University Press,
1990.
Ma, Debin, “The modern silk road: the global raw-silk market, 1850-1930,” The Journal of
Economic History, June 1996, 56 (2), 330–355.
Mendels, Franklin F., “Proto-industrialization: the first phase of the industrialization process,” The Journal of Economic History, March 1972, 42 (1), 241–261.
Minami, Ryoshin, The economic development of Japan: a quantitative study, Basingstoke:
Macmillan, 1994.
Nakabayashi, Masaki, Kindai shihonshugi no soshiki: seishigyo no hatten ni okeru torihiki
no tochi to seisan no kozo (An organization in modern capitalism: the governance oftrade and the system of production in the development of the silk reeling industry), Tokyo:
University of Tokyo Press, 2003.
, “The rise of a factory industry: silk reeling in Suwa, Nagano,” in Masayuki Tanimoto,ed., The role of traditional factors in Japanese industrialization: 1880-1920, Oxford
University Press Oxford 2006, pp. 183–216.
Nakamura, Takafusa, Economic growht in prewar Japan, New Haven: Yale University
Press, 1983.
North, Douglass C. and Robert Paul Thomas, The rise of the western world, Cambridge:
Cambridge University Press, 1973.
Nugent, Jeffrey B., “Exchange-rate movements and economic development in the late nineteenth century,” Journal of Political Economy, September/October 1973, 81 (5), 1110–
1135.
O’Brien, Patrick Karl, “The pax Britannica and American hegemony: precedent, antecedentor just another history?,” in Patrick Karl O’Brien and Armand Classe Burlington, eds.,
Two hegemonies: Britain 1846-1914 and the United States 1941-2001, Ashgate Aldershot 2002.
22

Ogilvie, Sheilagh C. and Markus Cerman, eds, European proto-industrialization, Cambridge: Cambridge University Press, 1996.
Patrick, Hugh T., “External equilibrium and internal convertibility: financial policy in Meiji
Japan,” The Journal of Econmic History, June 1965, 25 (2), 187–213.
Piore, Michael J. and Charles F. Sable, The second industrial divide: posibilities for prosperity, New York: Basic Books, 1984.
Rawlley, Ratan C., The silk industry and trade, London: P. S. King and Son, Ltd., 1919.
Saul, S. B., Studies in British overseas trade, 1870-1914, Liverpool: Liverpool University
Press, 1960.
Shinohara, Miyohei, Nihonkeizai no seicho to junkan (The growth and cycle of Japanese
economy), Tokyo: Sobunsha, 1961.
Sugihara, Kaoru, Ajia kan boeki no keisei to kozo (Formation and structure of Intra-Asian
trades, Kyoto: Minerva, 1996.
Wyckoff, WM. C., The silk goods of America: a brief account of the recent improvements andadvances of silk manufacture in the United States, New York: D. Van Nstrand, Publisher,
1879.
, “Report on the silk manufacturing industry of the United States,” in Census Office
Department of the Interior, ed., Report on the manufactures of the United States at thetenth Census(June 1, 1880), Government Printing Office Washington DC 1883.
Yamazawa, Ippei and Yuzo Yamamoto, Choki keizai tokei 14: boeki to kokusaishushi(Longterm economic statistics 14: trade and international balance of payments), Tokyo: Toyo
Keizai Shinposha, 1979.

23

Figure 1 Relative price of Filature over Hanks: 1881-1890
1.7
Observed

5-week moving average

1.6

Relative price

1.5

1.4

1.3

1.2

1.1

Source : Tokyo keizai zasshi (Tokyo economic journal) .
Note : Weekly data.

Year

1890

1889

1888

1887

1886

1885

1884

1883

1882

1881

1

Figure 2 Relative Price of Filature : (Japan Filature No.1 in New York) / (Japan Hanks in Lyon)
1.50(Japan Filature No.1 in New York(/(Japan Hanks in Lyon)
1.45

Relative price

1.40
1.35
1.30
1.25
1.20
1.15
1.10

Source : Nakabayashi (2003), p. 90.
Note : Monthly data.

Year

1886

1885

1884

1883

1882

1881

1.05

Figure 3 Gross Margins of Pesants per 1 picul (60kg) of Silk in 1886
650
600

Yen

550
500
450
400
350

selling cocoons to machine reelers
Source : Nakabayashi (2003), p. 100.

processing cocoons by traditional hand-reelingFigure 4 Coefficient of variation of cocoon prices in East Japan
0.30

0.25

0.20

0.15

0.10

0.05

Year

Source : Nakabayashi (2003), p. 135.
Note : Yearly data.

1919

1918

1917

1916

1915

1914

1913

1912

1911

1910

1909

1908

1907

1906

1905

1904

1903

1902

1901

1900

1899

1893

1892

1891

1890

1889

1888

1887

1886

0.00

j

850

800

750

700

650

600

550

500
70

75

Pj

R 2: 0.518.

85

Observed Jan 1882-Dec 1884 (3rd period)

Observed Jan 1885-Aug 1886 (4th period)

Observed Sep 1886-Mar 1890 (5th period)

Estimated Jan 1882-Dec1884 (3rd period)

Estimated Jan 1885-Aug 1886 (4th period)

Pj

90

21.035* -12.518**

R 2:0.341.

95

R 2: 0.651.

8.919**

t =1480.747-10.642E t-4.499**t =-615.204+13.603E t

Estimated Sep 1886-Mar 1890 (5th period)

Pj

E t : Foreign Exchange Rate (US Dollars per 100 Yens)80-9.582** 14.036**

t =-1426.784+27.641E t

Figure 5 Exchange rate and raw silk price at Yokohama: Jan 1882-Mar 1890

P t : Raw silk price (Mexican Dollars=Yens)Figure 6 Price of Filature and the index of consumer price avarage: 1880-1903 (1880−1903=100)

Price of Filature in Yokoahama

170

Index of comsumer prices (rural)160

Index of consumer prices (general)

150
140
130
120
110
100
90
80
70
60

1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903
Year
Sourse: Nakabayashi (2003), p.113.
Note: Yearly data.

Appendix Table 1 Effect of the foreign exchange rate on the price of Filature(machine reeled raw silk) in the Yokohama market: weekly data in 1880-1903
YF
P t : Raw silk price at the Yokohama market. E t : Exchange rate (US dollars per
100 yens).
Regression model: ln(P YF t ) = β 0+β 1ln(E t )+ε t .
Termnull hypothesis for t test
1st Jan 1880-Dec 1880

estimated elasticity Number
β0
β 1=e tof samples
β 1=0
β 1=-1-0.5461.558
52†-0.1341.717-0.6781.594
52*-0.1171.242
2.022-2.5451.990
156

t statistics
2nd Jan 1881-Dec 1881t statistics
3rd Jan 1882-Dec 1884t statistics-2.493* 8.765**
4th Jan 1885-Aug 1886 12.561 -1.397
t statistics
25.243** -12.393** -3.513**
3.122
5th Sep 1886-Mar 1890 -7.014
t statistics-7.301** 14.058**
7.901 -0.320
6th Apr 1890-Dec 1890t statistics
8.247** -1.478 3.148**
7th Jan 1891-Dec 1893 12.006 -1.290

R2

F value

0.560

2.948†

0.300

1.542

0.333

76.82386

0.642

153.579**

185

0.519

197.640**

39

0.056

2.185

154

0.679

130.271****t statistics
25.038** -11.414** -2.566**
8.552 -0.485
191
0.050
8th Jan 1894-Sep 1897
9.846**
t statistics
14.044** -3.138** 3.323**
7.447
319
0.234 96.717**
9th Oct 1897-Dec 1903 -22.196**
t statistics
9.834**-7.511
Sources: Tokyo Keizai Zasshi (Tokyo Economic Journal), Chugai Buuka Shimpo (Newson Domestic and International Prices), Chugai Shogyo Shimpo(News on Domestic andInternational Businesses).
Notes : Japan had been under the silver standard until September 1897, under the gold
standard since October 1897. **:significan at 1%. *: significant at 5%.

Appendix Table 2 The effect of Filature (machine reeled raw silk) priceon the exchange rate in the Yokohama market
P YF t : Raw silk price at the Yokohama market. E t : Exchange
rate (US dollars per 100 yens).
Regression model: ln(E t ) = β 0+β 1ln(P YF t )+ε t
Term

3rd Jan 1882-Dec 1884

estimatedelasticity
β0
β1
3.425
0.167

R2

F value

0.333

76.823**t statistics
28.036** 8.765**
3.246
0.166
0.519 197.640**
5th Sep 1886-Mar 1890t statistics
42.267** 14.058**
3.687
0.031
0.234
9th Oct 1897-Dec 1903
96.717**t statistics
168.197** 9.834**
Sources: Tokyo Keizai Zasshi (Tokyo Economic Journal) ,Chugai Buuka Shimpo (News on Domestic and International
Prices) , Chugai Shogyo Shimpo(News on Domestic andInternational Businesses).
Notes : **:significan at 1%. *: significant at 5%. The numbersof samples are the same as those on Table 1.