ble, investigate for itself. Clearly the value of the railways, even as security for interest, depends upon their earnings. In Japan about two-thirds of railway earnings is from passenger traffic,and this is decreasing under pressure of hard times and the extensive use of the railways and rolling stock for military purposes. A railway must also be kept up to a good standard of efficiency, or its earnings will drop. All the railways in Japan have run down as a result of the war, and it is not easy to see where the money to put them once more in first-class condition is to come from. But if the railways should be kept up well enough to earn the interest on a loan, what security would they offer for the principal? I have the opinion of several men familiar with Japanese law that it would be extremely difficult, if not impossible, ever to foreclose in satisfaction of a mortgage. Without entering into legal and political details, it is undoubtedly true that the foreign holders of Japanese bonds are practically at the mercy of the Japanese Government and courts.

Aside from the probability of a new foreign loan, many persons in Japan are beginning to feel decided uneasiness about the present financial situation. There is an apprehension that gold payments may be suspended at almost any time, and many persons and some business firms are having their bank deposits transferred to Europe and America. With the gold obtained by the recent foreign loan, and what is left from the first one, together with what can be taken from the Government bank reserve, it is probable that the Government can keep going until the first of next year. It is estimated that about two-thirds of the war purchases are made abroad, and gold is required to pay these. It is possible that in a pinch the Government might meet its internal expenses byissuing more paper currency. But at present the Nippon Ginko has outstanding paper notes amounting to 350 per cent. of its gold reserve, and there is a limit to which this can be carried before currency depreciation begins. There is practically no gold in circulation in the country, and comparatively little is to be found in the form of jewelry and the like. Hardly any gold is produced in the country, and experts think that such gold deposits as exist are about exhausted. With an annual revenue of only 230,000,000 yen ($115,000,000) in

ordinary times, and that barely equal to the budget, it is difficult to see how any part of the principal of the now existing debt is ever to be paid. Since the war special taxes have been levied, which are expected to net this year about 120,000,000 yen. From this, however, must be deducted the customs receipts and other sources of ordinary revenue hypothecated to pay interest on the foreign war loans. And even when the war is ended, the interest on the war domestic loans, which is payable in gold, will eat up the revenue secured by the war taxes. It seems probable, therefore, that the Government will not be able to remove the war taxes, which must be regarded as a permanent burden upon an already impoverished country. Even with a continuation of this extra revenue, it is by no means certain that the interest on the present loans can be met after a few years. Not only is Japan facing an early suspension of gold payments, but many conservative bankers who are familiar with her situation fear that she will not be able, if she goes on at the present pace, long to maintain silver specie payments. If these forebodings should be realized, it is clear that the national finances will go entirely to smash.

In such an event, what will happen to the foreign bondholders? There are several elements which may affect their interests, such as the future of Japan, the disposition of her Government and people toward Western nations, and the disposition of Westerners toward them. Should all things go smoothly with Japan, should she effect a favorable settlement of the war before she is totally bankrupt, and pursue a policy which would retain the good-will of England and America, she might be able to pay the interest on her debt and liquidate her foreign debt when it falls due by issuing a new loan in the same quarter. But here are several very large Ifs. It is not at all probable that the war will end for a year yet, before which time Japan will have reached, unless she can negotiate new foreign loans, the end of her bank account. It is highly probable, almost certain in my opinion, that when the settlement comes Japan's position will be found to be such as to alienate from her popular sympathy in America, and perhaps England, and to bring her policy into actual antagonism with those of these two great Western pow

ers, if we are to judge England by her past declarations. By that time, also, the propaganda will have run its course and lost momentum and acceptance through the very energy of its exertions, and Westerners will see Japan, her policy and resources in a clearer light. This will operate against the favorable placing of Japanese foreign loans. Not only this, but when Western opinion begins to turn against Japanese policy, and I think it will as the facts become known, one of the consequences will be to give full force and expression to the latent antipathy of the Japanese people toward the West and its ideals. Certain present tendencies in this direction are not lacking, but for the time I pass them. Should such a condition approximate the situation when the time comes for payment of the foreign loans, or an alternative of defaulting the interest on either the foreign or domestic loans present, I think there is little doubt that the foreigners would have to suffer. Placed between its creditors, its own nationals on one side and foreigners on the other, the Government, influenced by the sentiment of the people, would scarcely hesitate. And there are men who would see in this a certain justice. In fact, even to-day, in discussion of these possibilities, there is a disposition on the part of many Japanese to suggest covertly that should Japan lose the war or become financially bankrupt by it, England and America should expect to lose the money they have put in. The propaganda has taught the Japanese people to believe, and so far as possible disseminated the same view in the West, that Japan is really fighting the battle of Western civilization under an arrangement by which she furnishes the men and England and America the money. The masses in Japan make no distinction between the British and American Governments and the people of those countries, and they take literally the reports sent out by the Japanese press bureau representing that the two great Western powers are in hearty accord with and prepared to back the Japanese policy. In this connection it should be remembered that Japanese policy as it now appears to English and Americans is very different from the idea obtaining in Japan.

Of course, Japanese statesmen know the real facts. But a wide intellectual gulf

separates the oligarchy from the people. As to the real opinions of Japanese statesmen, I can only conjecture, since they cannot be expected to frankly discuss them in public. However, the main propositions stand out quite clearly. Japanese statesmen expected, and have up to now, to be able to utilize the propaganda inaugurated by England and continued by them to place large gold loans in England and America, and to blind the people of those countries in a considerable degree to Japan's real purpose in undertaking the war. They saw their way clear, with the tacit support of the British Government, to raise a large sum of money abroad, and they counted upon popular enthusiasm in Japan to secure what the country could supply. Thus they felt able to undertake the war, hoping that it could be ended in a year. Once committed to it, they are compelled to go wherever it may lead. There is no doubt that Japanese statesmen are very anxious for an early peace, although they cannot well urge it under present circumstances. And the reasons for this anxiety should be apparent. How they regard the future, if the war drags on, I cannot say; but the state of the national finances must weigh heavily upon them. As well as I am able to gauge their future policy in this matter, they hope to get British and American investors so deeply involved that they will be impelled by their own interests to keep Japan financially afloat, even to the extent of lending her more money; and that this will operate as a check upon a possible revulsion of Western popular opinion regarding the settlement. Japanese statesmen would regard as highly advantageous a situation which would prevent England and America from bringing national and financial ruin upon Japan because their own interests would be involved in the general disaster. How far this feeling is justified by probability remains to be seen.

When it is suggested in the presence of Japanese or pro-Japanese foreigners (these are numerically few, but vocally blatant) that even if Japan wins the war and realizes favorable terms, she will nevertheless be financially ruined, they immediately begin to speak of what Japan is going to gain by the settlement. Let us consider this. Suppose that Russia refuses to make peace, and prolongs the war indefinitely in order to exhaust her opponent financially while

at the same time assembling and perfecting her own great military resources. The war might easily be continued for years. There is nothing in the existing or probable military situation to prevent this. In case Russia adopts such a policy, Japan depends upon the intervention of other powers to terminate the war. The powers could legitimately do this, without any hostility toward either belligerent, on the broad grounds of humanity and civilization, and also that great neutral interests are being adversely affected by the war. But the powers would not be able to impose terms upon Russia under such intervention. In this respect Japan would be in the same situation as if she negotiated the peace herself. So, then, what may Japan reasonably expect to gain by a victory? An indemnity? This, I think, is out of the question, and I am sure Japanese statesmen do not expect it, although a huge indemnity is embraced in the popular ideal of the peace terms, and goes far to allay local uneasiness about the country's finances. She may get the island of Saghalien, comparatively worthless to anyone, and used by Russia only as a penal colony. Japan really does expect to be remunerated for her expense in keeping the Russian prisoners, but should Russia flatly refuse to pay Japan could do nothing but release them, as they are an enormous expense. Japan may, at fearful cost of life and money, take Vladivostok, but if Russia should refuse to pay to have it returned, which she probably would, its value to Japan in no way compensates her for the enormous cost of taking it, while giving almost positive assurance of having to fight in the future to keep it. Vladivostok has been nothing but a constant source of expense to Russia. Then there is the Manchurian Railway, and that part of the Siberian Railway lying east of the Siberian border. This railway, though nominally a private concern, is believed to be really the property of the Russian Government, and might become liable to confiscation. This is the only real asset so far mentioned, and it is very small compared to what it will cost, and will have to be entirely reconstructed. There are Port Arthur and Dalny, assuming that the powers permit Japan to keep them. Aside from some government property acquired and constructed by Russia, they are valuable, so

far as any return to the Japanese Government is concerned, only as military bases, and this implies outgo rather than income. This seems to be all. No; there are Korea and Manchuria. But I remember—I am forgetting it very rapidly here in Japanthat they are not to be touched. So for the time we will not consider them.

On the whole, I cannot see a very flattering future for Japan in this showing. And if there are facts and circumstances of opposite tendency I have been unable to discover them. One hears much optimistic talk, but probe it a bit for facts and it evaporates. It is clear that no matter what the details of Japan's real designs and ambitions, no one expects that one of it's features will be military retrenchment. Quite the contrary is anticipated by every person with whom I have talked. It may be that one of the effects of the war will be to eliminate Russia temporarily as a naval factor in the Pacific, and the fact that this is not assumed to imply a relaxation of Japan's energy in naval matters throws a beam of light upon her intentions. A new and more powerful navy is contemplated. For what? Success is a great stimulant, and the Japanese are beginning to speak of themselves habitually as a military nation. In the absence of any probability of encroachment upon the national territory, what does a military policy seem to imply? Against whom are such prospective preparations directed? Does there loom in the background a "The Orient for Orientals" doctrine, with Japan as the leader? Such conjectures naturally arise in any attempt to penetrate the future. But at present we need only concern ourselves with immediate probabilities, as indicated by facts and circumstances; and one probability is that before much time has elapsed Japan may find her policy opposed by one powerful, perhaps a combination of several Western powers. If this should come about, and Japan present to outside suggestion hindering her desires an outwardly resentful and belligerent attitude, the extent to which she will be able to make good such an attitude will depend upon her ability to fight a formidable opponent. This proposition has the two usual bearings-financial and military. I have already sufficiently reviewed her present and prospective financial situation. As to the military side, her ability to resent West

ern pressure must depend almost entirely upon control of the sea. So any position in respect to the settlement which Japan ultimately assumes should be subjected to close scrutiny, designed to reveal to what extent it depends upon "bluff." Extraneous factors in such a contretemps, such as the possible alignment of Western powers, must await later consideration. It should always be remembered that there is in Japan a strong minority of statesmen who favor conservative national action. These men opposed the present war, but they were overruled, and at present their influence is waning under the rising sun of military success. But in a dark hour their counsels may again become influential, and will be a check upon the extreme military party. As to Japan's future status as a great military power, the Western world should begin to consider whether, in the light of probable events, it is willing to put up the money to pay for it. For the money cannot be found in Japan.

One is compelled to admire the success that has attended the efforts of Japan so far, especially when her methods are considered. But her future pathway is strewn with pitfalls. In her embarkation upon this war and the policy it foreshadows is recognizable the inherent gambling instinct of the Oriental. By nature optimistic, the national spirit, directed by the oligarchy, has been thrown with its full force into a

movement which depends for ultimate success upon the favorable turning of all of a great number of chances. Should Japan continue by her propaganda to blind the English and American people to her impoverished national resources to the extent of obtaining future loans; should she continue successfully to bamboozle the Western world as to her real intentions and their meaning, and even when discovered so use her diplomacy as to prevent concerted action to check her; should she by these means manage to struggle along for a decade under the burden of huge expenditure until Korea and Manchuria can be converted into sources of possible profit, and her hold upon China firmly established; should she extricate her internal affairs from the disastrous state in which the termination of the war will leave them; should she accomplish all these things, and one depends largely upon the success of the other, she may eventually win out. She is a nation that has taken a chance in the great international lottery, with the odds enormously against her; and the seeming policy of her statesmen can only be soberly regarded as the action of men who have wittingly embarked in a mad gamble with destiny. Should they eventually succeed it will be the result of good luck rather than well-calculated management. Certainly the nerve to "play the game" is not lacking. TOKYO, May, 1905.