Until the present money economy was established, taxes had been paid in kind. Money was just an auxiliary or substitutive means. Currency was coined money and currency itself had a value as an object of substance. It was not a representational currency like paper currency. This is an important point.

 

In feudal Japan, the government had uniquely assumed the production of goods. The Shogunate, the lord of the country, was also a large landowner. Financial operations were an extension of the lord’s domestic economy and the secretary to the court.

 

That is to say, until modern days, economic activity was not based on money but objects. It was only after establishment of modern monetary systems that focused on paper currency that the money-centered societies like those of today came to be. Without recognizing this point, one cannot understand the essence of the monetary system and financial issues.

 

In the object economy, money was secured by a backup with physical worth. However, in the days of representative currency, especially in the days of inconvertible paper currency, currency lost its value as an object. This value as an object was replaced by confidence.

 

This relieved money of the restraints and restrictions it had as an object.

 

In the days of the object economy and those of the money economy, the meaning of financial deficit differs largely. Financial deficit in the days of the object economy meant that money was used as a supplement because of a shortage of the object. Even if finances were in the red, money was always secured as an object.

 

In contrast, financial deficit in the money economy is an event in terms of money. Therefore, the problem is one of how much working money is necessary.

 

The value of money is expressed by a natural number. Natural numbers can continue endlessly. That is why the value of money inflates without limit unless it is controlled.

 

In contrast, an object has limits. An object is restricted physically. Human strength also has limits. The lifetime of humans is limited. Humans always die. This is a presumption. But everyone believes it is self-evident. This is important and becomes a major premise.

 

The total amount of paper currency circulating in the market never exceeds the amount of outstanding paper currency.

 

The total amount of paper currency in a unit period depends on the amount of outstanding paper currency and the number of rotations.

 

The circulation of paper currency depends on the system used to issue and control paper currency. This is because the amount of outstanding paper currency is restricted by the issuance and collection system for the paper currency.

 

The fund volume is restricted by the fund raising method.

 

The paper currency issuance model is the same as the borrowing procedure. This is because paper currency is issued as public debt.

 

Convertible paper currency is issued by a nation’s central bank on the security of money possessed by the government or the government’s power to levy taxes. Inconvertible paper currency is issued by the central bank on the security of the national debt. For the central bank, the bank note indicates the account of debt and differs from cash in possession. Thus, paper currency is issued in compensation for the public receivables. Public receivables cause public debt at the other end of the spectrum. That is to say, paper currency is a kind of IOU.

 

Even when the government directly issues paper currency, the feature of public debt is the same. However, direct issuance of paper currency has some negative effects.

 

Direct issuance of paper currency by the government has several problems. The first problem is that the central bank cannot exert its functions if the government directly issues paper currency. The control power of the central bank over financial institutions would weaken and the systematic control of paper currency by financial institutions would incur difficulties.

 

Second of all, the consistency of accounting would be lost. While cash basis accounting is adopted for financial operations, accounting based on periodical profit and loss is adopted for the market. There is no systematized continuity between them. Consistency between finance and the market is sustained by putting the central bank between them as an intermediary. When the central bank is unable to act as an intermediary, the consistency of accounting would be lost.

 

Thirdly, paper currency would not receive confidence because it would fail to obtain some physical or monetary standard. The value of money would be unstable. The physical standard mentioned here means gold under the gold standard or the national debt if the paper currency is inconvertible.

 

In light of the supply of paper currency, the question of how much of the national debt is turned into funds and goes into circulation is more important than the question of the amount of paper currency issued.

 

Issuance of paper currency is just like power generation. The amount of power generated depends on the amount of electricity used. When the amount of electricity used exceeds the amount generated, a blackout occurs. If the amount of electricity used is small, the power generating efficiency decreases. It is meaningless to only be concerned about the amount of power generated, when the problem is in the demand and the need for electricity.

 

The fundamental function of finance is to adjust the circulation of paper currency depending on the scale of financial income and expenditure. The imbalance of financial income and expenditure is adjusted by the amount of public debt.

 

The role of finance is to adjust the circulation of paper currency so that the market scale and standard of living may be well-balanced. It is the government’s responsibility to construct a tax system and formulate a budget that achieves a balance between the market scale and standard of living.

 

Financial collapse means a condition in which the government cannot control the circulation of paper currency. The amount of paper currency is a function of the financial revenue, financial expenditure and public debt. Therefore, once finance has collapsed, the difference between the financial revenue and financial expenditure is extremely overextended and the public debt cannot be controlled.

 

Finance should work to collect and circulate paper currency efficiently. The government system for the collection of paper currency is the tax system. The tax system must collect paper currency efficiently. Once the balance between currency collection and circulation is lost, finance will collapse.

 

While the national expenditure is connected with the increase of paper currency in circulation, the national revenue is connected with the increase of paper currency collected. The increase and decrease of paper currency in circulation depends on the national revenue and expenditure.

 

The national expenditure is an issue of income redistribution. The national revenue is an issue of paper currency collection. An issue of the national debt is an issue of the balance of income and expenditure.

 

The national expenditure is based on people’s lives. The national income is based on the market scale. The factors of people’s lives are redistribution of income, improvement of social capital and administration cost. The views of the state underlie these factors.

 

A nation works not only for the sake of money and goods but also for the sake of its people. For example, in the area of care for the elderly, it is not enough for a nation to allocate a budget and construct facilities. What is more important is how to utilize human resources. The fundamental view of the state must be a human one. The foundations of national finance cannot be built up without it.

 

The scale of the national debt is proportional to the paper currency in circulation. The circulation of paper currency depends on the financial revenue and expenditure.

 

An increase in the paper currency in circulation may reveal a potential demand. Revealing the potential demand may lead to an activation of market transactions. However, the demand cannot be spurred only by circulating paper currency. What is important for the national expenditure is to maintain the balance of market transactions by correcting biased income.

 

The key points for a tax system are the collection rate of paper currency and the tax rate.

 

The tax revenue is a national revenue. In other words, the collected amount of paper currency by the government is proportional to the market scale. The market scale depends on the total amount of transactions. The problem is to what extend the tax system can catch up with the market scale.

 

An ironclad rule to cut administrative expenses to the bare minimum. For that purpose, part of the government’s administration should be shifted from cash basis accounting to accounting based on periodical profit and loss. In short, privatization is effective. This is because accounting based on periodical profit and loss can respond to the value of time flexibly while case basis accounting is rigid with regard to the value of time. Therefore, privatization of some portion of the administration is effective. In this case, public debt should also be capitalized, as well.

 

The elements constituting assets, i.e., receivables, are use value and exchange value. The exchange value is connected with liquidity.

 

When considering the bad loan problem, it is necessary to determine what contributed more to the cause, deterioration of the quality of assets and receivables or worsened liquidity.

 

For instance, let’s take real estate as an example. What are the causes of the declined asset value of land? Is it because land is unsalable or is it because the utility value or use value of land has declined? It is important to check this point.

 

As for bad loans, it is necessary to clarify whether this is really an issue of bad loans or actually an issue of bad receivables. Bad debt is on the opposite end of bad loans. Bad debt and bad loans should be considered as a pair. If bad loans for which the asset value has declined are disposed of easily, the debt may remain without backup in some cases.

 

There are some assets that maintain their use value and are being utilized, but their exchange value has declined. If such assets are disposed of only because they lack liquidity, it is an act akin to “killing an ox to straighten its horns.”

 

Fixed assets such as real property or facilities are assets based on a long-term balance. They should be assessed in relation to the inextricably linked debt. If a decision is made based on a short-term price fluctuation, collapse will occur as a matter of course

 

Furthermore, it is also important to determine whether the problem lies in the flow or in the stock.

 

In difficult economic times, both asset value and earnings worsen. Even when performance worsens, countermeasures vary depending on whether the cause is the flow or the stock.

 

If a lender urges a borrower to repay the principal of a loan only because of the decline in the asset value, without determining whether that decline in the asset value is temporary or long-term, the borrower may have difficulty continuing his business, or even go bankrupt in the worst case. Such an act is almost a crime.

 

In addition, it is necessary to clarify whether the decline affects earnings or not. Unless the cause of the worsened earnings is identified, it is impossible to take countermeasures.

 

Business conditions depend on cost.

 

When business is in recession, costs and borrowed money are regarded as the enemy in various ways. A loud chorus of opinion is raised to reduce borrowings and costs at any rate. Under the name of rationalization, costs and jobs are cut.

 

This is called economic rationalism. But, reduction of costs and jobs is really effective from the viewpoint of the entire economy.

 

Viewed from the reverse side, costs are income. Reduction of costs is synonymous with reduction of income.

 

If costs are cut, the earnings of trading partners decrease. Cutting jobs invites reductions in employment. Deals come into effect in a chain reaction. Cutting costs means the start of a such a negative chain reaction.

 

Many people embrace the illusion that exclusively pursuing profits is economic rationality. They believe that profits are the only economic guideline. They hold a stereotype-like view that both earnings and costs are only the means to get profits. For such people, economic rationality means unlimited cost-cutting. They never acknowledge the mechanism of cost. They tend to quickly interpret economic rationality in connection with the resultant profits. Consequently, they turn to cost reduction simply. However, the grounds for verifying rationality lie in logical preconditions and setting. The result is logically derived according to the preconditions and setting. If the preconditions and setting are changed, an utterly different conclusion would be derived.

 

The fundamentals of the economy lie in distribution. This means not only the distribution of goods but also the distribution of income. Assurance of income leads to economic independence and assurance of one’s position in society. And it also means an assurance of freedom.