With the end of the daimyo domains, the government needed to establish a new system of land ownership that would transform the mass of the rural population from indentured serfs into citizens. To do so, it enacted a land reform program that redefined the domain lands as the private property of the tillers while compensating the previous owner with government bonds. One reason for the new policy was that the government needed operating revenues. At the time, public funds came mainly from customs duties, which were limited by agreement with the foreign powers to 5 percent of the value of the product. To remedy the problem, the Meiji leaders added a new agriculture tax, which was set at an annual rate of 3 percent of the estimated value of the land. The new tax proved to be a lucrative and dependable source of income for the government, but it was quite onerous for the farmers, who had previously paid a fixed percentage of their harvest to the landowner. As a result, in bad years, many taxpaying peasants were unable to pay their taxes and were forced to sell their lands to wealthy neighbors. Eventually, the government reduced the tax to 2.5 percent of the land value. Still, by the end of the century, about 40 percent of all farmers were tenants. With its budget needs secured, the government turned to the promotion of industry. A small but growing industrial economy had already existed under the Tokugawa. In its early stages, manufacturing in Japan had been the exclusive responsibility of an artisan caste, who often worked for the local daimyo. Eventually, these artisans began to expand their activities, hiring workers and borrowing capital from merchants. By the end of the seventeenth century, manufacturing centers had developed in Japan’s growing cities, such as Edo, Kyoto, and Osaka. According to one historian, by 1700, Japan already had four cities with a population over 100,000 and was one of the most urbanized societies in the world. Japan’s industrial revolution received a massive stimulus from the Meiji Restoration. The government provided financial subsidies to needy industries, foreign advisers, improved transport and communications, and a universal system of education emphasizing applied science. In contrast to China, Japan was able to achieve results with minimum reliance on foreign capital. Although the first railroad—built in 1872—was underwritten by a loan from Great Britain, future projects were all financed locally. Foreign-currency holdings came largely from tea and silk, which were exported in significant quantities during the latter half of the nineteenth century. During the late Meiji era, Japan’s industrial sector began to grow. Besides tea and silk, other key industries were weaponry, shipbuilding, and sake. From the start, the distinctive feature of the Meiji model was the intimate relationship between government and private business in terms of operations and regulations. Once an individual enterprise or industry was on its feet (or sometimes, when it had ceased to make a profit), it was turned over entirely to private ownership, although the government often continued to play some role even after its direct involvement in management was terminated. Also noteworthy is the effect that the Meiji reforms had on rural areas. As we have seen, the new land tax provided the government with funds to subsidize the industrial sector, but it imposed severe hardship on the rural population, many of whom abandoned their farms and fled to the cities in search of jobs. This influx of people in turn benefited Japanese industry because it provided an abundant source of cheap labor. As in early modern Europe, the Industrial Revolution was built on the strong backs of the long-suffering peasantry.