Tags:
  1. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma

    Fixing This Economy

    Discussion in 'Plot Development' started by X Equestris, Dec 28, 2017.

    I'm a little hazy on where exactly this fits, since there are elements of setting development, research, and plot development, so apologies if this isn't the right section.

    The question I'm asking with this thread is fairly straightforward: if you're the new ruler of an empire whose coinage has been dramatically debased by your predecessors, how do you restore confidence in your money and stop the rapid inflation the debasements caused?

    Relevant details: like Rome, which it's based on, this empire uses a bimetallic standard. About a hundred years before the setting's present, the common coin used in everyday transactions is 99% silver.

    An almost century long period of political instability, revolts, and invasion by outsiders led numerous emperors and empresses to cut the silver content to stretch their budgets and fund things like accession bonuses for the military, spy networks, public works, disaster relief, and personal luxuries.

    At the start of the story, the silver content of this coin sits at only 4%, and the copious quantity of debased coins has caused spiraling inflation. The old emperor was planning on cutting that to 2% and instituting wage and price controls before he's overthrown by one of the central characters (a popular general who was informed that these changes might cause the empire's economy to completely collapse).

    The new emperor inherits these issues and, following a confidant's suggestions, calls a talented economist back from exile. My big problem is that while this genius is very familiar with the problems, I don't have solutions for him to put forward.

    Here are the additional complications the emperor has inherited:

    The empire has very little gold and silver in reserve, and production in their mines is negligible.

    A legal tender law designed to keep citizens of border provinces from using the coins of more stable, neighboring kingdoms has driven the old, higher silver content coins out of circulation, leaving only the debased ones. The law also means that any effort to reverse the debasement is doomed; bad money would drive out the good again (Gresham's Law).

    I've considered having the old coins be demonetized, but the first complication makes this impossible in the beginning. There aren't enough metals left in reserve to mint the needed number of new, better coins, so awful deflation would result.

    Tying in with the first two complications, significant quantities of gold and silver have left the empire through trade with neighboring states.

    While raising taxes is considered as a possibility to get enough metals back from the populace to mint more stable coins, it's ultimately dismissed. The new emperor doesn't want to burn his popularity or give rivals something to exploit, and there are some fears about the wider impact of tax hikes.

    All these factors are leading toward military conquest of some of the wealthy states in the east, and the empire using looted wealth to mint new, stable coins after demonetizing the old ones, and maybe starting a buyback program to get the metals out of those coins. This option also fits with the new emperor's military and cultural background.

    However, I'd like to be sure there aren't any other options which could conceivably work. That the Raubwirtschaft sort of solution I mentioned is something that an economist might actually recommend given all these factors. Any suggestions, or calling out holes in the scenario you spot, would be immensely helpful to plotting out this problem.
     
    Hydraphantom and John Calligan like this.
  2. ChickenFreak

    ChickenFreak Contributor Contributor

    Joined:
    Mar 9, 2010
    Messages:
    15,262
    Likes Received:
    13,084
    It sounds like your country has been going from hard currency to fiat currency, gradually. That feels a bit like going from driving on the left side of the road, to driving on the right side of the road, gradually. My brain is saying, "That's impossible!" but if someone handed me sixteen historical precedents, I wouldn't say that they were lying.

    You seem to be focusing on going back to hard currency as the only solution. But there are other solutions.

    I'm thinking of three different kinds of currency, but I only seem to have firm names for two.
    • Hard currency: A coin that has inherent value in the coin itself. A certain number of grams of silver, gold, whatever.
    • Hard money policy/representative currency/what's this one called?: The money itself has no inherent value, but it can be exchanged for a specific amount of a specific substance. So the piece of paper can be brought somewhere and exchanged for X grams of gold.
    • Fiat currency: The money has no inherent value AND nobody is promising to exchange a specific amount of something for that money.
    When your coins were silver, they were hard currency. When they were diluted, it sounds like they became fiat currency. But I'm unclear on why anyone ever agreed to use those coins. It seems to me that the country would have quite promptly abandoned the currency and gone to a barter economy. If you have a hard currency economy and you cut the amount of silver in a coin in half, it seems to me that the coin would instantly, not slowly and subtly, be halved in value, and that the 4% coins would have essentially zero value, and that nobody would be using this country's coins at all.

    Does this country have anything else that has value and that the government can get its hands on? Jewels? Salt? Potatoes? Olive oil? Ceiling tiles? 3 X 5 signed glossies of the king?

    It seems to me that one solution is to issue representative currency that can be redeemed for that thing of value. And if the country's currency has been this bad for this long, I suspect that plenty of organizations would have already been doing that by formalizing barter with some sort of coinage. The fisherman's guild would have been minting wooden coins that can be exchanged for ten pounds of cod, the forester's gild minting wooden coins that can be exchanged for a cord of firewood, and so on.
     
    BayView likes this.
  3. ChickenFreak

    ChickenFreak Contributor Contributor

    Joined:
    Mar 9, 2010
    Messages:
    15,262
    Likes Received:
    13,084
    I'm going to suggest reading about tally sticks, England, and taxes.

    http://www.bbc.com/news/business-40189959
     
  4. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    In short, the legal tender laws I mentioned. People were forced to accept the debased coins and the non-debased ones as having equal value, which eventually brought Gresham's Law into effect. Otherwise, you'd be right: good money would drive out the bad without these laws. I've thought about having them simply repealed, but the new ruler has nationalistic reasons for keeping them.

    Some localities have gone to barter, though this is seen as bad by leadership due to the limitations of barter economies.

    I should mention that the debasement was mostly gradual, over the course of a century. One percent here, two percent there, with a few occasional large cuts spread out over the decades. The situation as a whole is based on what happened to Rome's coinage during the Crisis of the Third Century. Problem being that even after the Crisis Rome never completely sorted out its economy, and the debasement was a contributing factor to the West's collapse.
     
  5. ChickenFreak

    ChickenFreak Contributor Contributor

    Joined:
    Mar 9, 2010
    Messages:
    15,262
    Likes Received:
    13,084
    To me, that means that the government absolutely went to fiat currency--the inherent value of the coin became totally irrelevant, and the coins could effectively have been replaced with paper.

    However, how did the government manage to enforce that? Laws are all very well, but without a government representative standing around every five feet, how do you enforce those laws? If a fisherman would normally charge one silver coin per fish, and the coins are only four percent silver, then he's going to charge 25 "silver" coins per fish, and if he happens to get one with more silver, yay!

    Governments can run just fine on fiat currency. The United States has fiat currency. Representative currency can also work fine. So why does this country want to go back to hard currency? If precious metals are hard to come by, why form a plan dependent on precious metals?

    It appears that your Roman model does result in a reversion to barter, at least on an admittedly quick Google.
     
  6. BayView

    BayView Huh. Interesting. Contributor

    Joined:
    Sep 6, 2014
    Messages:
    10,462
    Likes Received:
    11,689
    If you don't want fiat currency and you don't have the precious metals to support hard currency...?

    Does the country have anything of value? Is this a currency crisis or a larger economic collapse? If they've got something of value, and there's a market for it, I'd suggest they sell whatever it is in order to get the precious metals to mint new, hard-currency coins.

    If they have wealthy citizens, maybe they take out loans from those citizens, although the citizens are unlikely to agree to such loans without hefty compensation... maybe your country is going to suddenly find itself with a lot of new dukes or whatever they'd be, with their own dukedoms under some level of control from the central government.

    In other words, if your country is going to have hard currency but doesn't have the liquid wealth to support hard currency, your country needs to give something up in order to get the wealth.
     
  7. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    From what I've researched on Rome's crisis and England's Great Debasement, it seems the main difference between fiat money and debased commodity money forced on the people is that with the latter, the government basically lies and says it has the same intrinsic value as before.

    The legal tender laws? With hefty punishments. Obviously some people are willing to break them, but most aren't. And your example is absolutely right, though getting one of the higher content coins is unlikely due to people hoarding them (one of the behaviors described by Gresham's Law/Copernicus' Law/whatever you want to call it).

    With fiat, the issue is a complete lack of precedent in this empire's world, and the populace's skepticism of it.

    The biggest trouble I've run across while looking for solutions to this problem is fitting them in with the new ruler's own agenda. The core of it is a yearning for and vow to restore the empire's earlier golden age; stable commodity money is part of that idealized vision, along with military might and an equivalent of the Pax Romana. To him, representative money might work in the interim, but the goal is always to get back to the way of things in "the good old days".

    Yeah, it led to lots of local bartering, though new, more stable coins were issued and used as well.

    Loans from the wealthy would work quite well, at least as a partial solution. Prior to this extended turmoil, the empire was more of a constitutional monarchy, and before that an oligarchic republic. Loans in exchange for regaining significant chunks of the upper class' lost power in the government adds a nice political wrinkle.
     
  8. Kalisto

    Kalisto Senior Member

    Joined:
    Jun 23, 2015
    Messages:
    975
    Likes Received:
    995
    Did you study the German Hyperinflation that led to the rise of the Nazi party...? Apparently not.
     
  9. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    The solution implemented by the Weimar government wouldn't work due to the underlying differences between the economic systems. And although it's bad, the empire's crisis doesn't qualify as hyperinflation (>50% price increases in a one month period). It's more on the level of galloping inflation.
     
  10. Kalisto

    Kalisto Senior Member

    Joined:
    Jun 23, 2015
    Messages:
    975
    Likes Received:
    995
    Dude, I'm not talking about the Weimer Republic. No wonder you're stuck. I will say it again. You didn't read about the hyperinflation, did you?

    Did you know about 3rd Reich changing the currency? Reichbanknotes were the currency of the
    Weimer Republic, but they were changed after Hitler to the Rettennotes. Traditionally currency is backed by precious metal, but the 3rd Reich did something interesting. They put down actual assets as the backing for the currency. Things like railroads, lands, buildings. Whatever the government owned, was what was said to back this currency.

    Right now, we don't have a real backing for the US currency other than the good graces of the US.
     
  11. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    I've apparently read more than you. The Weimar Republic fixed its hyperinflation nearly a decade before Hitler was brought to power. From the Wikipedia page on the Rentenmark:

    "As hyperinflation took hold, the cabinet of Cuno resigned in August 1923 and was replaced by the cabinet of Gustav Stresemann. After Stresemann reshuffled his cabinet in early October, Hans Luther became Minister of Finance.[1][2]

    Working with Hjalmar Schacht at the Reichsbank, Luther quickly came up with a stabilization plan for the currency which combined elements of a monetary reform by economist Karl Helfferich with ideas of Luther's predecessor in office Rudolf Hilferding. With the help of the emergency law (Ermächtigungsgesetz) of 13 October 1923 which gave the government the power to issue decrees on financial and economic matters, the plan was implemented that same day, 15 October 1923.[2]

    The newly created Rentenmark replaced the old Papiermark. Because of the economic crisis in Germany after World War I, there was no gold available to back the currency. Luther thus used Helfferich's idea of a currency backed by real goods. The new currency was backed by the land used for agriculture and business. This was mortgaged (Rente is a technical term for mortgage in German) to the tune of 3.2 billion Goldmarks, based on the 1913 wealth charge called Wehrbeitrag which had helped fund the German war effort in World War I. Notes worth 3.2 billion Rentenmarks were issued. The Rentenmark was introduced at a rate of one Rentenmark to equal one million million old marks, with an exchange rate of one United States dollar to equal 4.2 Rentenmarks.[2]

    The Act creating the Rentenmark backed the currency by means of twice yearly payments on property, due in April and October, payable for five years. Although the Rentenmark was not initially legal tender, it was accepted by the population and its value was relatively stable. The Act prohibited the recently privatised Reichsbank from continuing to discount bills and the inflation of the Papiermark immediately stopped.

    Thus the monetary policy spearheaded by Schacht at the Reichsbank and the fiscal policy of Finance Minister Hans Luther brought the period of hyperinflation in Germany to an end. The Reichsmark became the new legal tender on 30 August 1924, equal in value to the Rentenmark. This marked a return to a gold-backed currency in connection with the implementation of the Dawes plan.[2]"

    You're wrongly conflating the hyperinflation caused by 1) Imperial Germany's rampant borrowing to pay for WW1 and 2) the inability of the Weimar Republic to pay these debts and the reparations laid on it by Versailles with the economic downturn caused by the Great Depression. The Great Depression was deflationary, not tied to hyperinflation. Nazi efforts to deal with this deflation in the short term were successful, but would've caused other issues further down the line without reforms. The first reply in this Reddit thread gives a nice summary:



    Long story short, neither the measures of the Nazis nor the Weimar government help my situation, since 1) the Nazis dealt with a deflationary crisis, and 2)the Weimar economic system involved a number of features my state just doesn't have.
     
  12. Kalisto

    Kalisto Senior Member

    Joined:
    Jun 23, 2015
    Messages:
    975
    Likes Received:
    995
    You obviously haven't read more than me. But thanks for repeating everything I said... I guess.
     
  13. NigeTheHat

    NigeTheHat Contributor Contributor

    Joined:
    Nov 20, 2008
    Messages:
    1,594
    Likes Received:
    1,776
    Location:
    London
    You might be able to adapt the method used to fix Brazil's currency in the 90s, using a ghost currency. There's a write-up at the end of this PDF that's quite entertaining:

    https://positivemoney.org/wp-content/uploads/2014/03/Money-money-money-Chapter-3-from-Tim-Harfords-The-Undercover-Economist-Strikes-Back-1.pdf

    That book's written in a question-and-answer conversational style, and there's not a huge difference between the formatting of the questions and answers in that doc, but it's an easy read once you've worked out the effect he's going for.

    Re: the barter economy, it seems that the easiest way to stop that would be to force the people to pay their taxes using the currency. You can trade oranges for fishes if you want, but if you know you're going to need to provide a bag of coins to the men with big swords soon, the coins start to be pretty valuable regardless of how much silver they've got in them.
     
  14. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    I didn't repeat what you said. You claimed the Nazis implemented the Rentenmark when it was actually Stresemann's government. As I noted already, the Nazis dealt with a deflationary crisis, not a hyperinflationary are one.

    I'll definitely take a look at it.

    Yeah, research had lead me toward that as the best option. Diocletian switched to collecting goods instead of coins for taxes, and it accelerated the move away from coins and damaged trade; definitely not the result this new ruler would want.
     
    Last edited: Dec 30, 2017
  15. mashers

    mashers Contributor Contributor Community Volunteer

    Joined:
    Jun 6, 2016
    Messages:
    2,323
    Likes Received:
    3,089
    I’m not very knowledgeable about economics, so this might already have been touched on in other postings that I didn’t understand :p I’m wondering whether there are neighbouring civilisations which might possess the resources needed to manufacture currency. Presumably nearby colonies would be at a similar level of development so would also be able to mine ores, refine them and fashion them into coins. If your city has something worth exporting, they could exchange whatever resource for payment in coins from their neighbours, and then either adopt that as their currency or reforge the coins into their own.
     
  16. X Equestris

    X Equestris Contributor Contributor

    Joined:
    Aug 24, 2015
    Messages:
    2,595
    Likes Received:
    3,186
    Location:
    Oklahoma
    In better times, that would work pretty well. Unfortunately, the instability of the period has made long distance trade difficult, dangerous, and sometimes unprofitable. Most of the empire's neighbor's are also its enemies. Still, it might work as at least a partial solution.
     

Share This Page

  1. This site uses cookies to help personalise content, tailor your experience and to keep you logged in if you register.
    By continuing to use this site, you are consenting to our use of cookies.
    Dismiss Notice