Chapter 166: Grain-backed Currency

The next item on the agenda was monetary reform. Thanks to the modern internet, this diverse group of people from all walks of life had at least a superficial knowledge of economics, albeit drawn from various competing theories. In the dormitories, the future economic structure and monetary policy ranked as the fourth most hotly debated topic, right after official titles, inheritance, and women. Much like on the internet forums of their time, many argued passionately, using all sorts of specious theories about subjects they barely understood, often getting into heated, spittle-flying debates that nearly came to blows.

However, to Cheng Dong, all these theories were meaningless for the Finance and Treasury Committee. Anyone with a basic knowledge of history knew that ancient Chinese society was fundamentally a natural economy, where self-sufficiency was the norm and commodity exchange was underdeveloped.

But it wasn’t until they arrived in this time and place, in Lingao, and truly experienced the local people, events, and the prevailing social and commercial environment, that the transmigrators realized just how “natural” this economy was. This was especially true in a remote, purely agricultural county like Lingao. Although the late Ming Dynasty was often called the “sprouting period of Chinese capitalism,” here in Lingao, there was no sign of capitalism, and even the most basic forms of commodity exchange were pitifully scarce.

The entire county had only fourteen markets, and their scale was so small they couldn’t even compare to the community farmers’ markets in the transmigrators’ original time. Some “markets” had no buildings at all, just a patch of muddy ground and a few thatched huts. Within this already minuscule market circulation, barter was the dominant form of exchange. Whether it was peasants paying rent to landlords or landowners paying taxes to the yamen, grain was the medium. Most peasants and landlords lived a self-sufficient life, purchasing only a very small number of goods from the market. Even then, many of these transactions were conducted through barter, exchanging things like homespun cloth or special products from the mountains. Even the yamen paid its bailiffs and minor officials in grain and cloth.

Consequently, forget about the “silver notes” seen in movies and TV shows; even silver itself was a rare sight here. The limited monetary circulation consisted mainly of various types of copper coins. According to statistics from the Ministry of Finance, the most common coins in circulation were from the Tang, Song, and Ming dynasties. Even Wuzhu coins from as far back as the Han dynasty were still in use.

This created a significant problem for the transmigrator regime: a lack of suitable means of payment. The transmigrators had plenty of gold and silver, whether brought from their original time or acquired in this one by selling goods and expropriating wealthy households. The Finance and Treasury Committee’s direct inventory alone included 120 kg of 975 silver, and over 700 kg of various silver ingots, cakes, fragments, and jewelry, equivalent to more than 20,000 taels of Kuping silver of this era. They also had over 20,000 foreign silver coins, mostly Spanish Reales and Pesos. Their gold reserves totaled over two hundred taels. In addition, they had more than five thousand strings of copper coins.

Despite this enormous wealth, the transmigrators found it difficult to use. Most of their local expenditures were small-scale: paying wages, and buying raw materials and food. Silver was rarely used in such transactions, making copper coins the most consumed currency. However, the transmigrators viewed copper coins as a strategic metal resource and wanted to minimize spending them.

As a result, various departments under the Executive Committee came up with their own payment methods. Wu De first introduced work-point coupons for the labor teams and communes, which were soon followed by more direct rice coupons and salt coupons. In essence, these work-point coupons were a form of grain-backed currency. To complicate matters further, the Women’s Welfare Cooperative, after its opening, introduced a system allowing people to purchase goods using the “points” from their recorded wages.

This situation plunged the finance department into chaos. The budgets, payment records, and reimbursement requests submitted by various departments used different units: some used “taels” and “wen,” others used “jin,” and still others used “points” and “work-points.” The constant conversions between these different units of value nearly drove Cheng Dong’s accountants mad. Consequently, the finance department strongly insisted on unifying the currency. Only with a unified currency could they establish a proper currency exchange and financial system.

The first monetary system proposed by the Executive Committee was a silver standard, involving the issuance of silver dollars, each equivalent to half a Kuping tael of the Ming era.

The transmigrators had sufficient silver reserves, and these reserves were expected to grow in the future, providing a solid material guarantee for issuing silver dollars.

Secondly, considering the infamous reputation of the Great Ming Treasure Note, it was likely that both merchants and the common people would be averse to paper money, making its circulation and promotion very difficult.

From this perspective, a silver dollar system seemed the most appropriate choice.

However, others held a different view, arguing that the time was not yet ripe for issuing silver dollars.

Lingao’s economy was underdeveloped, with a small market and limited local production. Even a silver dollar worth half a Kuping tael had too much purchasing power. After all, the price of rice in Lingao was only 1.3 taels per shi, meaning half a tael could buy about thirty-six kilograms of rice. This was still too large for small daily transactions, which would force the transmigrator regime to issue subsidiary coins.

To establish credibility, the transmigrators’ coinage would have to be of high quality. However, another law of the market is that bad money drives out good. One could imagine that as soon as the transmigrators released high-quality coins into the market, the traditional Chinese habit of hoarding gold, silver, and even high-quality copper coins would act like a black hole, swallowing them up. Not only would they fail to dominate the market, but they would also likely be overwhelmed by the influx of inferior currency from surrounding areas. After all, the transmigrators only controlled the small county of Lingao.

After considering all factors, the Executive Committee ultimately decided to issue grain-backed banknotes in the territories they controlled. This paper currency was named the “Lingao Grain Coupon.” They deliberately avoided names like “Tongbao” to avoid provoking the official authorities. Tokens like coupons and tallies had long been issued by private businesses in ancient China, and the government rarely interfered.

The currency used the “yuan” as its unit to avoid confusion with the old units like “wen,” “tael,” and “qian.” The basic unit of the Lingao coupon was the yuan, with each yuan being equivalent to 500 grams of rice. The yuan was subdivided into “fen,” with one yuan equaling one hundred fen.

As long as the transmigrator regime held sufficient grain reserves, the credit of this paper currency could be guaranteed—and the transmigrators had full confidence in their agricultural capabilities.

In the long run, the grain standard was just a temporary measure. However, at their current stage, this system was relatively safe and acceptable. After all, the transmigrators had already established a considerable degree of credibility locally. Promoting this “grain coupon” was not expected to be very difficult.

“I still doubt whether this paper money will be accepted,” said Li Haiping from the Navy during the discussion, feeling that the plan was unreliable. “Don’t talk to me about the paper currency of the Song and Yuan dynasties. That was a government action. No matter how corrupt a government is, it still has some credibility before it completely collapses. What basis do we have to make the common people believe in us?”

Wen Desi explained, “As long as there is a place where it can be exchanged for its equivalent value in full, the people will accept it. When the British pound was still backed by gold, everyone knew how much gold a pound sterling could be exchanged for, but almost no one actually went to exchange it. It was enough for people to know that they could exchange the banknote for gold at the Bank of England.”

“But what do we use for foreign trade payments?” someone from the Commerce Department questioned. “Foreigners won’t recognize your banknotes, and they don’t want your rice either. All they care about is shiny silver.”

“Heh, still thinking about silver. What do we need silver for? To buy things outside of Hainan Island? Why not just have people ship the goods directly to us? Why go through the trouble of an extra transaction with silver? We’re not the Spanish, who have nothing good to offer and have to rely on silver for purchases. We have attractive goods; merchants will naturally come chasing profits. Direct barter is the way to go,” said Yan Quezhi. As a finance undergraduate who understood accounting, he had already been transferred to the Finance and Treasury Committee by Cheng Dong.

“Actually, I also think there’s not much point in increasing the local silver reserves in Lingao,” Wen Desi said. “In a small place like Lingao, too much silver will just cause it to devalue. As for our current foreign procurement, we have hundreds of thousands in funds available in Guangzhou, and the Guangzhou station will continue to replenish it. Procurement payments are not a problem.”

“If we really need to use hard currency, we can manage with silver pesos,” said Cheng Dong. “That currency is very popular along the coast and circulates easily.”

“What about when outsiders come to our territory? What exchange rate will we use?”

Cheng Dong said, “Let me explain the monetary policy.”

For now, the transmigrator regime had no plans to completely replace all existing currency in the local market with the new coupons. That was beyond their current capabilities. The transmigrators intended to use it merely as a means of payment and settlement. The silver and copper coins already in circulation would continue to circulate. The exchange rate between them would be based on the price of rice. Assuming the price of rice was 1 Kuping tael per hectoliter (100 kg), then 1 Kuping tael would be exchangeable for 200 Lingao coupons.

“However, this is just a theoretical rate. For the next few years, we will not be exchanging our coupons for the various miscellaneous silver and copper coins.”

Cheng Dong explained that the reason for not offering exchange was the extreme chaos of the Ming dynasty’s monetary system. Counterfeiting was rampant, and the purity of both silver and copper coins was incredibly varied, making it almost impossible to estimate their true value. The difficulty of managing such exchanges would be immense.

Someone asked, “I want to know how much power we actually have to control the rice market in Lingao. Since the currency is backed by rice, won’t fluctuations in the price of rice cause the real purchasing power of our money to rise and fall?”

“That is indeed a problem,” Cheng Dong admitted. “Grain is not like precious metals such as gold and silver, which have relatively stable values. The price of grain is affected by many external factors. But I believe that within the scope of Lingao, the transmigrator government is fully capable of controlling the price of rice.”