Chapter 33: The New Monetary Policy

Yi Fan said, “I can’t agree with his line of thinking. Firstly, the pound and the dollar were built on the foundation that they were first and foremost manufacturing powerhouses. Our current production capacity is high in efficiency but low in total volume. A large portion of our limited capacity and products must be devoted to our own upgrades. In the short term, we can’t even effectively meet the demand for industrial consumer goods on the Chinese mainland. Therefore, relying solely on selling Lingao’s goods is not enough to support a large-scale issuance of credit banknotes. As for using military force alone to circulate currency, that’s even more impossible.”

“I don’t agree either. Dugong’s thinking is still stuck in the ‘planned economy is omnipotent’ mindset,” Wu Di said. “He just infinitely belittles the role of financial tools. It’s no different from the model decades ago when the People’s Bank of China was both the central bank and a retail bank, and then the People’s Bank retreated to the second line, creating four specialized banks to take over.”

“Let’s not talk about that for now. Let’s talk about the new monetary policy,” Chen Ce said. “As for a planned economy, we are already a planned economy, and one that is even more planned than the Soviet Union’s.”

“Monetary policy is a monthly issue. There isn’t a month when this isn’t debated on the BBS. Everyone wants to be an economist,” Yi Fan said. “I think the Executive Committee is already having a huge headache over this issue. First, they know the grain circulation voucher is problematic. Second, they don’t know what to replace it with. Third, and this is the fundamental problem, there are too many opinions.”

Wu Di said, “From our perspective, basically copying the silver standard system is the most operable and stable system at present. It’s easy to implement, and the common people can accept it.”

The current system was clearly an unsustainable temporary measure. Therefore, with the idea of being prepared, the people in the finance and economics department had already held multiple work meetings on this issue, and there were still some disagreements.

Chen Ce said, “We are a service department. We can’t go against the Executive Committee on this matter. The production and sales departments are the main players. We are just coordinating with their work, solving problems in the great cause of transmigration, and at most looking ahead five to ten years.”

“Alright, tell us your plan.” Everyone present knew that Chen Ce was actually entrusted by the Executive Committee to draft the new monetary system. His speech was meant to set the tone.

“The theories now are all over the place, but they can be boiled down to two main ideas,” Chen Ce said. “One is the silver standard, and the other is pure credit currency. Both have their advantages. I personally feel that given Lingao’s current situation, we can implement a credit currency system pegged to silver.”

“I think the silver standard is very good at this stage. It’s convenient, intuitive, and has a guaranteed credit,” Wu Di said. “Referring to the use of the Spanish dollar in China, a silver coin with a fineness of only 900, because it is beautifully minted and easy to value, is actually more useful in circulation than 925 silver bullion. Often, a silver dollar of seven qian and two fen can be used as one tael in transactions! The minting itself can generate profit. And you have to consider foreign trade demand. Without silver, you can’t buy goods at all.”

“Machine-minted silver dollars,” Yi Fan said. “Once they circulate, they will definitely become the object of hoarding by the wealthy on the mainland. Bad money drives out good; we must be on guard. China’s silver black hole is not called that for nothing.”

“It’s fine, let them hoard it. Anyway, they have to bring silver to buy things in Lingao. As long as the outflow and inflow are balanced. According to our development momentum, the future will likely see a serious trade surplus and severe inflation,” Wu Di said.

“I’m afraid it’s not that simple. What we need most are bulk goods. The merchants who sell bulk raw materials may not want to buy anything from us. They will just take the silver and leave, instead of purchasing our goods. Besides, what they take away are standard silver dollars, but what they bring may not be 925 silver. People always tend to use the worst currency.”

“That’s right. Silver’s role for us is equivalent to foreign exchange,” Chen Ce said, tapping his teacup with a pencil. “And what about our circulation vouchers? They are basically the renminbi before 1990. The Executive Committee really hopes that the circulation vouchers can be circulated on a large scale, but in fact, this is impossible—at least for now. Despite various measures, the amount held by foreign merchants is still limited. The circulation voucher has no purchasing power outside of Lingao. Foreign merchants will either choose to accept silver or spend all their circulation vouchers.”

“You want to peg the currency to silver?” Yi Fan immediately understood his meaning.

“That’s right. It’s wrong to deny the value of silver, at least for now. Let’s first look at the problems we are facing.”

He opened his notebook:

“First is the lack of raw materials. Except for steel, which will achieve self-sufficiency in the short term, almost everything else relies on imports. Second, almost all export products rely on native channels. Third, the population under our control is too small.”

“This is very similar to the early British!”

“That’s right, but our burden is much greater than the British,” Chen Ce said. “Britain only needed a sufficient navy, while we have to build and maintain a strong army at the same time. Army, navy, merchant fleet; an ever-expanding administrative and technical team; large-scale basic education… all of these require massive investment. And what about our productivity? Unfortunately, the industrial goods produced in Lingao, the bulk of them are used for infrastructure construction and expanding new capacity. Only a small part is for export. Currently, maintaining the balance of payments for the current account…”

Yi Fan coughed. Chen Ce realized he was talking about state secrets. He said, “Everyone understands what I mean.”

Yi Fan said, “Of course, in the foreseeable future, Lingao’s industrial production capacity will not be sufficient to effectively meet even East Asia’s demand for industrial consumer goods, so it’s impossible to export grain circulation vouchers. People won’t accept them. So, there’s really only one answer—follow the historical practice and temporarily implement a paper currency based on the silver standard. Especially since this is the only precious metal we can master in large quantities and that is recognized by everyone.”

“No, that’s too wasteful!” Chen Ce, seeing his long speech being directly twisted by Yi Fan, said, “It’s a credit currency with a silver-pegged exchange rate!” He continued, “The circulation of silver itself within Lingao’s economy is a waste of resources!”

“Use silver dollar vouchers,” Wu Di said. “No silver dollars will be seen in the market, just stipulate that one yuan of paper currency can be exchanged for one silver dollar. Or we could have an incomplete silver standard, stipulating the silver content of the banknotes but limiting the amount of silver that can be exchanged, to avoid a situation where a sudden run on the bank makes redemption impossible.”

“If I had to choose between the two, I would rather choose the first. The second, given our low credit, will only accelerate a credit collapse. If it can’t be 100% converted to silver, what’s the point of stipulating the silver content? One day, if a big merchant comes to exchange a large amount of circulation vouchers, and you say, ‘Sorry, this exceeds the exchange limit. You’d better buy some goods to take back.’ Do you think he would understand what an incomplete silver standard with limited exchange means? He wouldn’t.” Chen Ce’s tone became heavier. “He would only know one fact: the circulation vouchers can’t be exchanged for silver anymore. Then everyone who does business with us will know this, and our currency’s credit will be ruined. If it can’t be exchanged, it’s better not to stipulate the silver content at all.”

“You’re having a Great Leap Forward,” Yi Fan said, tapping the table. “Never mind whether your so-called credit currency can be realized, first tell me, how big is Lingao’s economy? You have to know that without knowing the total economic scale, you can’t even talk about the total amount of currency issuance. You can’t just print money according to demand, otherwise we’ll be the second coming of Chiang Kai-shek.”

“Isn’t the accounting of Lingao’s economic scale your responsibility?” Chen Ce kicked the ball right back. “The Ministry of Finance has already issued a document requiring all departments to establish a primary financial system. This is something that native accounting staff can quickly learn with a little training.”

“Difficult!” Yi Fan said just this one word. “Very difficult. I don’t even have anyone to do auditing right now. Talking about this is just a fantasy.” He took a sip of tea. “The accounting alone is enough to make you faint.”

“Let’s talk about that later. I’ll continue with my monetary policy,” Chen Ce said. “Simply put, we can currently imitate the monetary system of the Celestial Empire. The circulation of precious metals is prohibited within the territory. Not only foreign merchants, but all commercial activities within the controlled area will be switched to circulation vouchers. Without circulation vouchers, no one can buy anything. By withdrawing and exchanging precious metals, we will gradually consolidate all precious metals in the controlled area into the hands of the transmigrator group, to be held as foreign exchange reserves and used. The paper currency will be pegged to silver at a managed fixed exchange rate. This is not the same as a silver standard. The exchange rate between silver and circulation vouchers is only meaningful in trade.”

“I understand what you mean,” Yi Fan said. “To sum it up: all transactions within the transmigrator group’s controlled area will use circulation vouchers. Small foreign merchants will exchange for circulation vouchers at designated banks to purchase Lingao products. All major trade transactions will be priced in circulation vouchers but settled in a currency acceptable to the other party, with a special agency responsible for this. Foreign trade enterprises within the transmigrator group’s controlled area will conduct foreign trade through designated banks, priced in circulation vouchers. The circulation voucher will no longer be based solely on a grain standard but will be pegged to a basket of basic agricultural and industrial products. The circulation voucher will have a designated exchange rate with silver.”

“Roughly so,” Chen Ce said. “The key to this policy is to implement a compulsory settlement and sale of foreign exchange. Under the influence of Lingao’s infrastructure, technology, and policies, a batch of domestic joint ventures and wholly-owned enterprises will inevitably emerge. Their export earnings in silver and gold must be settled at Delong Bank. For their domestic consumption, production expansion, and recruitment of labor, circulation vouchers will be sufficient. Their import needs for silver will be sold by Delong only after review and approval. Of course, as circulation vouchers flow out, a certain amount of daily circulation will also occur in places like Guangzhou and Leizhou. The difference from deposit slips is that the circulation vouchers in Li Luoyou’s hands can be used to purchase certain consumer services and products from Lingao-controlled enterprises in Guangzhou. But this amount will be very limited in the near future and not very significant.”

“Your thing is still a disguised silver standard. It’s just that you are now using compulsory exchange settlement to control the financial risks within the Lingao economy. You need to be clear about one thing: industrial products are priced in currency, not the other way around. For Lingao, the largest and most important imported products now are coal, iron, and grain. After the production capacity of Hongji and Tiandu normalizes, the most important input will be people. Slaves for the mines, and people from the mainland for enterprises and agriculture. As long as we don’t fall out with the Ming, how much will refugees cost? In the end, it’s still a matter of grain. And the possibility of self-sufficiency in grain is also high. In the long run, Lingao is bound to have a trade surplus. The only thing to consider will be inflation. This closed economy can only avoid being killed by inflation by exporting capital and technology.”

“That’s a problem for the future,” Chen Ce said. “The fact at this stage is that we have a deficit. And this deficit will continue to exist for a considerable period of time.”

“Your system will still rely on continuously increasing silver reserves in the early stages. Otherwise, the risk is still very high,” Ji An noted in his notebook. “The problem is that our recent export growth is not very ideal.”

“After the first five-year plan, when the light industry capacity comes online, trade will definitely be in surplus. I’m not very worried about that.”

“Alright, it still comes down to one fundamental question: how big is Lingao’s economy? The scale of banknote issuance cannot be based on silver reserves, but on the size of Lingao’s economy.”

“Doesn’t that still depend on your hard work?” Chen Ce said with a smile.

“Alright, alright. If your policy passes, I’ll have to talk to Cheng Dong and expand the accounting department. It would be best to create a statistics bureau and enforce a unified accounting system,” he thought for a moment. “The currency will be pegged solely to silver. Gold coins will be traded at market prices.”

“Right.”

“Let’s do it this way for now. In the long run, silver is not suitable as a currency,” Yi Fan stretched. “There’s still too much silver. A gold standard would be better—or a stainless steel standard.”

Wu Di said, “Speaking of a stainless steel standard, there’s one more thing. No matter what plan the Executive Committee finally implements, I strongly demand the implementation of a unified legal tender in Lingao, abolishing the current circulation of various kinds of silver and copper coins. The circulation in the market is too chaotic now. Silver, copper coins, circulation vouchers, and the fineness of silver and copper coins are different. It’s too difficult for the bank to make conversions.”

“This matter, Dugong has talked about it many times, but he was coming from the perspective of the industrial sector. The main thing is to recycle the copper coins—there is very little silver in daily circulation in Lingao. Copper coins are the main thing. But even the lowest quality copper coins contain a large amount of lead. Wouldn’t it be better to use this as metal?”

“If you ask me, it would be better to just ship them to Southeast Asia. This kind of low-quality small coin is the most widely used currency in Southeast Asia. Some sea merchants specialize in shipping this to Manila.”

“The reality is that what we need most are subsidiary coins. What is most needed in circulation is also small-denomination subsidiary coins,” Wu Di said. “Small-denomination subsidiary coins are best minted from metal. The 1-fen, 5-fen, and 10-fen banknotes we are using now are not ideal. The common people are not used to using them, and copper coins are still widely used for small payments.”

The few of them pondered for a moment. It would be best to continue minting copper coins, but this was a strategic material, with high demand from both the military and electrical industries. Moreover, copper’s self-lubricating properties made it even more useful in the transmigrators’ industry. Lingao’s own copper reserves were small, and the Planning Committee would definitely not agree. They couldn’t issue iron coins either—this had a very low status in the minds of the people. And the eras when iron coins were issued were not good times; it was a currency with a very bad reputation.

“How about issuing steel coins? Just like the renminbi. Shiny, looks like silver. We can call it ‘mithril’!” a plan came to Wu Di’s mind.

“The renminbi is made of stainless steel. Coins stamped from ordinary steel look okay at first, but they will rust after a while. The common people will know it’s iron at a glance, and you’ll get a reputation for counterfeiting. Not advisable.”

“What do you need to make stainless steel?” Yi Fan had long had his eyes on stainless steel coins. If they had this “mithril,” why bother with all this nonsense? They could just use a stainless steel standard directly. Anyway, only the transmigrator group could make stainless steel, and there wasn’t a single gram of it in this era. The issuance and use would not need to consider external factors. And “mithril” looked good, was not light, and if done well, it might even replace silver!

“We need nickel.”

“Do we have this stuff?”

“As for non-ferrous metals, the Holy Ship basically brought a small reserve of everything—including a lot of stainless steel. But the people in the Executive Committee would never take it out to use for minting coins. If it were up to those engineers, they would rather use silver in the industrial sector.”

“As long as there are suitable substitutes, I don’t object,” Yi Fan said. “Can we import nickel?”

“We have to import it from Southeast Asia, and we might even have to open our own mines—in this era, you have to do everything yourself. It seems there’s some in Guangdong. But making stainless steel is probably not that simple.”

“We can report it. Let the industrial department solve it,” Yi Fan said. “By the way, we can also make aluminum coins. In the past, aluminum products were very valuable, comparable to silver. As long as we control the output, it can also play the role of mithril.”

“Aluminum coins are too light, and their color doesn’t look good after a long time. I quite like the concept of stainless steel,” Wu Di said. “If I had known, I should have brought more one-yuan and one-jiao renminbi coins. We could have just issued them directly. The new version of the coins doesn’t have the country’s name, so we wouldn’t even need to explain.”

“Too heavy. It would have been better to bring more stainless steel than that. At least you could define the denomination and size yourself.”

“Alright. We’ll submit two plans. The subsidiary coin issue must be resolved.”

Everyone reached a basic consensus on this issue. The next step was to decide on various details in a work meeting and formulate a plan. This plan would be reported to the Executive Committee for discussion, and after passing, it would be sent to the Standing Committee of the Yuanlaoyuan for approval. The latter was basically just a formality.

“On the Executive Committee’s side, Ma Dugong’s attitude is hard to say,” Chen Ce said to Yi Fan. “Dugong is not very keen on your proposal for a comprehensive accounting of the economic system.”