Chapter 589 - New Monetary Policy

Yi Fan shook his head. "I cannot agree with his line of reasoning. First, the pound and the dollar were built upon the foundation that Britain and America were, above all, manufacturing powerhouses. Our current production capacity has high efficiency but minuscule total volume. Most of our limited capacity and output must be reinvested in self-upgrading. In the short term, we cannot even effectively meet the industrial consumer goods demand of the Chinese mainland—so relying solely on Lingao's exports to support large-scale credit paper is simply unrealistic. As for using force to compel currency circulation, that's even more impossible."

"I don't approve either. Director Ma's thinking remains mired in that 'planned economy cures all ills' mentality," Wu Di added. "He simply refuses to acknowledge the role of financial instruments. It's nothing more than the model from decades ago, when the entire country had only the People's Bank serving as both central bank and retail bank—until eventually the People's Bank retreated to the second line and spawned the four specialized banks to take over."

"Let's set that aside for now and discuss the new monetary policy," Chen Ce interjected. "We are, after all, a planned economy ourselves—and more rigorously planned than even Soviet Revisionism."

"Monetary policy is a 'monthly cycle' around here—not a month passes without someone spouting nonsense about it on the BBS. Everyone fancies themselves an economist," Yi Fan remarked. "I suspect the Executive Committee already has a headache the size of a bucket over this issue. First, they know there are problems with grain circulation notes. Second, they have no idea what to replace them with. Third—and this is fundamental—there are simply too many opinions."

Wu Di spoke up: "From our perspective, basically copying the silver standard system is the most operationally stable approach right now. Easy to implement, and commoners can accept it."

The current system was clearly an unsustainable stopgap. With that understanding, people in the fiscal and financial department had held multiple working meetings on the matter—yet disagreements persisted even now.

"We are a service department," Chen Ce said. "We cannot act against the Executive Committee on this. The production and sales departments are the driving force; we merely coordinate with their work to solve problems arising in the grand enterprise of transmigration—forecasting five to ten years ahead at most."

"Fine. Enlighten us with your plan," someone prompted. Everyone present knew Chen Ce had actually been commissioned by the Executive Committee to draft the new monetary system. His remarks were setting the tone.

"Current theories are bewilderingly varied, but they essentially distill into two schools of thought," Chen Ce began. "One advocates a silver standard; the other champions pure credit currency. Both have merits. My personal view, given Lingao's present circumstances, is that we should implement a credit currency linked to silver."

"I feel the silver standard works quite well at this stage—convenient, intuitive, and its credit is guaranteed," Wu Di said. "Consider the use of Spanish Pillar Dollars in China: silver coins of only ninety percent fineness are actually more practical in circulation than scattered silver of ninety-two-and-a-half percent fineness, simply because they're beautifully minted and easy to value. In many transactions, a coin worth 0.72 taels can pass for a full tael! Minting itself generates profit. And we must consider foreign trade demand—without silver, we simply cannot purchase goods."

"Mechanized silver dollars," Yi Fan mused. "Once they circulate outward, they'll inevitably become hoarding objects for mainland landlords. Gresham's law—bad money drives out good. We must guard against this. China's silver 'black hole' earned that name for a reason."

"That's acceptable. Let them hoard. They'll always need to bring silver back to purchase goods in Lingao. As long as outflow and inflow roughly balance, we're fine. Given our development trajectory, we'll probably face a serious trade surplus with severe inflation in the future," Wu Di replied.

"Probably not that simple. What we need most are bulk commodities. Merchants selling bulk raw materials may not want to buy anything from us at all. They'll sail off directly with silver rather than purchasing our goods. Furthermore, what they take away will be standardized silver dollars, but what they bring might not be ninety-two-and-a-half percent pure. Everyone prefers to spend their worst currency."

"Exactly. For us, silver functions essentially as foreign exchange." Chen Ce tapped his pencil against his teacup. "And what about our circulation notes? They're really just RMB before the 1990s. The Executive Committee genuinely hopes circulation notes can circulate widely, but in practice this is impossible—at least for now. Despite various measures, the quantity retained in foreign merchants' hands remains limited. Circulation notes have no purchasing power outside Lingao. Foreign merchants will simply choose either to accept silver or to spend all their circulation notes before leaving."

"So you want to link the currency to silver?" Yi Fan immediately grasped his intent.

"Exactly. Denying the value of silver is wrong—at least wrong at this moment." He opened his notebook. "Let's examine where our problems actually lie.

"First: scarcity of raw materials. Except for steel, which will soon be self-sufficient, everything else relies almost entirely on imports. Second: export products rely almost entirely on indigenous distribution channels. Third: controlled population is far too small."

"This resembles early Britain quite closely!"

"Correct, but our burden is substantially heavier," Chen Ce replied. "Britain only needed a sufficient navy. We must simultaneously build and maintain a strong army. Army, navy, merchant fleet; constantly expanding administrative and technical teams; large-scale basic education—all require enormous investment. And our productivity? Unfortunately, the majority of industrial goods produced in Lingao must be devoted to infrastructure construction and capacity expansion, with only a small portion available for export. Maintaining balance of payments in the current account..."

Yi Fan coughed. Chen Ce realized he was veering into classified territory. "Everyone understands my meaning."

Yi Fan spoke: "Of course. In the foreseeable future, Lingao's industrial production capacity is insufficient to meet even East Asia's demand for industrial consumer goods. Therefore, exporting grain circulation notes is impossible—no one will recognize them. So there's really only one answer: copy history's method, temporarily promote paper money based on a silver standard. This is, after all, the only precious metal we can acquire in large quantities and that everyone recognizes."

"No! That's far too wasteful!" Chen Ce saw that his lengthy explanation had been summarily overridden by Yi Fan. "It's credit currency linked to silver exchange rates!" he insisted, pressing forward. "The existence of silver circulation within Lingao's domestic economic activities is itself a waste of resources!"

"Use silver dollar certificates," Wu Di suggested. "No actual silver dollars visible in the market—just stipulate that one dollar of paper money can be exchanged for one silver dollar. Alternatively, implement an incomplete silver standard: specify the silver content of banknotes but limit the amount exchangeable. That prevents a sudden run overwhelming our ability to pay out."

"If I had to choose between those two, I'd take the first. The second would only accelerate credit collapse given our low credibility. If notes cannot be exchanged for silver one hundred percent of the time, what's the point of specifying silver content? Imagine a major merchant arrives to exchange a large sum of circulation notes, and you tell him, 'Sorry, this exceeds the exchange limit. You'd better purchase goods instead.' Do you think he'll appreciate the nuances of an 'incomplete silver standard with restricted exchange'?" Chen Ce emphasized his point. "He won't. He'll understand only one thing: circulation notes can no longer be converted to silver. And then everyone who does business with us will know it—and our banknote credit is finished. If conversion isn't guaranteed, don't stipulate a silver content at all."

"You're making a Great Leap Forward." Yi Fan rapped his knuckles on the table. "Setting aside whether your so-called credit currency can actually be realized—first tell me: how large is Lingao's economic scale? You must understand that without knowing total economic scale, you cannot determine total currency issuance. Print money according to 'demand' and we'll be Chiang Kai-shek the Second."

"Isn't accounting for Lingao's economic scale your responsibility?" Chen Ce kicked the ball right back. "The Ministry of Finance has issued a document requiring all departments to establish basic financial systems. Train indigenous accounting personnel a bit, and they can pick this up fairly quickly."

"Difficult." Yi Fan uttered the single word. "Very difficult. I have no one available for auditing right now; talking about this is pure fantasy." He sipped his tea. "Just accounting alone is enough to make your head spin."

"We'll discuss that later. Let me continue outlining my approach." Chen Ce pressed on with his monetary policy vision. "Simply put, we can emulate the Celestial Dynasty's monetary system. Prohibit precious metal circulation within our territory—not just for foreign merchants, but for all commercial activities within the controlled area. Everything must switch to circulation notes. Except with circulation notes, no one can purchase anything. Through withdrawing precious metals and through redemption, we gradually consolidate all precious metals in the controlled area into Transmigration Group hands—to be reserved and used as foreign exchange. Paper money is 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 notes has meaning only in the context of trade."

"I understand your meaning." Yi Fan summarized: "Use circulation notes exclusively within the Transmigration Group's controlled area. Foreign small merchants exchange for circulation notes through designated banks to purchase Lingao products. Bulk trade transactions are all priced in circulation notes but settled in currencies acceptable to the counterparty, through specialized agencies. Foreign trade enterprises within the Transmigration Group's controlled area conduct external transactions through designated banks, priced in circulation notes. Circulation notes will no longer be anchored solely to the grain standard but pegged to a basket of basic agro-industrial products. Circulation notes will have a designated exchange rate with silver."

"Roughly so," Chen Ce confirmed. "The key to this policy is mandatory settlement and sale of foreign exchange. Under Lingao's infrastructure, technology, and policy influence, a cohort of domestic joint ventures and wholly-owned enterprises will inevitably emerge. The silver and gold they earn from exports must be mandatorily settled at Delung Bank. For their domestic consumption, production expansion, and labor recruitment, circulation notes suffice. Silver needed for their imports is sold only after Delung approves. Of course, as circulation notes flow outward, some degree of daily commercial circulation will occur at overseas locations like Guangzhou and Leizhou. Unlike deposit slips, circulation notes in Li Luoyou's hands can purchase certain consumer services and products from Lingao-controlled enterprises in Guangzhou. But this volume will remain quite limited in the near future—of little significance."

"Your proposal is essentially still a disguised silver standard. You're merely using mandatory foreign exchange settlement to contain financial risks within the Lingao economy." Yi Fan pointed at a crucial issue. "You must be clear on one point: industrial products are priced in currency—currency is not priced in industrial products. For Lingao, the biggest and most critical imports right now are coal, iron, and grain. Once Hongji and Tiandu production capacities normalize, the most important import becomes people. Mines use slave labor; enterprises and agriculture use people imported from the mainland. As long as we don't fall out with Great Ming, how much can refugees possibly cost? Ultimately it's a grain problem. And the likelihood of achieving grain self-sufficiency is high. Lingao will inevitably run a trade surplus in the long run. The only concern will be managing inflation. This closed economy can only prevent itself from being destroyed by inflation through capital export and technology diffusion."

"That's a problem to address later," Chen Ce replied. "The present fact is that we have a deficit. And this deficit will persist for quite some time."

"Your system still relies on steadily increasing silver reserves in the early phase. Otherwise, the risk remains substantial." Ji An had been scribbling in his notebook at length. "The problem is, our export growth hasn't been very impressive lately."

"After the First Five-Year Plan, when light industry capacity comes online, trade will certainly swing into surplus. I'm not overly worried about that."

"Fine. Ultimately it comes down to one fundamental question: what is Lingao's economic scale? The scale of banknote issuance cannot be calculated based on silver reserves alone—it must be based on Lingao's economic scale."

"And doesn't that still require your efforts?" Chen Ce said with a faint smile.

"Fine, fine. If your policy passes, I'll need to talk to Cheng Dong. The accounting office must expand. Best to create a Statistics Bureau as well—enforce a unified financial accounting system." Yi Fan mulled it over. "Currency will be singly pegged to silver. Gold coins follow market prices."

"Correct."

"Let's proceed this way for now. In the long run, silver is unsuitable as currency." Yi Fan stretched. "Silver's volume is simply too large. Ideally, a gold standard—or perhaps a stainless steel standard—would be better."

Wu Di spoke up: "Speaking of a stainless steel standard, there's another matter. Regardless of whatever plan the Executive Committee ultimately adopts, I strongly urge that we enforce a unified legal tender in Lingao and abolish the circulation of various silver and copper coins currently in use. Market circulation is far too chaotic right now—silver coins, copper cash, circulation notes—all jumbled together. Copper cash and silver fineness vary wildly; bank conversion is a nightmare."

"Director Ma has raised this multiple times, though he approaches it from industrial needs. Primarily to reclaim copper cash—there's actually little silver in Lingao's daily circulation. Copper cash is the bulk. But even the most degraded copper cash contains substantial lead. Isn't it better to spend it as currency and use it as metal?" someone observed.

"If you ask me, we might as well ship it directly to Southeast Asia. That kind of inferior small cash is the most widely used currency in Southeast Asia. Some maritime merchants make a living specifically trafficking these coins to Manila."

"The reality is that we need subsidiary currency most urgently; the circulation system most needs small-denomination subsidiary currency." Wu Di continued. "Subsidiary currency is best minted in metal. The one-fen, five-fen, ten-fen paper notes we're using now are not ideal. Commoners aren't accustomed to them. Copper cash still circulates heavily for small payments."

Everyone pondered this. Continuing to mint copper cash would be optimal, but copper was a strategic material in massive demand for both military industry and the power sector. And copper's self-lubricating properties made it invaluable in countless industrial applications. Lingao's copper reserves were already low; the Planning Agency would never agree. Nor could they issue iron coins—the psychological status of iron coins was simply too degraded. Historically, eras that issued iron coins were generally troubled times; iron currency carried a reputation for worthlessness.

"What about issuing steel coins? Like modern RMB. Shiny, resembles silver. We could call it 'Mithril'!" Wu Di proposed with enthusiasm.

"Modern RMB uses stainless steel. Ordinary steel stamped coins look fine initially, but they rust within weeks. Commoners will recognize it as iron at a glance—you'll earn a reputation for counterfeiting. Inadvisable."

"What's required to make stainless steel?" Yi Fan had long harbored designs on stainless steel coinage. If they had this "Mithril," why waste time debating? They could simply adopt a stainless steel standard. Only the Transmigration Group could produce stainless steel; not a single gram of the metal existed in this spacetime. Issuance and usage wouldn't need to account for external factors. And "Mithril" was attractive, substantial in weight—replacing silver might actually be achievable!

"Requires nickel."

"Do we have any?"

"The Holy Ship brought small reserves of virtually every non-ferrous metal—including a fair quantity of stainless steel. But the Executive Committee types will never release it for minting. According to those engineers' plans, even silver ought to be diverted to industrial use."

"As long as a suitable substitute exists, I have no objection." Yi Fan said. "Can nickel be imported?"

"Would have to import from Southeast Asia—might even have to mine it ourselves. These days everything must be done ourselves. Apparently Guangdong has deposits as well. But producing stainless steel is probably more complicated than we imagine."

"We can submit a report upward. Let the industrial department sort it out." Yi Fan said. "Oh—we could also do aluminum coins. Aluminum products were once tremendously valuable, priced comparably to silver. As long as we control output, it could serve as Mithril."

"Aluminum coins are too light, and they don't age gracefully. I rather like the stainless steel concept." Wu Di said. "If only we'd known, we should have brought more one-yuan and one-jiao RMB. Issue and circulate them directly. The new coins don't bear country names—no explanation needed."

"Far too heavy. Rather than haul that weight, better to bring more stainless steel—at least then you can define denomination and size yourself."

"Agreed. We'll submit two proposals. The subsidiary currency problem must be solved."

Everyone reached basic consensus on the issue. The next step was to finalize various details in working meetings and formulate a comprehensive proposal. This proposal would be submitted to the Executive Committee for discussion; once passed, it would go to the Senate Standing Committee for approval. The latter step was essentially a formality.

"On the Executive Committee side, Director Ma's attitude remains unpredictable." Chen Ce addressed Yi Fan. "He's quite indifferent to the comprehensive economic accounting system you've proposed."

(End of Chapter)