Imperial Currency

So, some thoughts to answer a comment I received a while back on a Trope-a-Day:

Hmm, so the Libertarian Spess Elves have a fiat currency. That’s interesting to learn and I’m curious to find out some more about how that came about down the line.

Well, first, it’s not like commodity currencies didn’t exist – the Imperial Charter is very specific in that while it requires the Empire to provide a currency, it doesn’t prevent anyone else who wants to from doing the same thing – including the classic precious metal currencies, the gAu, gAg, and gPt (grain gold, grain silver, grain platinum). But… well, look, as of 2009, 165,000 tonnes of gold had been mined in the whole of human history. Their numbers were similar in the late pre-space era.

So when asteroid miners started going out and rendering down space rocks and dumping gold, silver, and platinum-group metals onto the market in kiloton lots, even after their overheads – which were substantial – the effect on the price of precious metals was… salutary. On the downside.

And when Atalant Materials, ICC, invented the automated smeltership and upped the ante to megaton lots, the second crash pretty much put an end to the preciousness of precious metals. Gold became worth about as much as iron used to, and since it’s still pretty and unreactive, is used for an astonishing range of relatively cheap applications, like casings and cloth, which is why the Empire looks so… shiny. (As for iron, it’s so much of a glut on the market that it’s essentially just-haul-the-damn-stuff-away free. There are gigatonnes of it floating around in far orbit stockpiles as a byproduct of extracting more interesting metals.)

The gAu, gAg, and gPt are still around, but worth practically nothing in real money; and those people who didn’t divest them quickly enough when the space-mining revolution came around learned a really harsh lesson in not keeping up with the markets. The effects, incidentally, of applying this de facto hyperinflation across the entire economy, had they been using the gAu as the sole currency, are left as an exercise for the appalled reader.

Now, of course, this isn’t one of the incidents that led up to them using a fiat currency, it’s just one of the most graphic examples why they should. But the actual reasons were pretty similar. The years between the overthrow of the korásan in the Old Empires region and the founding of the Empire were not, shall we say, known for their political and commercial stability, and commodity prices were correspondingly bouncy; and Alphas I knew perfectly well that by founding the Empire, and then by its remorseless dedication to progress, dammit, progress above most, he wasn’t planning to invite stability in to stay all that quickly.

So, he went looking at the functions of currency and what makes it work, and then set out to create an artificial currency that fulfilled the necessary criteria to work as a medium of exchange and store of value, and in particular, what a commodity couldn’t give people: namely, a constant value/purchasing power.

What it says on each esteyn coin, bill, and certificate is “By Our Imperial Word, One Esteyn” (or whatever the denomination happens to be). Most people leave it there, but were you to go to the Exchequer and ask, “Ah, what word exactly?”, what they would tell you is that the guarantee is that what Yesterday’s Esteyn would buy, Today’s Esteyn will buy, and what Today’s Esteyn bought, Tomorrow’s Esteyn will also buy; that is, that it’s a reliable store of value that doesn’t have an accidental or deliberate inflationary or deflationary trend to it.

The reality is, of course, a little more complicated. In theory, the way this works is that the Exchequer, or to be more specific, the Imperial Board of Money and Values, controls the money supply, and what they do is carefully adjust the money supply to match what the currency’s really backed by, which is to say, the productive capacity of the Imperial economy (or, rather, the esteyn-denominated economy, but that’s very close in practical terms). When production expands, prices of their carefully selected broad basket of commodities fall, and they mint enough money to keep the purchasing power of the esteyn constant, distributing this seigniorage – in modern times, where this is practicable – evenly through the entire economy in proportion to how much money various holders already have, in order to avoid distorting the market by having it all appear in one place. Should production contract, prices rise, and they requisition an appropriate amount of the government’s revenue and make it disappear.

In practice, of course, this is substantially more difficult because of technological innovation, new resource discoveries, etc., etc., ad nauseam, so it requires considerable juggling of the basket to ensure that such adjustments as they make to the money supply reflect secular productivity changes across the entire economy, and not one commodity, say, going way off the average because of, well, resource discoveries like the above space-mining example, or technological innovation in manufacturing (which should be reflected in price changes, because it’s not merely a consequence of an artificial supply constraint), or some such. And ultimately, of course, the basket ending up as a primarily energy/cycle index when nanofacturing, automation, and such, made the manufacturing cost of pretty much all material goods – “post-scarcity commodity goods” – fall right off the bottom of the chart.

But over the millennia, they’ve got pretty good at it.

Now, you may well ask, why isn’t this abused in much the same way that fiat currencies generally are in our timeline?

Well, firstly, there’s much less institutional power there. There’s no actual central bank, for one thing. The IBMV can create and destroy currency to adjust the money supply, and another part of the Exchequer does operate an interbank clearing system, but they don’t operate as a lender of last resort (there is no lender of last resort), no-one sets any sort of interest rates except for individual lenders at their own discretion, and so on and so forth.

Secondly, their governmental system is distinctly minarchical and largely immune to political pressures, and much more importantly, much more harshly designed to weed out idiots than any system on Earth has managed to be. Plus, given the local lifespans, people are used to thinking in time horizons of centuries or longer, which makes quick-fix interventions a lot less attractive.

And lastly, when Alphas I set the IBMV up, he deliberately designed it as a self-perpetuating oligarchy of – making use of the obsessive tendencies of his race – the kind of people who genuinely love money. Not making money, you understand, nor spending money, nor yet having money… but money. The principle that money stands for. And as such, universally despise the notion of using monetary policy to screw around with the economy, abhor anything that might devalue the instantiation of the principle they believe really hard in, and if ordered to do anything that might go against the Proper Way of Things, monetarily speaking, by anyone from the Senate through the Imperial Couple to the Golden God Itself, would order the Exchequer Guard to take up positions around Worth House and tell them to “come and bloody get it”.

And no-one’s dumb enough to even provoke that offer, much less take it up.