Financing the navy

Hi Graydon,

You commented that Laghorne forbade certain financial practices:

"Charis can't use the real world solutions--fractional banking...etc."

Is there textev for this, a pearl I've missed, a post from RFC?? If so, Id be interested to see it....

Don

n7axw wrote:Hi Graydon,

You commented that Laghorne forbade certain financial practices:

"Charis can't use the real world solutions--fractional banking...etc."

Is there textev for this, a pearl I've missed, a post from RFC?? If so, Id be interested to see it....

Hi Don --

It's a direct consequence of the Writ's strict and narrow definition of money. We don't see textev that Langhorne forbade these things in specific detail. (Which would be a lot like forbidding people to build steam engines by precisely describing building one and saying "never do that", so I'd be surprised if there are specific prohibitions.)

The Writ sets out coinage standards and forbids adulteration of metallic content; they've got a divinely mandated hard gold standard with the only licit form of money being coined metal. (As opposed to a soft gold standard, where there's more gold-backed money in circulation than gold to back it, which is OK (or not!) because everybody knows the real backing is the economy. Duchairn is in the position of being compelled to move to a soft gold standard under the economic pressures of the war.)

This kind of hard-money-is-the-only-money setup is right back there in historical financial development with something like the Mortgage of Normandy where Red William sent actual barrels of silver pennies to Robert Curthose. (And eventually got Normandy when brother Robert's crusade wasn't profitable.) It's the sort of thing which secures the power of large landowners with reliable tax bases because under such a system that's about the only reliable way to get a lot of money.

If you've got that hard money gold standard with a divine mandate, fractional reserve banking -- where the bank creates money by making the loan -- is a heresy.

Fractional reserve banking is the observation that, as a bank, almost all your loans are good; you only need bank reserves to cover your default rate, not all your loans. That way you can make many more loans and the economy can expand much faster, which is a benefit to everybody. The money you create in making the loan gets a corresponding amount of debt created next to it at the same time, like matter and antimatter; as the debt gets paid off, both the money and the debt are annihilated, but the interest payments aren't, and that money enters the economy. (like the energy generated by the matter-antimatter reactor. If you've got a hard gold standard you can't do that, because it forces you to have actual gold to make the loan in the first place. (and of course if you get greedy or are badly surprised fractional reserve banking goes bad, which is where bank regulation and a central bank start getting involved.)

If you can't do fractional reserve banking, you can't do any of the other stuff -- fiat currency, central bank lender-of-last-resort stability mechanisms, trading government debt to set interest rates appropriate to the market perception of risk, etc. -- we do to have a global economy much, much larger than the supply of gold. All that "modern" stuff got invented by the UK as a means of financing the Napoleonic Wars. (and the concomitant beginning of industrialization.) This is just what Charis needs to do, and can't, per the Writ telling them the only allowable money is coined gold. Langhorne (or someone on staff) certainly intended that. (I'm pretty sure silver circulates but doesn't have a fixed exchange rate with gold. Can't remember any specifics.)

You can see in the text various attempts to work around the strict definition of money a bit to apply capital to projects, but promissory notes and such don't have the status of money. Even temple notes don't have the status of money. (Money, by definition, doesn't trade at a discount in its own currency, which is what the Temple notes are doing. You don't get people voluntarily taking "I'll give you ninety bucks for that hundred dollar bill" offers about actual money; you do about the future value of promissory notes, because the note has risk.(Just being in the future is a risk.))

Because the author is on their side, Charis has Silverlode Island. (It's not without historical precedent; the UK got the Transvaal, and the US got the California Gold Strike during the Civil War.) They're going to be able to expand their economy enough while staying on the Writ's restrictions about what money really is.

Graydon wrote:

n7axw wrote:Hi Graydon,

You commented that Laghorne forbade certain financial practices:

"Charis can't use the real world solutions--fractional banking...etc."

Is there textev for this, a pearl I've missed, a post from RFC?? If so, Id be interested to see it....

Hi Don --

It's a direct consequence of the Writ's strict and narrow definition of money. We don't see textev that Langhorne forbade these things in specific detail. (Which would be a lot like forbidding people to build steam engines by precisely describing building one and saying "never do that", so I'd be surprised if there are specific prohibitions.)

The Writ sets out coinage standards and forbids adulteration of metallic content; they've got a divinely mandated hard gold standard with the only licit form of money being coined metal. (As opposed to a soft gold standard, where there's more gold-backed money in circulation than gold to back it, which is OK (or not!) because everybody knows the real backing is the economy. Duchairn is in the position of being compelled to move to a soft gold standard under the economic pressures of the war.)

This kind of hard-money-is-the-only-money setup is right back there in historical financial development with something like the Mortgage of Normandy where Red William sent actual barrels of silver pennies to Robert Curthose. (And eventually got Normandy when brother Robert's crusade wasn't profitable.) It's the sort of thing which secures the power of large landowners with reliable tax bases because under such a system that's about the only reliable way to get a lot of money.

If you've got that hard money gold standard with a divine mandate, fractional reserve banking -- where the bank creates money by making the loan -- is a heresy.

Fractional reserve banking is the observation that, as a bank, almost all your loans are good; you only need bank reserves to cover your default rate, not all your loans. That way you can make many more loans and the economy can expand much faster, which is a benefit to everybody. The money you create in making the loan gets a corresponding amount of debt created next to it at the same time, like matter and antimatter; as the debt gets paid off, both the money and the debt are annihilated, but the interest payments aren't, and that money enters the economy. (like the energy generated by the matter-antimatter reactor. If you've got a hard gold standard you can't do that, because it forces you to have actual gold to make the loan in the first place. (and of course if you get greedy or are badly surprised fractional reserve banking goes bad, which is where bank regulation and a central bank start getting involved.)

If you can't do fractional reserve banking, you can't do any of the other stuff -- fiat currency, central bank lender-of-last-resort stability mechanisms, trading government debt to set interest rates appropriate to the market perception of risk, etc. -- we do to have a global economy much, much larger than the supply of gold. All that "modern" stuff got invented by the UK as a means of financing the Napoleonic Wars. (and the concomitant beginning of industrialization.) This is just what Charis needs to do, and can't, per the Writ telling them the only allowable money is coined gold. Langhorne (or someone on staff) certainly intended that. (I'm pretty sure silver circulates but doesn't have a fixed exchange rate with gold. Can't remember any specifics.)

You can see in the text various attempts to work around the strict definition of money a bit to apply capital to projects, but promissory notes and such don't have the status of money. Even temple notes don't have the status of money. (Money, by definition, doesn't trade at a discount in its own currency, which is what the Temple notes are doing. You don't get people voluntarily taking "I'll give you ninety bucks for that hundred dollar bill" offers about actual money; you do about the future value of promissory notes, because the note has risk.(Just being in the future is a risk.))

Because the author is on their side, Charis has Silverlode Island. (It's not without historical precedent; the UK got the Transvaal, and the US got the California Gold Strike during the Civil War.) They're going to be able to expand their economy enough while staying on the Writ's restrictions about what money really is.

Thanks for the nice, informative post. I bet that everyone, including the church has been looking for ways to cheat on that, though.

Don

n7axw wrote:Thanks for the nice, informative post. I bet that everyone, including the church has been looking for ways to cheat on that, though.

You're welcome!

And, yes, because strict gold currency doesn't quite work with international trade. Some place with a thriving economy but no gold mines can have a problem selling enough wool or coal or whatever directly enough (meaning to relatively close markets, so the transport costs don't eat their profits) to get enough gold to buy what they want, and other places with gold mines tend to cripple their own economy by over-producing and deflating. (So the future is more expensive than the present.) Then there's some place like Charis, which is selling manufactured goods significantly for gold; this would tend to make Charis a gold sink, with more gold coming in than going out. I strongly suspect the Church used to use tithes to try to balance all this out; the miners of Glacierheart can pay their tithes in coal, but Charis and Desnair have to pay in gold, sorts of thing, to make sure all the gold doesn't slosh into Charis or Harchong (you want steel thistle silk? pay gold. What does the Harchongese aristo want that they can't get at home? hardly anything...) and stay there.

Right now, though, the Temple is headed at a situation where they're forcing people to buy their commercial paper above market rates and the Empire of Charis is paying in gold coins Langhorne would approve of. It's not going to help Temple legitimacy at all.

Graydon wrote:

n7axw wrote:Thanks for the nice, informative post. I bet that everyone, including the church has been looking for ways to cheat on that, though.

You're welcome!

And, yes, because strict gold currency doesn't quite work with international trade. Some place with a thriving economy but no gold mines can have a problem selling enough wool or coal or whatever directly enough (meaning to relatively close markets, so the transport costs don't eat their profits) to get enough gold to buy what they want, and other places with gold mines tend to cripple their own economy by over-producing and deflating. (So the future is more expensive than the present.) Then there's some place like Charis, which is selling manufactured goods significantly for gold; this would tend to make Charis a gold sink, with more gold coming in than going out. I strongly suspect the Church used to use tithes to try to balance all this out; the miners of Glacierheart can pay their tithes in coal, but Charis and Desnair have to pay in gold, sorts of thing, to make sure all the gold doesn't slosh into Charis or Harchong (you want steel thistle silk? pay gold. What does the Harchongese aristo want that they can't get at home? hardly anything...) and stay there.

Right now, though, the Temple is headed at a situation where they're forcing people to buy their commercial paper above market rates and the Empire of Charis is paying in gold coins Langhorne would approve of. It's not going to help Temple legitimacy at all.

If gold is easy to come by, then it's value decreases.
If lead was scarce on Safehold, we might me looking at lead marks vs. gold doubloons.

Graydon wrote:

n7axw wrote:Hi Graydon,

You commented that Laghorne forbade certain financial practices:

"Charis can't use the real world solutions--fractional banking...etc."

Is there textev for this, a pearl I've missed, a post from RFC?? If so, Id be interested to see it....

Hi Don --

It's a direct consequence of the Writ's strict and narrow definition of money. We don't see textev that Langhorne forbade these things in specific detail. (Which would be a lot like forbidding people to build steam engines by precisely describing building one and saying "never do that", so I'd be surprised if there are specific prohibitions.)

The Writ sets out coinage standards and forbids adulteration of metallic content; they've got a divinely mandated hard gold standard with the only licit form of money being coined metal. (As opposed to a soft gold standard, where there's more gold-backed money in circulation than gold to back it, which is OK (or not!) because everybody knows the real backing is the economy. Duchairn is in the position of being compelled to move to a soft gold standard under the economic pressures of the war.)

This kind of hard-money-is-the-only-money setup is right back there in historical financial development with something like the Mortgage of Normandy where Red William sent actual barrels of silver pennies to Robert Curthose. (And eventually got Normandy when brother Robert's crusade wasn't profitable.) It's the sort of thing which secures the power of large landowners with reliable tax bases because under such a system that's about the only reliable way to get a lot of money.

If you've got that hard money gold standard with a divine mandate, fractional reserve banking -- where the bank creates money by making the loan -- is a heresy.

Fractional reserve banking is the observation that, as a bank, almost all your loans are good; you only need bank reserves to cover your default rate, not all your loans. That way you can make many more loans and the economy can expand much faster, which is a benefit to everybody. The money you create in making the loan gets a corresponding amount of debt created next to it at the same time, like matter and antimatter; as the debt gets paid off, both the money and the debt are annihilated, but the interest payments aren't, and that money enters the economy. (like the energy generated by the matter-antimatter reactor. If you've got a hard gold standard you can't do that, because it forces you to have actual gold to make the loan in the first place. (and of course if you get greedy or are badly surprised fractional reserve banking goes bad, which is where bank regulation and a central bank start getting involved.)

If you can't do fractional reserve banking, you can't do any of the other stuff -- fiat currency, central bank lender-of-last-resort stability mechanisms, trading government debt to set interest rates appropriate to the market perception of risk, etc. -- we do to have a global economy much, much larger than the supply of gold. All that "modern" stuff got invented by the UK as a means of financing the Napoleonic Wars. (and the concomitant beginning of industrialization.) This is just what Charis needs to do, and can't, per the Writ telling them the only allowable money is coined gold. Langhorne (or someone on staff) certainly intended that. (I'm pretty sure silver circulates but doesn't have a fixed exchange rate with gold. Can't remember any specifics.)

You can see in the text various attempts to work around the strict definition of money a bit to apply capital to projects, but promissory notes and such don't have the status of money. Even temple notes don't have the status of money. (Money, by definition, doesn't trade at a discount in its own currency, which is what the Temple notes are doing. You don't get people voluntarily taking "I'll give you ninety bucks for that hundred dollar bill" offers about actual money; you do about the future value of promissory notes, because the note has risk.(Just being in the future is a risk.))

Because the author is on their side, Charis has Silverlode Island. (It's not without historical precedent; the UK got the Transvaal, and the US got the California Gold Strike during the Civil War.) They're going to be able to expand their economy enough while staying on the Writ's restrictions about what money really is.

Really great summary. A couple of minor nits - the California Gold Strike was in 1849, 12 years before the ACW. What helped by the Comstock Lode Silver strike in Nevada in 1859, which was just in time for the ACW. Other than that, a masterful summary.

And are you sure that Langhorne wouldn't have called for the free coinage of silver at 16:1?

Graydon,

The ICA gold production backed promissory notes are the key to a variant of fractional reserve banking. Gresham's Law suggests that given the option of keeping gold or these gold backed promissory notes, informed investors will keep the promissory notes. If the House of Ahrmahk guarantees the present value of the note in gold upon demand, there should be little problem making loans denominated in those notes. Heck, many would borrow those notes and use gold to fund operations first and those notes last.

Once these notes are accepted as currency, deposits of these notes can be lent out or kept to cover losses. Nothing in text suggests that a bank/lender must hold 100% of the value of funds lent out in reserve. That would mean that a bank might only lend 50% of its assets at any time. Considering that most Safehold banks lend out the owners' assets, why couldn't they loan out all their wealth if they choose? I am thinking of the House of Qwyntyn.

A deposit bank as we know it would have to contract with depositors for the use of those deposits. The terms would be like any other loan regarding risk and any recourse available to depositors. I see no reason that a bank couldn't state how much reserve it will keep and publish its default/distressed rates. In essence make those terms standard for all depositors in that bank. Since Langhorne's laws don't prohibit lending/borrowing, how can it prohibit deposits that fund lending/borrowing? Depositing funds in an institution is the same thing as lending fund to that institution.

Bottom line is that those notes will find their way into banks as deposits or reserves. Since gold doesn't earn interest, there is an incentive to lend it out. So long as there is enough reserves and capital to cover a reasonable amount of losses, deposits in banks will be seen as a very low risk investment. The reputation of the institution will determine just how attractive depositing funds will be as an investment.

TN4994 wrote:

Graydon wrote:and other places with gold mines tend to cripple their own economy by over-producing and deflating. (So the future is more expensive than the present.)

If gold is easy to come by, then it's value decreases.
If lead was scarce on Safehold, we might me looking at lead marks vs. gold doubloons.

If you're freeling trading gold as bullion, yes. You should inflate because you have lots of gold. (Post-Columbus Spain.)

So far as I can tell, though, all of Safehold is nominally on a single universal currency as defined in the Writ and used to pay tithes. Given that, Desnair's local gold has a sort of artificial price peg that makes it more valuable than it "ought" to be for the local economy, and thus deflationary. (Money gets more valuable with time.) That's getting into the non-obvious counter-intuitive end of things, though, and I could have that wrong.

Graydon wrote:

Graydon wrote:and other places with gold mines tend to cripple their own economy by over-producing and deflating. (So the future is more expensive than the present.)

TN4994 wrote:If gold is easy to come by, then it's value decreases.
If lead was scarce on Safehold, we might me looking at lead marks vs. gold doubloons.

If you're freeling trading gold as bullion, yes. You should inflate because you have lots of gold. (Post-Columbus Spain.)

So far as I can tell, though, all of Safehold is nominally on a single universal currency as defined in the Writ and used to pay tithes. Given that, Desnair's local gold has a sort of artificial price peg that makes it more valuable than it "ought" to be for the local economy, and thus deflationary. (Money gets more valuable with time.) That's getting into the non-obvious counter-intuitive end of things, though, and I could have that wrong.

There is textev that not all of the currencies are the same. At one point Duchairn says the the Temple mark was once worth 14% more than a Charisan mark, but that it was now worth 11% less. This tends to indicate that the relative value of currencies fluctuates between them.