I've been toying around with the idea that the Empire in my flintlock fantasy setting is trying to make sure that the money used in all its territories is the same, as the use of localized currencies has resulted in some problems, especially in terms of counterfeiting. The new currency is largely paper bills. The empire wants to phase out all the old currencies with these new bills. My question is, how much of an effect would this have on inflation? The old paper bills and coins are going to become worthless as the new currency is phased into circulation, so the actual amount of cash isn't changing by that much. You exchange your local currency for an equal value of the new currency. My thinking is that the rate of inflation would not be greatly affected, but I'm not an expert on these things, so I wanted to be sure of that. So, am I right or not?
The operation will have no effect at all on inflation if done properly, ie. if the total amount of money does not change. This can be achieved by :
- replacing the old currency through exchange with the new one (but not the reverse). Usually a progressive operation over months or years.
- set the value of former currencies to zero. The value of a money is either related to its material (gold coins have at least the value of their metal), either built by the trust you have that the emitter will be able to garantee it (a bank, a state, a guild). "material value" is hard to deal with and implies devaluating the value of the material (putting large quantities on the market for nearly free), or magically turn it to something cheap, like gold into lead (expect strong reactions from money owners). "trust value" can be managed by political means.
Note that if done wrongly by simply adding new bills and coins, you will indeed inflate the money quantity and reduce its value.
You've asked a question that, technically, you could research on your own. But, to be fair, economics is a subject so complex that it's an oxymoron to describe it with a single, short word.
To begin, you're dealing with something that our real world had been experimenting with for (as I recall) 100-200 years before our flintlock era. You're dealing with fiat money, meaning the money, itself, has no intrinsic value (it's not made of gold, etc.). It's only purpose is to represent value in exchange.
Using fiat money has pros and cons (please remember that I'm simplifying something awful. If anyone notes my oversimplification being reasonably in error, please point it out in a comment.). Fiat money is more flexible, less costly to produce, and has the capability of allowing an economy to grow far beyond the material cost of commodity coinage or commodity-backed scrip.
The cons are that it's counterfeitable, subject to value fluctuation (e.g. inflation and deflation), and must be constantly replaced.
The narrator of Ken Burn's The Civil War noted that counterfeit Confederate bills were often detected because they were so much better than actual production scrip. One of the biggest problems with fiat money is that it's cheap and inexpensive to produce. That was circumvented (mostly) in our modern times through the use of complex difficult-to-reproduce printing processes such as the use of Intaglio printing. You won't have that or any of the modern technologies in your flintlock world. Therefore, you will suffer inflation due to (at least) foreign powers trying to destablize your economy by printing fakes. You'll also have inflation by patriotic crooks who are simply looking to put bread on the gold gilt tables their families should be eating at (honestly!).
Value fluctuation is amazingly complex (people make careers out of trying to explain it). But, really really really simplistically, if I think my house is worth 10,000 dinero but it's actually only worth 5,000... and some
idiotdiscerning buyer purchases it... the result is inflation. In other words, greed and the desire to make the most money possible will naturally cause inflation. Adding a middle-man to the selling process (oh, call them wholesalers) causes inflation. Passing minimum-wage laws causes inflation. Suddenly running out of Mother Emelda's Amazing Hair Tonic (which everybody has to have!) causes inflation. War (which usually needs Mother Emelda's Amazing Hair Tonic — MEAH — to grease axles) causes inflation. That darn local wizard who happened to figure out how to wave his stinking wand and POOF! whole cart loads of MEAH appear... that causes deflation. You get the picture.
Finally, you should not ignore the last issue: paper scrip wears out quickly by today's standards, and we know how to make durable money. It's more than just printing more (inflation!), it's distributing it that's the problem. Now you have a bazzillion distribution points (ok, call them "banks") and you have to get the new scrip to those points and make absolutely sure the old scrip is actually destroyed and doesn't end up lining Uncle Ted's shoes ("But I have a hole in my sole! I just wanted to keep the mud out!") as he trades the scrip. You need guards because the opportunity to steal money went up a thousand-fold. In other words, there's suddenly a whole lot of people getting paid for work that isn't actually producing anything... inflation!
And just to make things worse, you're going to replace the scrip of multiple nations. Yes, Europe did it without a ton of inflation — but that happened today with a lot of high-tech communication and security. How, in your flintlock era, will you determine how much of one nation's money is actually in circulation? Guess too low and the result of the exchange is inflation.
Because you can't just exchange it 1:1. Oh, that would be awful! What if your nation has only 1,000,000 dinero in circulation but your neighbor has 100,000,000 onyx coins in circulation? Are you going to replace them 1:1? Suddenly your neighbor is 100X more wealthy than you are? Is their GDP worth that? Do they have natural resources valued like that? I doubt it. Figuring out that the exchange needed to be 1:100 or, worse, 1:50 because they have 2X the gold mines you do (or something/anything else!)... currency exchange is non-trivial. I love it!
I think inflation would be an entirely believable aspect of the story. I believe the efforts to staunch inflation (if your flintlock society actually understood it) would make for good writing with excellent morals we need to hear today (like "spend what you earn"...). I think the opportunity for inflation is wonderfully complex, which I like to see in stories. And I think your flintlock society is mightily screwed... which makes the best stories of all!
This should have very little effect on inflation if done carefully. There are examples of it in the real world - for example replacement of a large group of currencies by the Euro when it was introduced in 1999. The changeover went smoothly with no inflation or panic. A similar thing occurs (admittedly only involving replacement of a single currency) when a nation changes its currency - for example replacement of pound/shilling/pence with dollars/cents in New Zealand in 1967.
A stock-pile of Newnotes is held at each bank. A citizen can deposit 'local' currency but only withdraw NewNotes to the same value. Shops take local currency or NewNotes in transactions but only provide NewNotes as change. A time limit is set beyond which the old currency will cease to be legal-tender (that is - usable for buying and selling). There is usually a longer period of grace set during which old currency can still be swapped for new at a central bank (after the point it has ceased to be legal-tender).
It's a great question.
This happens all the time in the real world, and it has no effect on inflation.
Some say it slightly affects the "perceived stability" of the currency/government in question. ("They're forever changing the design of the notes.")
Note that flakey governments do indeed frequently change the design of the notes, there's always some new scheme. And indeed those regimes usually suffer inflation. But there's no cause and effect. If the Swiss change their note designs, it's just a design change, nobody sees it as flakeyness.
Note - OP, it's somewhat unclear if you meant:
There are two totally different issues/questions at hand...
[A] replacing the "currency design" (as happened frequently, see notes above)
[B] eliminating national currencies, to replace with the national currency of a bigger, encompassing nation (examples include when the Euro was introduced, and early US federal money replacing local money)
Inflation ensues when the governing body that prints currency starts to print currency that is not backed by anything; but because people accept the currency (and may be required to accept it by law), the governing body extracts value from the economy without necessarily creating any value.
If I build a bicycle and sell it, I have used my time and energy to create a value that did not exist before. If I just print money and buy things of value produced in the economy, and do not produce anything of value using them, then I am effectively taxing the economy.
Of course the government CAN create something of value with the money, like funding a standing army to defend against invasion, or funding a police force to prevent crime that would otherwise happen. They can build and maintain public roads that have a utility for people and business far beyond their cost. And other utilities as well, that can take advantage of economies of scale to produce power, water, sewage handling and garbage collection much more cheaply and efficiently (and less dangerously and more healthily) than if all citizens were left to their own devices. If the benefit of these to the people is greater than the cost, a value is being created, savings are being experienced, productivity is being increased.
But governments tend to do many things that create much less value than they cost, like funding far more military than would suffice for self-defense, like doing political favors for their friends by over-paying for their products, or entertaining themselves or enriching themselves. They are spending "free money", and the temptations can be boundless.
This can make them parasites on their economy, and this causes inflation, by increasing the amount of currency in the society without providing any service or products that increase the net value of the society. I.e. instead of making life easier, safer and more convenient for the ruled, they are imposing a hardship on the ruled to support a "royal class" because some portion of their labor and productivity is being taken from them without providing them any corresponding benefit.