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I am Queen Aerith the 3rd of Alagaesia. I rule a large and powerful nation in a time period technologically equivalent to the 17th century or so. Most of my world map is known, and cross-ocean trade is increasingly common.

However, I have a problem. One of my court mages has discovered a means to transform straw into gold. I have ordered them to keep this a state secret, but said mage is prone to going on wild adventures, and is terrible at keeping secrets. Since I am not willing to execute this mage to prevent word getting out (and I probably couldn't keep them imprisoned if I tried), it's only a matter of time before the technique spreads elsewhere.

In the few years or so I might have before other people start learning, I want to prepare my kingdom for the inevitable crash in the value of gold. I would like to similarly help my allies weather the economic storm, while ensuring my enemies are hit as hard as possible.

What should I do to ensure that My nation and it's allies are hurt as little as possible by the sudden influx in gold, while my enemies are severely harmed by the economic shift?

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    $\begingroup$ There's actually a fairly close historical parallel to this: Spain after the gold & silver "treasures" of the New World. $\endgroup$ – jamesqf May 2 at 4:31
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    $\begingroup$ If you are willing to risk the stability of your kingdom (and your allies') to protect one mage, then your vassals who disagree may conspire to intrigue and influence you toward a different policy. Their wealth and power are at stake, too. They might murder the mage behind your back. And monarchs have been usurped or overthrown for less. $\endgroup$ – user535733 May 2 at 6:15
  • $\begingroup$ There’s a proverb about keeping all your eggs in one basket. $\endgroup$ – Konchog May 2 at 10:37
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    $\begingroup$ I'll note that if your mage has discovered this secret, it's only a matter of time before someone else does as well. Even if you go all murdery on this mage, you've only delayed the collapse. $\endgroup$ – user3757614 May 3 at 2:18
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    $\begingroup$ There is only one reliable solution to this problem. You know what it is. It is not moral, but... "for the greater good", right? Give the wizard a posthumous award for services to the country above and beyond expectation. And a grand state funeral. $\endgroup$ – PcMan May 3 at 8:01

12 Answers 12

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Step 1, train your mage in deception

The funny thing about chronic gossipers like your mage is that people who are bad at keeping secrets tend to also be good at telling lies. Give him a cover story so that when his friends ask him what he's been up to, he has a brag worthy lie to tell in place of the truth. "I've been working on new methods of enchanting armor! but shhh, don't tell anyone because it's a secret." Lies in place of the truth are much easier for gossipers to maintain than silence; so, in this way your mage will be able to keep things under wraps for a while, while still having something to brag about. Now that said, eventually the truth, or part of it will come out; so, when it does your mage is also trained to lie about WHEN he discovered the thing, and report his slipup directly to the queen right away. So if he accidentally slips and says he's been making gold, he can immediately back peddle and say that it was something he accidentally discovered last week while doing his armor enchanting work.

Step 2, exploit the discovery while creating plausible deniability

Dumping your gold into purchases or going into debt are great ideas already listed, but as Otkin and user253751 have pointed out, this kind of insider trading will be horrible for your foreign relations. This means that on top of doing insider trading, you also need a really good scapegoat for WHY you are doing these things.

The best way to do this is to engineer a crisis for your own people that would be just bad enough that no other monarch would believe that you did it to yourself: Turn your own people against you. That's right, you pay people to go out into your streets and sow discontent... but the kind of discontent that you want. Protests and maybe some riots start over all sorts of things like people wanting more education, new farm equipment, better infrastructure, etc. So, you spend everything you have and borrow a lot of money to meet the demands that you have engineered yourself to be good for the long term good of your nation. During this time you also bolster the heck out of your military which every other kingdom can clearly see you need right now.

Not only does this make you gold poor, but it also cements the eventually loyalty of your people. While other monarchs would send in their armies, to quell these sentiments, you helped your own people first and foremost, you proved that you are willing to hear and accommodate their concerns, and you've earned yourself the title "Queen Aerith the Kind" or something like that so that when the crisis is over, you will have the absolute loyalty of your own citizens.

Then, after about a year or two of crisis or whenever your mage slips up and talks, you reveal that you've just discovered gold alchemy, and you pay back all of your debts very quickly. Within weeks you flood foreign markets with tons of gold. Your own economy and military have become massively inflated to deal with your "crisis", and your competitors are now buried in undervalued gold.

Step 3, the truth now sounds like a lie

To the rest of the world, you were just in the right place at the right time, and if the mage does eventually slip up and say he invented the gold thing long before it was made known, well, everyone already believes he is a loud mouthed braggart. Only the most radical conspiracy theorists would believe that a queen intentionally turned her own people against herself based on the word of such a man.

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Charlie's suggestion of switching to a silver- or fiat-based currency is a good one.

Another thing you might want to do is control when the court mage's discovery becomes well known. You could offer the mage a super-luxury vacation to an exotic island where he doesn't speak the language. This could buy you two or three years.

In that two or three years, you should spend all your gold on things meeting the following criteria:

  • Wherever possible, brought from your enemies
  • Things that are going to make money / raise tax revenue in the long term.
  • Things that are logical enough not to draw attention to what you're doing (if you simply swap all your gold for silver, people will know something's up)
  • Things that can be delivered within two years and can't easily be taken back if they get salty about your subterfuge (no contracts to deliver food in 5 years time or shares of foreign companies a foreign king can annul)
  • Don't lure people with a high gold salary - but do lure indebted people where you pay off their debts then pay them a moderate salary; and people who need investments they can spend quickly.

For example, you can buy books, machines, ships, industrial and magical secrets, rare materials, magic items and foreign colonies.

Convert all your gold into factories that make textiles and so long as people need clothes, you can get paid in whatever medium replaces gold.

Of course, your fictional work will be using a lot of artistic license here: We're basically mashing together the running of modern democracies (where having an empty treasury and huge debts is business as usual), the foreign policies of 1700s European powers (give your rivals a black eye even if it starts a war) and a dash of the Industrial Revolution (if you want machines and industrial secrets to buy) but if you've already got mages turning straw into gold, I assume that won't be a problem!

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    $\begingroup$ I would imagine you would want long term gold-for-stuff contracts. If they are honored, you win. If they are annulled, you look like the aggrieved party and may have casus belli to take some land from an enemy. $\endgroup$ – Joel Harmon May 2 at 17:03
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    $\begingroup$ This is too conspicuous. Any monarch worth their throne will be able to put 2 and 2 together if this strategy is used. Two-three years are not enough to build fortifications and train an army to protect the country from an invasion by several united kingdoms/nations. And even if your kingdom is the biggest and strongest and can successfully repel attacks you will suffer from long-term loss of trust and resulting political and economic repercussions. This is a very bad plan for a kingdom! $\endgroup$ – Otkin May 2 at 18:56
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    $\begingroup$ @Otkin I'm assuming, when the question asks how best to economically harm enemies and mentions the 17th century, that the countries are already anticipating the next war - like the major European powers were around then. $\endgroup$ – mjt May 2 at 19:43
  • $\begingroup$ @mjt No major power at that time was prepared or desired for the extermination war. IIRC, most armed conflicts were uprisings, border and inheritance disputes, redistribution of colonies, and religious wars. Most of them were rather small in scale. Notable exceptions were the Nine Years' War, the Dutch war, and the Turkish wars. Still, those were territorial disputes. $\endgroup$ – Otkin May 3 at 1:47
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    $\begingroup$ (+1) I would add: build a navy with the gold you have before it becomes worthless. Ships are expensive and a big navy is essential to both project force and protect trade. Doubly so in island nations, but anyting with a coastline will benefit from that. $\endgroup$ – Rekesoft May 3 at 6:51
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Go into debt.

Preferably, debt owed to nations you hope to damage with the coming crisis. Payment of the debt is stipulated to be in gold. Your scenario is in essence the same as the runaway inflation that occurs in nations that finance expenses by printing money. The value of their money decreases.

That is bad if you have savings denominated in that money because the value of your savings decreases. But if you have debt that is good: the value of your debt decreases!

You know what is coming and that it will be easy for you to pay off your debt in gold. Borrow from your competitors. Then use your savings and the money you borrow to finance projects that will be lucrative in the future after the money decreases in value. New mines (for silver), new arable lands, armadas for wars of conque... exploration, etc.
You will have converted your wealth and theirs into assets for your country that have real worth after gold tanks.

It occurs to me that if entity with whom I have had an adversarial relation suddenly wants to borrow money, I might want some collateral. That could complicate this scenario...

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    $\begingroup$ In that case, have the talkative court mage train up some more secretive mages with his straw-into-gold magic, trade them over as collateral, and when you start using your court mage to pay off the debts, devaluing gold, have the collateral mages convince your enemies to pull a Weimar Republic and just print money at the problem, hastening their demise! $\endgroup$ – No Name May 2 at 18:22
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    $\begingroup$ @NoName: you are hereby hired as the Grand Vizier of Willkistan. $\endgroup$ – Willk May 2 at 19:02
  • $\begingroup$ Note: you are now at war with those countries and they will never trade with you again $\endgroup$ – user253751 May 3 at 9:36
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Trade currency, not materials

If you have an insecure currency, people will want to trade precious materials. But if you have a stable currency, then people won't keep their wealth in gold. When the price of gold drops people will want to hold gold even less, strengthening your currency if it stable. The hard part of making currency isn't getting materials, it is faking the currency, so long as that is still secure making the materials cheaper will have little effect.

I don't currently have a secure currency

Switch to fiat currency and the Silver standard.

Make a new fiat currency that it easy to make, but fairly secure. Demand people pay taxes in it when possible. Unless your mage has figured out how to turn straw into any material then you can just change what you use to back your money. You will give people a 0.05% of an ounce of gold for a dollar, or 4% of an ounce of silver for a dollar. If gold is devalued, then people will just ask for silver instead of gold. Yes, you might not have silver stockpiled in the same way, but so long as you give people silver for their money at the beginning you will stop a run on the bank.

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    $\begingroup$ Silver was actually a far more common currency than gold anyway. gold is too rare for general circulation much of the time. $\endgroup$ – John May 2 at 3:48
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    $\begingroup$ Of course the problem with this is that fiat currency is just as easy, if not easier, to render worthless when the supply increases. Real-world examples are plentiful, from Weimar Germany to Zimbabwe. Even the US dollar loses worth over time. Look at prices of things measured in gold, rather than dollars. For instance, my house cost about 525 oz of gold when I bought it, a couple of decades ago. Today it'd sell for about 282 oz, or about 50%. But in dollars it'd sell for well over 300% of its purchase price. $\endgroup$ – jamesqf May 2 at 17:12
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    $\begingroup$ @jamesqf an adequately managed fiat currency is better than the gold for the economy. True, it requires both knowledge and discipline, but at least the queen can appoint a loyal (and with some luck, competent) central bank manager. She is in no position to control the mage to the same extent. $\endgroup$ – fraxinus May 2 at 21:27
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    $\begingroup$ @fraxinus: Yes, an adequately managed currency would be better. Alas, we have human beings doing the managing, so it's seldom adequately managed. Sooner or later, the managers give in to the temptation to just print more money - AKA "stimulus checks" :-( $\endgroup$ – jamesqf May 3 at 3:46
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    $\begingroup$ @jamesqf a misguided "stimulus check" now and then (or lack thereof when actually needed) is still way better than all the problems inherent to the gold standard. And, note that an "adequate management" of a currency means keeping the economy (an unstable system by itself) running and not simply avoiding unpleasant levels of inflation. Whoever has a 20th century finances in the OP's 17th century is a clear winner, with or without a loose mage. $\endgroup$ – fraxinus May 3 at 7:40
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Different precious material economy

The solution can be quite simple. Use the technique to make gold and your current gold for a massive investment in a few different precious materials, like silver and platinum. Trading should be done mostly with your enemies, who might be thinking to get a good deal. This investment is used for new coins or a shift that the coins buy silver or platinum and not gold.

When dissent about this economic shift worsens and your enemies are loaded with gold you actively spread the spell. You want this to happen quick and sudden to make the panic on the gold market extend the damage hugely, people are aware and no mercenaries or other services can be bought with gold and your own economic change is now heralded as the move of the century. Bankrupting your enemies while you and your allies still have metal that has worth, highly coveted by the enemies. Due to the high demand your new economy will rise to unfortold heights.

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Consider that not only is gold fungible, but it seems 'wealth' is also fungible. Wealth is wealth. It is a commodity in and of itself, without having to be represented by any particular commodity. A million dollars of this 'wealth' is pretty much exchangeable for a million dollars of that 'wealth'. They are pretty much interchangeable.

Consider today's bitcoin - a completely worthless idea in and of itself, it's only value comes from what people are willing to pay for it. That, really, is the essence of wealth. It can be transferred to almost anything that can be kept in limited supply, and that someone with great power and authority has deemed to be 'wealth'. As the DeBeers family discovered, it is all about controlling desires and greed and perception - its all about PR.

So, given that you have some time, willing mage supporters, and the ability to turn straw into gold, the solution seems to me to introduce a brand new 'wealth' vehicle into the world. Something that is only available in your kingdom. Say the dried up residue of some 'magical' transformation of some plant or fauna local to your lands, that will miraculously make people desirous of you should you have it (or some such line). As supreme all-wise queen, declare this substance as the 'nectar of the gods', and bequeath it to be absolutely invaluable. Proclaim that if every one exchanges their gold for this most valuable commodity, they will still be equally wealthy. And back up the claim by purchasing it with your own gold wealth. Declare that you will pay huge sums of gold for a small quantity of it, and proclaim that everyone else should too.

Then, when the market is flooded with straw gold, all those who exchanged their previously valuable but now worthless gold, will have retained their wealth, but those who failed to convert their wealth would be left poor and destitute.

TL:DR

That is, simply replace one 'wealth' commodity for another of your choosing, and that you can control.

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    $\begingroup$ Bitcoin is "fake" wealth though. The real wealth of a kingdom comes from the farms and towns and homes and palaces and roads and skills of the people and horses and horseshoes and ... Using all that stuff is how you got the gold in the first place, right? And you can use it to get whatever replaces gold, too. $\endgroup$ – user253751 May 2 at 11:44
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    $\begingroup$ @user253751 All monetary/financial 'wealth' is fake wealth. It is all based on what someone else is willing to pay for it. A company 'stock' has no intrinsic worth. If no one wants it, it is worthless. Same with bonds and mortgages. Even fiat currency. As you said, food has intrinsic value. It has a function that returns a direct benefit. You can use it. They are two different types of 'wealth'. They are not always interchangeable. Otherwise we would never have inflation/deflation or bubbles. What you are referring to is the 'head space' between 'functional' wealth and 'fake' wealth. $\endgroup$ – Justin Thyme the Second May 2 at 14:19
  • $\begingroup$ Yes, that is correct. $\endgroup$ – user253751 May 2 at 18:45
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In Stross’ merchant prince books, he makes a good argument regarding the weaknesses of commodity based economy altogether, let alone the destructive risk of choosing a single commodity. Service based economies are far more stable. Look at Amazon, Google, etc. - they have no commodities but trade in services. Even Tesla and Apple trade in (manufacturing) services: they take raw materials and process them into desirable objects - the basic materials are not so valuable. This is why education is such an important metric for a nation- as it is the high quality of minds that a service based economy depends upon.

Being aware of the future devaluation of gold puts your queen into an incredibly opportune position. She can short her gold for service oriented skills - essentially fund the enlightenment, and benefit in spades.

Whatever, it must be clear to her to sell all of her gold while it has value.

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  • $\begingroup$ Ahhh, a true Marxist. The only value is the value of human labor. Everything stems from the 'service' (i,e, labor) economy. Nothing else is stable. $\endgroup$ – Justin Thyme the Second May 2 at 14:28
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    $\begingroup$ @justin-thyme-the-second, Marxist? I don’t know. It’s not labour that is valued, so much as creativity. I would not consider it fair or wise to conflate the two. $\endgroup$ – Konchog May 2 at 17:01
  • $\begingroup$ "Even Tesla and Apple trade in (manufacturing) services: they take raw materials and process them into desirable objects - the basic materials are not so valuable." That statement is right out of Marx, with updated terminology. $\endgroup$ – Justin Thyme the Second May 3 at 1:39
  • $\begingroup$ @JustinThymetheSecond Not at all. Commodity money ties your national money supply to the commodity; you can't issue extra money at times of deflationary crisis. Current policies of "quantitative easing" involve printing money and lending it out. You can't do that with gold. (Well, the OP could, but only if nobody else has the secret). But QE isn't Marxism. $\endgroup$ – Paul Johnson May 3 at 7:25
  • $\begingroup$ It beggars belief that anyone could consider apple, Tesla, or Amazon to run on, or be founded by, Marxism. If one is a marxist based on the recognition that a single commodity economy suffers from lack of control (exactly what the OP is struggling with) then we are all Marxists. $\endgroup$ – Konchog May 3 at 8:30
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A gradual transition to a mixed-commodity-backed currency, starting right now. Your loyal subjects won't be prepared for new-fangled notions, so you have to train them up to that gradually.

  • Offer paper currency that can be redeemed (at any time) for a defined quantity of gold, or for certain other goods (possibly with some restrictions).
    Pay the bearer of this note 1 lb. of gold, or, within three months of harvest time, so-and-so many bushels of wheat, or, within six months of harvest time, so-and-so many tuns of wine, or so-and-so many bales of wool.
  • Make sure that the promise to pay gold is rock-solid. That's the one angle which suspicious markets will test at first.
  • Change your tax assessments by allowing alternative methods of payment, in the ratio specified by your notes. So someone who owes the crown 0.01 lb. of gold can also pay in wheat, or wine, or wool. At first, that's an offer, not a requirement.

So basically you have fixed the exchange rate between gold, wheat, wine, and wool. Now the tricky part.

  • After a few years (sooner if pressured), stop accepting gold as payment of debts to the crown. You still accept your own notes, at face value, and also the other commodities.
  • When the gold price tanks, no sane merchant will reclaim their notes in gold, and you have a wheat, wool, and wine-backed paper currency.

In a decade or two, go to a paper currency backed by the taxes owed to the crown.

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    $\begingroup$ This has a bit of a weakness if your currency is backed by three different perishable goods. If there is ever a year, and sooner or later there will be, when the harvest of, say, wine is particularly bad, and the price goes up above the amount you redeem for, then there will be a run on the currency, crashing the economy. $\endgroup$ – MegaCrow May 2 at 14:08
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    $\begingroup$ @MegaCrow, possibly, but there is no time for anything else -- see my last sentence regarding the desired end state. $\endgroup$ – o.m. May 2 at 14:52
  • $\begingroup$ A sudden switch to a mixed-commodity-backed currency might be too complicated for a 17th-century economy. (And as o.m. suggests, it might be too unstable over a few decades.) I recommend a crown currency redeemable in either gold or silver, at a fixed ratio. $\endgroup$ – A. I. Breveleri May 3 at 2:45
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Hire another mage that can turn straw into dust, and have them destroy all the straw in the world. Convert your kingdom over to using grains for animal feed. Have the anti-straw mage release their anti-straw herbicide as an aerosol that spreads across the world on the trade winds. Other kingdoms won't be ready for the blight. They quickly starve as animals die without food.

No Straw. No Gold. No Problem.

This would be a completely outlandish scenario...

But, what we have to take into account for your straw-to-gold scenario is...

  • How much straw can the mage convert into gold at a time?

If it's a boat-load, then you've got problems. If they can only do a few ounces a week, it will hardly break any economy.

You're basically looking at a pipe.. it has inputs and outputs over time.

The important factors for the wizard are how much gold can he make over how much time.

Like I said, if it takes him weeks to make a couple of ounces.. who cares.

But, if he can convert entire towns with straw-thatched roofs into gold in the blink of an eye... well, with that kind of power, Why aren't mages rulers of Kingdoms instead of you?

That's your main problem... If a mage has the power to truly facture economies by turning mass quantities of straw into gold, then mages in your world are god-like, and would take over. The ruling nobility would get quickly displaced if they had no way to keep up with the magic power mages had.

So, if your mage can turn vast fields of straw into gold with the snap of his fingers... a ruined economy is the least of your concerns. Imagine if he can turn blood into water... He could snap his fingers and everyone dies.

Eventually the time & power equation for magic tips the scales to where mages just take over, and not only are you no longer Queen.. but all other Kings, Queens, etc are displaced by mages.

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How common the skill is? Is it restricted to some highly skilled mages? Or any farmer could do it? If it is the former, your queen have nothing to fear, at least in her reign. The amount of gold will grow fast, but the mages will still want to get paid for it, so they may form an OPEC style council to prevent the overproduction of gold, and even if not, the impact would be only felt after may years.

If latter, something else would need to be used for wealth storage, but it still take years before the economic impact would be felt.

But if the problem is known, there are many ways to protect the wealth, for example gold could be replaced with anything else - precious stones, silver etc.

Spanish bankruptcy in XVIth century was more due to the Charles Vth incompetent economic policy and wasting all Spanish resources on wars needed to keep HRE crown and Spanish supremacy. He accumulated debt impossible to pay back, then paid it with silver from America only to make even more debt by organizing even more expensive war campaigns.

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In addition to the advice already posted to spend all your gold, I would add the following:

Get the mage to make more gold for you to spend. Not only does this increase your spending power, but as time goes on people are going to start doing the sums and realise that you must have a secret source of gold somewhere. Encourage them to believe that you have a secret gold mine with massive reserves out in the colonies. This will cause everyone else in the world to start devaluing their gold and moving their wealth into other assets. This will help to soften the crash when the real secret finally gets out.

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Isn't Queen Aerith's dilemma similar to that of the Chinese who discovered that mulberry leaves plus some very industrious worms could produce silk? Wasn't silk more precious than gold in old China? (please correct me if I'm mis-informed) And weren't the Chinese paranoid that this secret would eventually spread outside of China and wasn't the punishment for such a 'crime' death? (again please correct me if I'm mis-informed). What was the economic effect on China when this did eventually happen?

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