Does a culture focused on gaining material wealth expand, contract or ignore where its currency is circulated?

Question

I'm putting together a setting for a RPG campaign. The feel I am going for is Age of Englightment / Pirates of the Carribean (so, roughly 1730 technology level) but in an alternate world where humans compete with elves, dwarves, halfings and gnomes for resources on the planet (and those are just the "good/benign" races). Magic is used by a small percentage of the global population.

One culture/race is obsessed with gaining wealth through their large ocean-capable floating cities. Some members see value in controlling raw materials through legal ownership ("We own that distant mine and take our percentage"). Other members want to control services (manage an army that occupies someone else's mine or city; form a monopoly in one trade guild).

Those two are the minority, however; most of this population plans to profit through trade. Floating cities can transport large goods valuable to City A, small goods valuable to everyone, and perishables that have to be preserved. Dock a floating city near a large port, extend bridges, trade for a short season. All done, retract bridges, sail offshore; more security. These floating cities are very large (circular diameter of three miles); for shallow harbours they can build bridges or set up smaller trading floating trading posts that have a more shallow draft.

The population has much more knowledge and experience with economics than I do. (I'm willing to learn.) This race is known for the security of its banks and bank vaults, and for the trustworthiness of its citizens. There's enough infrastructure and trust between a set of nations for banks, loans and related financial tools to exist.

If this culture stamps its own coin, would it plan to put its currency in circulation with other races, cultures and nations? Would it try to keep all its currency internal and take in currency from other nations, and strongly limit where its currency went? Or would it make essentially no difference?

Answer 1

If this culture stamps its own coin, would it plan to put its currency in circulation with other races, cultures and nations? Would it try to keep all its currency internal and take in currency from other nations, and strongly limit where its currency went? Or would it make essentially no difference?

Countries want to keep their coin, particularly medieval coin. In medieval times, coin was primarily valued for its metal content. They would stamp it so as to say, certified gold by such-and-such (or silver or whatever). People would cut coins in half to make change (or in eights, e.g. the famous pieces of eight). Coins are therefore wealth, and they'd want to keep their wealth.

Countries don't particularly want to keep their paper currency. Paper currency's value is not intrinsic like coins traditionally were. Its value is in the redemption. But in order to redeem the paper, the person has to trade with the government of the issuing country. Or trade it along with someone else. The truly essential value of paper money is that you can pay taxes with it in the issuing country.

This gives you some options. Paper money originated in China around 600-900 AD. This is after the time of the historical King Arthur but before the Norman invasion of England. I'm going to say that your floating cities are likely to be as advanced in terms of money as the Chinese of our world. So the basic question is whether your want your world to be more Arthurian or Norman. Is paper money soon to be invented (possibly during your story) or something from the past?

So long as money is metal-based, people will try to hoard it. People will transact in paper money. So paper money is advantageous for a trading culture as soon as you can get people to take it.

Paper money tends to start as letters of credit rather than something held in a wallet. Letters of credit allowed banks to exchange customers as they traveled. If the amounts balanced, they never needed to exchange the physical money at all. Even if money is primarily metal, expect the banks of the floating cities to write letters of credit regardless. They could redeem them when they visited. A traveling city is safer transport than a caravan or a wagon.

Answer 2

It would want its currency to be used widely.

If its currency is used widely, then the community whose currency is being used is insulated against exchange rate risks that all other traders must bear in addition to the other risks that they face in the trading economy.

Also, it could set its monetary policies to meet its own economic needs without regard to the macroeconomic impact that those monetary policies have on other economies that use but do not control that currency.

For example, suppose that the issuing community reached a point where they owed a lot of debts denominated in their currency (both sovereign debts and private ones) relative to the debts that were owed to them denominated in their currency. The issuing community could produce more money leading to inflation and reduce the inflation adjusted economic burden associated with those debts.

On the other hand, if the issuing community was primarily a lender vis-a-vis the outside world (e.g. the "Iron Bank" of the Game of Thrones world), it would want to manage its currency so as to prevent inflation or even to deflate its currency by keeping the amount of money in circulation steady or reducing the amount of money in circulation.

Ideally, to gain this flexibility, the currency should be valued at a level significantly more than the intrinsic value of the materials in the coins, even if coins are still necessary because the concept of fiat money is not yet well understood.

Answer 3

For your answer, you'd have to look at how trade has been done throughout the ages.

If you look at the silk road, connecting Europe with China through the Middle East, you'll see that it was mostly caravans trekking back and forth. Those caravans could do one trip a year, roughly. They'd want to carry as much high-value goods as they can. Make a 1-year trip for 1000 bucks worth of goods, or a 1-year trip for 100.000 bucks worth of goods makes a definite difference.

A caravan's got a certain, limited amount of capacity, though. You can't just say: "Oh, I'll throw in another 100Kg" if your packs are full already. As such, they'd likely not be lugging around tons and tons of gold coins. If you can fill a certain capacity with eg. 100 gold coins or with goods worth 500 gold coins, the choice would be made quickly.

All this, of course, is assuming there's a "home base" to exchange goods into coins. In the case of your floating cities, if there's no "homeland" they go back to after a trade trip, but the entire country is only floating cities, I don't think they'd value coins all that much. Instead, their most valuable good probably would be food, as I can't imagine they can grow crops on a floating city. All the people in those cities would have to eat, yet can't produce that food themselves. They can't exactly eat gold, and nobody enjoys famine. This still counts in case there's a "home base", just less so, as they can grow crops there, reducing the need to import food. The floating cities would still need it, and can easily change fancy goods for exotic fruits, vegetables, spices, etc. which they can bring back home, which would be of significant value there.

So, I'd say they don't really care about the coins, and would just see it as a trade commodity, like anything else. Food would be something with real value to them.

Answer 4

Sometimes it would expand the foreign circulation of its currency, sometimes it would attempt contract it, sometimes it would let it be; it all depends on whether the trade is balanced or not...

The Opium Wars

Let's assume that, as almost everybody did in the 1730s, the culture which "stamps its own coin" uses silver (and possibly gold) coins. Of those, silver is the most important, because gold has always been too expensive to be used for everyday coins.

The thing with silver and gold coins is that they are made of actual silver and gold, so, in order to make the coins, that culture needs the metal. Metal needs to be mined or imported; it cannot be manufactured. One of the major risks associated with using such a metal currency for international trade is deflation, triggered by another culture which operates as a metal sink. (Another risk in inflation triggered by another culture which operates as a metal source; but that's another tale, to be told some other time.)

Consider the situation of the mighty United Kingdom of Great Britain and Ireland in the first half of the 19th century. It was the sole world superpower of its time; Britannia ruled the waves; it was by far the largest exporter of manufactured goods; it was the arbiter of peace: Pax Britannica. It also used silver and gold for money, and it didn't have any domestic sources of silver.

The United Kingdom traded extensively with the Celestial Empire, from where it imported silk, porcelain, and tea. The Celestial Empire did not import anything much from the cold and foggy British Isles (or from anywhere else, for that matter) so the net result was that China functioned as a bottomless sink of British silver.

As the trade expanded (by about 4% annually, says Wikipedia),

"The perpetual expenditure of British bullion on Chinese products limited the amount of currency in British circulation, weakening the domestic economy, preventing economic growth and causing deflation. Attempts by a British embassy (led by Macartney in 1793), a Dutch mission (under Van Braam in 1794), Russia's Golovkin in 1805 and the British again (Amherst in 1816) to negotiate increased access to the Chinese market were all vetoed by successive Qing Emperors."

(Wikipedia, quoting Alain Peyrefitte, The Immobile Empire, New York, 1992, pp. 487–503)

Eventually, the British were forced to find something which the Chinese would buy, in order to staunch the deadly haemorrhage of silver. What they found was opium from India; opium is nicely addictive, so the Chinese demand for British-sold Indian-grown opium grew and grew, and the eastwards flow of silver stopped. The Celestial Emperor was, quite understandably, not favorable to a foreign power making opium addicts of his subjects, so he attempted to forbid the sale of opium; the most humane and Christian British Kingdom objected, and went to war against China in order to enforce the enlightened right of British merchants to a free market in addictive narcotics.

China lost, conceded the bitterly resented unequal Treaty of Nanking, and ceded Hong Kong to the British Crown "in perpetuity".

The rest is history. In this case, the "perpetuity" lasted for 155 years.