Sarun, Appointee of Rixo, is pacing back and forth in his garden, lost in thought. Around him, the serfs are working the estate; inside, the servants are keeping up the house; his wife is around here somewhere, sitting outside in the cool of the evening with the kids, but he can't hear them, they probably went down to the stream. He is thinking about currency issues; they just keep coming up.
That is exactly what she plans on doing. She just needs to find out which of her ingenious ideas still work in a world of elementals, and which don't work otherwise.
Right now she's wondering if she can set up a fiat currency. Probably not? How much do people trust the government to keep its word when it can profit by breaking it, and how stable is government policy? - Actually, how does the government work?
Ah, that makes sense, perfectly reasonable. Her city was a republic, too, but a different kind of republic; every district elected its own representative and then the representatives all got together to decide how to handle things like tax collection and law enforcement and famine preparation, with them choosing specialists instead of the people choosing the specialists immediately. (Though she'd been elected to a different job, where she was in charge of representing Sanand in a larger entity that was trying to get standardized trade rules and low tariffs and handle things that affected lots and lots of different cities, like the alien invasion. But that's kind of a side note.)
So, if she's correct... if someone else gets elected next time (which hopefully won't happen!) and wants to handle the treasury a different way, he can change all his predecessor's rules? Are there any things-the-government-isn't-allowed-to-do?
... So, a lot of countries in her part of the world have rules they make in advance defining what their governments are and aren't allowed to do, and they write those down and the people need to support it overwhelmingly to change it, and since the government and the army and the people all respect these rules, if the government broke the rules, the people and the army would replace them with a different government.
Silda just wanted to check if you had rules like that. That's all.
The idea that those places follow is that the government does what the people want and the people choose the government, and also make up the army, and the people and the army don't really have different interests, except that the army has a little more training.
Right, no, understood. It just makes it harder for the government to give its word and keep it, is all. And the best way to have a currency depends on the government - or some other entity, but it's better if it's the government - being able to give its word and keep it.
... Right, this is kind of complicated and there's lots of preliminary topics.
So, consider the case of borrowing money. Maybe the government is fighting a war and wants to hire mercenaries, but doesn't have enough money for it? Or there's a famine and they want to buy food so the people don't starve? Then the government might try to get a loan, from their own people or from other countries. And if you're considering lending money to a government like that, Silda thinks that your main question is going to be, will the government you're lending money to pay the money back. If, after the war or the famine is over, they say "well, it's our money now" and refuse to repay it, everyone who lent them money is going to be very unhappy. So the people considering lending them money will, themselves, care a lot about whether the government is going to repay them. If they think that there's equal odds it will repay them and that it won't repay them, they'll want to be repaid at least twice as much as they lent, because otherwise they expect lending the money will be a bad idea. Does this make sense so far?
So, setting optimal tax policy is actually a really difficult and complicated question, because the more you tax people, the more they try to hide the money they're making so they're hard to tax, or the more they avoid doing whatever you're taxing and do substitutes instead, or just the less they work? And precise level aside it's important that taxes be consistent over time, because people will often say, "well, we have a clever idea for something a little risky to do that would make us better off, but if the harvest is bad or there's a war or the government raises taxes we might starve, so we won't -" and the more crises you can mean they don't need to consider, the more likely they are to do good-but-risky things, and the more people do good-but-risky things, the richer the people are and the better the state is. So there's also a reason to have a stable tax rate that usually gets you more than you spend but occasionally you need to borrow more briefly and then pay it back, even in normal times.
(Silda is not even going to mention anything more complicated about slight government debts being good at the moment. If she does these people will borrow ALL THE MONEY and go into hyperinflation and then their economy will collapse and they will be a very valuable object lesson for future generations.)
And also government sometimes borrow from people from other countries that aren't their own... sorry this was a digression she thinks trying to manage a state's finances is really interesting and important.
Yeah, she's going to need to go back to really basic levels for this. She definitely thinks famine relief is important and good, and of course states should collect taxes, they need to in order to do good things.
... Uh... wait one moment. What are they taxing and how?
... Right, this seems reasonable but she's going to want to get into the weeds of exact methods later.
So Sarun knows how the reason people take payment in salt or gold or seashells isn't just that it's valuable, it's that it's the thing everyone else acknowledges as currency? They'll store lots more salt or gold or seashells than they need right now, because they know they can trade it for whatever they like later? Seashells are pretty, but what makes them good as currency is that other people will accept them as currency?
Yes! That salt is useful and important is good, because it means that even if everyone suddenly stops using it as currency tomorrow, it will still keep being worth having. And being difficult to counterfeit is also important! If people can make fakes than they do that and the value goes down to the cost of making fakes, which is usually very low.
The problem with salt is that carrying around little bags of salt everywhere is annoying, and salt melts in the rain, and it isn't convenient to trade with at all. So, let's imagine that you adopt salt as your currency, but you also set up a "bank", an organization which issues little bronze coins. If you give them a [unit] of salt, they'll give you a little coin saying they owe you a [unit] of salt, and they can give you back the coin any time and you'll give them the salt.
If we can somehow make these coins too expensive to counterfeit to be worth making fakes of, and if people trust that the bank will still be around and keeping deals, this seems much more practical than everyone carrying around salt everywhere. But those two conditions are important, and if you can't do that, this currency doesn't work. Does this make sense?
Yes, that happens. You hear about bank robberies sometimes, though they're mostly built like fortresses to be very hard to rob.
Anyway, the other really weird thing is... You know the salt-backed currency?
If everyone expects a currency to be used by everyone, it does not, technically, need the backing. It just needs the belief. People will want it because they know other people will want it in the future; 'that you can buy stuff with this' is sufficient reason. This is not a state she thinks that Rixo is in right now, to be clear, where she could have a non-backed, a 'fiat', currency. But it is how most states where she's from work, and they all work very very hard to make sure that everyone believes they will keep their word and never default or do anything to make the currency worth too much less, so that people will keep using it.
The main advantage is that countries don't want to have to spend lots of resources collecting salt. It's cheaper for them to just issue easy-to-make coins than to collect huge quantities of salt and guard it behind fortress walls.
They've also noticed, in all their history-learning, that it's mostly good for a country if the amount of money it has is growing at a steady rate, very slightly faster than the rate at which production of goods is growing? And that's easy to control with a fiat currency? But explaining why would be kind of complicated.
Yeah, she's not sure they have the tools to measure the amount of money in circulation precisely enough for her to try to manage that? It's very tricky to track it precisely, and it's... really not good... when there's a breakdown enough that you can see very high prices in the market, though everyone having a lot more stuff because of all the mages will make the bad effects much less bad, because it is good when everyone has a lot more stuff.