Money and Banking

[Sander 3312]

Money and Banking
Considered within a
Proposal 

for supplying the
Nation with Money

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By mr. Gilondir Oronar Arvellon,
Treasurer of the Royal Exchequer of Suffonia
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Warwick:
Printed at the request of Lord Treasurer James Percival in
Warwick Castle, Kingdom of Suffonia, 1747



A depiction of one of the Promissory Banknotes that would be issued.

 

Within this Proposal will be given a detailed plan for the building of a national institution regarding the financing of the national government, the growing of the national economy, the stabilization of currency and more. This plan will be shown in a step by step manner down from the very principles of money to the workings of this idea and its institution up to the very results for both the Crown and its subjects.


Part I - Money
One of the most important if not the most important principle to take in consideration when regarding the entirety of this here proposal or in general, these radical theoretics of money, is also one of the hardest principles to understand. It is the principle that money is not the value by which goods are exchanged, but the value for which goods are exchanged. What this means is that money itself holds no value in the slightest. We only treat it as such because everyone accepts it does. Keeping this in mind, this means that other means of currency can be introduced as well, hence Gold and Silver were in frequent use long before minas were a thing.

In essence there are three key properties  any possible currency needs to have to be a successful currency. The first is that money need to be durable. It can’t go bad at some point, otherwise you’re eventually going to lose your money. Secondly the money needs to be easy to divide up into smaller amounts for obvious reasons. How else will you get change and how else would it be possible to calculate amounts of money with ease. Thirdly, your currency needs to be generally accepted. This last one is perhaps the most important of all because like I said; if people don’t think your money's worth something, it isn’t. The value of money lies in the trust people put in it.
These three conditions for a currency however mean that money doesn’t need to specifically be minas. It can be anything that is durable, easy to divide and trusted by people. And of course trust in anything is subjective and thus can be created. This means a new currency can be created if one can manage to get people to trust it.


Part II - Institutionalizing Money
The following outlines of a plan will be for the formation of a government institution to control not only the acquisition of money, but money itself. In principle, this institution is a bank and therefore, under the specific circumstances of being situated in the Kingdom of Suffonia, I will dub it the Royal Bank of Suffonia.

I hear you asking, what is this bank for? This bank will serve as the government’s tool for distributing it’s new currency as well as controlling its value. It will be the growth catalyst for the national economy and the government’s treasury. What then is this currency the bank will distribute among the populus? They are Government Bonds or simply Government backed I.O.U (I Owe Unto) notes also known as Promissory notes. Essentially, these I.O.U notes are investments into the National Government. The National Bank will (in the beginning) sell and buy these notes for the same value they are worth in minas. An I.O.U of 10 will be sold for 10 minas, which is a 10 mina investment from the buyer into the Government, and also be sold back for 10 minas in case the buyer wants to retrieve his investment. What follows are 2 key principles that ensure this system works:

I: Not all investors will come to retrieve their money at once, meaning that after some bonds have been sold, the National Bank will be able to invest a certain percentage of the money made into the Government for things like funding the army, keeping the rest of the invested money safe in case a large number of people do come to retrieve their money. In case there isn’t enough money in the bank to return all the investments, the government will have to immediately return the required funds to the bank.
II: The second principle of the National Banking system is to do with interest and it ensures both that people want to invest in the government and that these national banknotes become a more stable currency than minas. Interest is based on inflation, so first off: what is inflation? Inflation is the lowering of a currency’s value as a result of the amount of that currency increasing. The amount of minas is ever increasing and thus the value of minas is ever decreasing, meaning that something that’ll at one point cost you 1000 minas will at some point cost you 1100 minas. How does this inflation affect our banknotes? It’s simple: the worth of the banknotes in minas increases over time. Meaning that while in the beginning a banknote worth of 10 costs you 10 minas, after some time a banknote worth of 10 costs you (for example) 15 minas. But, investors can also sell their banknotes for 15 minas while they bought them for 10 minas. 

This way, people are inclined to invest in the National Bank, as the amount of money they invest will increase at some point, making their profits larger and larger the longer they invest in the bank. It also stabilizes the banknotes as a currency as their worth is adjusted for inflation. While the price of a sword in minas may go from 15 to 20, the price of the sword in banknotes will remain 15. This stable receipt of currency can then, once popularize, become a currency itself. After all, it's value is guaranteed by the bank, thee can always get minas for it.


Part III - Regulations

Of course, with all this money comes a lot of responsibility towards the investors and the populus as a whole. After all, mismanagement of these large investments will affect the economy on a national level and create distrust between the Crown and its subjects. Therefore, strict regulations regarding the functioning of this bank are required.

I: The National Bank must at all times keep at least 60% of the invested money in its safe to ensure it has enough money on hand to repay its investors when they wish to retrieve their investment. This percentage can be changed with the consent of two thirds of the Privy Council, including the head of the National Bank.
II: In the event of a rush on the bank, where the National Bank will suddenly need more than this percentage of money to repay its investors, the Government will have to return part of their loan they took from the bank to make up the required funds.
III: The amount of interest the Bank offers can never become negative, it must always rise from where it starts to ensure the (eventual) profit of it´s investors.


Part IV - Results of this policy for money and banking
The results of this sizeable change in monetary policy will be felt by the economy as a whole, thus I will briefly go over the results for the Crown first and then for the population as a whole to attempt to cover the entire national economy.

For the Crown the results of this National Bank and promissory note money system are quite prominent. After all, the main effect of this policy is that the National Bank becomes a large holder of value within the country from which the Crown is free to take loans when needed for funding matters like warfare, building projects or civil service wages. The interest the Crown has to pay over these loans is agreed upon when the deal for the loan is signed, but by default should be zero. After all, the National Bank is to serve the Crown in expanding the flexibility of its Treasury.

This policy also holds some major benefits for the general public and the national economy though. First of all, as discussed before, it provides a currency that is relatively free from inflation for day to day use in trade. Furthermore, it is a way for the economy to grow, both by investors seeing their capital grow over time, as well as through possible investments the National Bank makes into private enterprises. Lastly, the National Bank is interesting for those who want to save up money, as they can invest their savings into the Bank and eventually retrieve them again with interest, granting them a passive way of earning money.


It is for these results and effects of the here described policy, that I argue for the following of this policy and the founding of this National Bank for granting Government Bonds. For I envision a society that prospers as this system flourishes, aiding civilization in its monetary endeavors through time.

[monkeypoacher 8055]

Joseph Nicéphore looks up from the lake of boiling gold imprisoning him in the Nether, smiling a faint smile at the thought of sensible fiscal legislation.

[Animale 6]

“What an interesting economic initiative, I should try to invest some coins.”  Publius would have said by reading the document displayed in the city of Suffonia.

[Arcean 201]

“Gilondir is surely a wise and hardworking gentleman” James stated after reading the paper on his desk while sipping lemonade.