Chapter 253: It's Time to Give the People of the Great Tang a Little Financial Shock

"Sigh!"

The aftereffects of a hangover gave Fang Chongyong a splitting headache. After waking up the next day, he sat alone at the desk in his bedroom for a long time to calm down before finally recovering.

The wine brewed here in Liangzhou had a powerful delayed effect and was not very pure. The Tang Dynasty's wine brewing learned its techniques from the Western Regions, and was still in the exploratory stage, especially since distillation technology was not yet mature.

Fang Chongyong estimated that the methanol content in the wine was seriously exceeding safe levels—this stuff truly could not be drunk in excess.

To improve the technology, one had to incorporate a precise distillation process, ideally using activated carbon, and the grape varieties would also need to undergo long-term screening—none of which could be accomplished overnight.

It seemed that developing a wine economy would not work in the short term; at the very least, it could not serve as the mainstream.

Fang Chongyong sighed, spread out a large sheet of paper on the desk, ground ink, raised his brush, and wrote: "Issues to settle before the relocation of troops."

Relocating the Hexi troops to Hedong and Shuofang was the most fundamental and important part of all his plans. Cutting off the illicit income of these soldiers who had grown accustomed to pocketing dirty money, and moving them out of Hexi—this was the first step in changing the economic model.

Of course, the reason Fang Chongyong gave Brother Ji was: relocating troops was the best remedy to prevent local commanders from amassing military power for themselves.

He believed that given Brother Ji's pettiness, he would never refuse this proposal.

Without their handy troops, the mid- and high-ranking commanders of Hexi would find it very difficult to make trouble on that basis.

However, before the Hexi troops were relocated, there were still several problems to solve.

The first was who would pay the resettlement costs.

Fang Chongyong had already discussed this with Brother Ji. In principle, the approach was "whoever receives them, resettles them." When Hexi's troops arrived in Shuofang's Lingzhou, the people of Lingzhou would handle the resettlement; likewise, when Shuofang's troops came to Hexi, Liangzhou would handle the resettlement.

On the surface, this seemed no different from Liangzhou giving money to the Hexi troops for travel expenses, but in reality, it bought Liangzhou one or two months of transit time on the road!

Financial operations had an important hidden attribute: circulation time. For a given regime, the difference between repaying the same loan a month earlier or a month later could be worlds apart in effect.

The second was dealing with the problem of local soldiers participating in "hoarding and speculation."

This one was harder to handle.

For example, the mutton-fat jade from the Western Regions was originally quite valuable, and demand in Chang'an was still strong. Some soldiers at the border garrisons had a bit of spare cash, so they converted it into mutton-fat jade.

And now, the luxury goods market in Chang'an was in chaos. The once-valuable mutton-fat jade had no buyers! Those with demand could not afford it, and those wanting to sell refused to lower their prices, so a standoff ensued.

These pieces of mutton-fat jade in the hands of Hexi soldiers were neither edible nor usable—like begging for food while holding a golden bowl. Their lives had not improved because of these luxury goods; on the contrary, after being stuck with them, they lacked the funds to buy farming tools, making their lives worse! Even normal military farming was affected.

The key problem was that these things were now despised by all—no one wanted them even at a discount.

In a falsely prosperous market, there were too many speculators. Genuine demand was suppressed, prices had departed far from normal levels, yet supply had been over-issued due to false demand!

If the court rashly relocated these soldiers to Shuofang and Hedong, one could imagine they would certainly seize the opportunity to cause trouble. The Hexi Military Commission taking the lead in resolving their worries was the proper business that Fang Chongyong, as Military Commissioner, needed to handle.

So how to solve the practical problems these people faced?

The answer was simple: the government would establish a trading firm to purchase the Western Region luxury goods from these soldiers at a discount, then exchange them for hard currency such as silk.

As for how steep the discount would be, that depended on how much conscience the government still had. With some conscience, the discount would be modest; with none, it would be slashed to the bone.

Of course, whether or not to exchange was entirely voluntary. In any case, the relocation of Hexi's long-service soldiers to Hedong and elsewhere was an unalterable reality.

Solving this problem meant stabilizing Hexi's grassroots and the hearts of its people. With the Hexi Military Commission stepping in to absorb the chaos caused by development over the past period, it would also reestablish an unchallengeable authority in the Hexi Corridor!

Of course, solving the grassroots problems was only the beginning. Next came something even more troublesome.

Fang Chongyong continued writing on the paper: "Restore commercial taxes, restore customs duties, crack down on smuggling, rebuild a healthy fiscal system."

Over the past few years, the Tang army had personally participated in smuggling. To set things right now required strengthening the government's management and revenue-generating capacity. Customs duties and commercial taxes were the largest source of income here; in the past, the risk had merely been passed along—it did not mean these taxes were unnecessary to collect.

Unlike the harsh, cold land of Longyou, the grain produced by military farming here in Hexi was sufficient to supply the tens of thousands of troops stationed locally.

"As long as there's no food shortage, things are manageable."

Fang Chongyong let out a long breath and continued writing on the paper: "Establish a silk and Western Region luxury goods standard system, open pawnshops, open money houses, open trading firms, issue low-interest loans."

In his view, the central officials of the Great Tang had a very shallow understanding of "money." Even by the Ming Dynasty, the official who proposed the "Kaizhong Policy" had not fully understood what money truly meant for a state.

Because for an individual, no matter how large the clan, money was simply hard currency used to buy things. But for a state, so-called "money" was merely an abbreviation for the three characters "liquidity."

Whether there was much money or little, and what form served as the mainstream, depended entirely on the circulation process and had nothing to do with social wealth itself.

The better the liquidity and the smoother the circulation, the more beneficial it was for economic development. People's understanding of this process went through three stages: "money is wealth," "money is not wealth," and "money is still wealth."

The first stage was easy to understand—put plainly, it was barter.

The second stage was also easy to understand. Whether paper currency or precious metals, as currency itself, there was a process of "use value gradually approaching zero," transitioning from commodity money to credit money.

As for the third stage, in fact, right up until the establishment of macroeconomics, humans who had invented paper currency generally believed that money was of little use. In other words, everyone subscribed to the "veil of money" theory—namely, that money had no real practical effect on the economy, that money was merely a veil over real goods.

And the core viewpoint of later macroeconomics was the theory that money was useful to the real economy.

In other words, whether virtual currency or bonds, as long as they could circulate smoothly, they were beneficial to the real economy!

Although the Tang Dynasty used silk as the main medium of circulation, in reality, silk also had broad use value, and was essentially not much different from "barter." This kind of currency had very low circulation efficiency.

It was still at the stage of "money is wealth."

If some form of "notes" could replace silk for circulation within a small scope, then in essence it would "liberate" a batch of silk that was tied up in circulation, making more goods available for use in society.

When the total amount of currency available for trading in society increased and circulation became smooth, living standards would naturally rise.

Fang Chongyong felt that this was the key to untangling Hexi.

And to "issue" such notes, one had to stockpile a staggering quantity of silk in the government treasury, available for "exchange" at any time. Similar to the gold standard, except using silk. Or luxury goods from the Western Regions. Or a mixture of both.

It would sit there, available for withdrawal and use at any time, yet ordinarily people would neither withdraw nor use it—this was the ideal state Fang Chongyong hoped to see.

Put plainly, these goods were merely used as "collateral" for issuing bonds. Fang Chongyong's original intent was not to encourage such goods to circulate on the Hexi market in the form of currency.

So, where would the vast quantities of silk needed come from?

One had to understand that caravans traveling between the Western Regions and Shazhou often brought along several thousand camels—the volume of goods transported was enormous. Even if Brother Ji desperately shipped silk to Hexi, it might not necessarily meet the demand.

Therefore, corresponding supporting policies were essential for this system to work.

Thinking of this, Fang Chongyong wrote on the paper again: "Silk export quota system, import-export equivalence system, deposit system."

Different Western Region caravans would receive different annual silk import quotas based on their "contribution level." How the "contribution level" was determined was decided by the Hexi Military Commission, which had a relatively clear set of standards.

In any case, the Hexi Military Commission would stipulate: to prevent Western Region merchants from committing crimes within Tang territory, when foreign merchants brought Western Region goods into the country, they must also pay a "deposit" to the Hexi government office based on the value of the goods they carried.

In other words, it was fine for foreign merchants to come empty-handed, but if they brought goods, they had to pay a deposit. Furthermore, this deposit was collected only in goods, not in precious metals. When the foreign merchants returned to the Western Regions, the money would be returned to them.

These "deposits" were originally goods meant to be sold, so they certainly would not be taken back intact. This was, in effect, a disguised way of forcing foreign merchants to purchase and sell goods locally in Hexi, thereby stimulating the local economy.

The so-called equal-value import and export meant that however much goods a foreign merchant brought through the pass, they could take out an equivalent value of Great Tang specialties such as silk and tea.

If a foreign merchant came empty-handed, they could only spend within Great Tang territory and could not take away so much as a single leaf. What counted as merchandise required "customs declaration" — only with a declaration and an "export quota" could a foreign merchant carry goods out through the Hexi Corridor.

Of course, there were bound to be "clever little rascals" who brought large quantities of Western Regions goods in but then neither declared customs nor returned to the Western Regions via Hexi!

Fang Chongyong did not particularly care about this; he simply considered those people as having contributed bricks and tiles to Great Tang's construction. In truth, there could not be Western Regions merchants that foolish anyway.

The current situation in Hexi was that tariffs and commercial taxes had been abolished, while the official smuggling channels had been thoroughly destroyed — a era of demons running wild. The previously agreed-upon rules were no longer being followed by anyone, and everyone hoped the Hexi Military Commissioner would step forward to take charge and restore the former "glorious days"!

Hexi, having become a "free port," could not provide sufficient revenue for the government due to trade chaos, which also aroused dissatisfaction among many within the government and the border army grandees. Therefore, for the Hexi Military Commissioner to take the lead and set things right, he had to overcorrect.

Now was the perfect time to tighten trade policy and lay down rules for the foreign merchants in Hexi. And the policies Fang Chongyong envisioned contained a great deal of room for maneuver — he could play however he wanted.

These flashy policies were not something he came up with on a whim; they were experience gained from long-term practice in Hexi itself, just never previously implemented in time.

Fang Chongyong recalled the years when he had just become a "hands-off Inspector" in Shazhou — the local yamen in Dunhuang had in fact already been implementing a "silk-for-grain" ever-normal granary policy. The government pooled all the silk transported to Shazhou and exchanged the silk in the treasury for grain from the hands of Shazhou's common people.

The surplus silk was then lent to foreign merchants as loans, revitalizing local commerce. When repaying, the foreign merchants had to repay the loans in grain.

This measure could effectively control local grain prices and prevent foreign merchants from hoarding to corner the market.

At first, this policy seemed quite ordinary, but gradually, things began to take a crooked turn.

Later, after observing economic circulation in Shazhou over a long period, Fang Chongyong discovered that the loan instruments issued by the Shazhou yamen had invisibly become a kind of "currency" for large-scale transactions. Foreign merchants holding government loan contracts would draw up separate contracts for private transactions.

This was vastly different from the original intent of the government loans!

It had effectively become what people in Fang Chongyong's previous life knew well as "debt as anchor"!

Bonds could be used to exchange for grain and also to exchange for silk. One only needed to bring the bond to the Shazhou yamen to settle the account when the contract came due.

Because the Shazhou government had been making normal loans over a long period, it guaranteed the credit of the bonds.

Later on, if a certain foreign merchant had cash-flow difficulties, he could take a short-term bond nearing maturity and, under the guarantee of a commercial guild, offer certain payment or trading conditions to find someone to swap it for a long-term bond.

Within a limited area, bonds replaced the inconvenient-to-carry silk and grain, effectively becoming a form of currency.

This was in fact only one step away from the modern banking system that existed before the advent of the telegraph and telephone.

Back then, Fang Chongyong himself had personally signed numerous large-denomination debt contracts and knew the grassroots operational model in great detail.

And those who owed debts and refused to repay ultimately disappeared in a physical sense. In the vast desert, there was no place that was absolutely safe — a person dying and their bones being buried was the most normal thing in the world.

The core of "debt as anchor" was using debt as "collateral" to create "currency." And the key to "debt as anchor" lay in the fact that this debt relationship was safe and that bonds could be normally redeemed upon maturity.

It needed two things to safeguard it: first, a powerful military that could guarantee debt collection and physically eliminate those who defaulted; second, powerful economic strength that could ensure repayment.

As it happened, during the Tianbao era, Great Tang had both of these in Hexi! The Liangzhou border army was powerful, and even without money, it could borrow from Great Tang's prestige.

In fact, playing this game only required "wealth expectations" and did not need actual wealth.

It was the same principle as a bank run — so long as not everyone came to withdraw at once, the bank could always handle its daily business. So long as Great Tang remained strong for even one more day, this game could continue to be played.

It was time to give the people of Great Tang a little financial shock.

Fang Chongyong thought to himself, and without hesitation wrote four vigorous and forceful large characters on the big paper: "Debt as Anchor"!

As for how long this move could be played, he could not worry about that much.

Life was but a few short decades. If he did not play like this, he probably could not even last a month. What would he do for the remaining decades?

Never mind all that — just charge in first and talk later!

Fang Chongyong decided to go all-in on this hand.

(End of this chapter)