Chapter 407: Silver

Liu Ruogu's eyes clearly shifted; Pang Yu could finally tell he was pondering, and had not yet found an answer. Zhou Yueru's eyes also grew lively — she seemed quite interested in the question as well.

"They relied on the Precious Note." Liu Ruogu hesitated a moment before speaking. "The court could manufacture Precious Notes using nothing but mulberry-bark paper and ink, then use them to purchase military pay and supplies."

Pang Yu nodded toward Liu Ruogu. "The court used paper to buy real goods — so who took the loss?"

Zhou Yueru's paper shop had been subjected to He Mai many times, and she had personally taken part in He Mai dealings. Without hesitation she said, "The ones selling the goods took the loss."

"But the court paid out Precious Notes, and the sellers could also use those Precious Notes to buy other things. Why count it as a loss?"

Zhou Yueru thought for a moment, then shook her head to show she did not understand. Pang Yu braced his hands on the window ledge. "Before we discuss our Great Ming, let us first look at the earlier Mongol Yuan. Their primary currency was paper notes. The Yuan court's annual revenues were chronically insufficient to cover expenditures, so printing more paper notes was the most convenient remedy. The paper currency in circulation kept increasing, while society's output remained basically constant — so the value of the paper notes kept falling. This is called inflation. To what degree did the Yuan dynasty's paper notes lose value? If we take the original rate of one string equaling one dan of grain, by the late Yuan the Zhongtong Note had depreciated sixty thousand times. If anyone stored their wealth in paper notes, only one sixty-thousandth remained. Rich or poor, buyer or seller — all alike could be said to have been plundered clean."

Zhou Yueru stared at Pang Yu. "So in truth, everyone lost."

Jiang Fan turned his head to glance at the other two, then said, "Then the common people simply wouldn't use them. If it were me, I'd only accept silver — or copper coins would do as well."

"What Jiang Company Commander says is the reality. Under such inflation, the common people are no fools; naturally they would not accept paper notes. But earlier, the Yuan court had shipped silver off to Central Asia through trade, so very little silver remained among the people. Copper coins had low value and great weight, suitable only for small transactions. Because the Mongol Yuan mainly used paper currency, they had even less inclination to fire up furnaces and mint coins. Copper coins were insufficient to sustain the circulation of goods, so the common people could only revert to barter. This inefficient method of exchange severely reduces economic vitality, leaving the common people unable to survive — naturally, righteous armies would rise up everywhere. The Mongol Yuan's military expenditures surged, so they could only keep issuing more paper notes. More common people could not go on living, so the righteous armies grew the more they were suppressed — and so they issued still more paper notes."

Liu Ruogu could not help asking, "My lord, are you saying the Tartars lost their empire because of paper notes?"

Pang Yu paced from the window toward the desk. The three people here were all intimately connected to the coupon issuance, and now that the enterprise was growing larger by the day, he needed these people to gradually take charge on their own. He wished to explain clearly his reasons for advancing the silver bank.

He returned to the desk. "Paper notes are a manifestation of economic problems. Before any dynasty's ruling crisis, there is always first an economic crisis. If the common people are well-fed and well-clothed, who would go make trouble and rebel? Even if there are a handful of ambitious schemers, they could never gain momentum. But when economic problems arise, many will answer the call. The root lies not in paper notes, but in the unjust distribution of wealth, which creates an excessive gap between rich and poor — only in the end does this manifest in the currency. The Mongol Yuan maintained alien rule, so the distribution of wealth was innately and extremely unjust. Their fiscal expenditures could not be reduced. When they exploited the common people to the point they could not survive, the people could only rise up and rebel against the Mongol Yuan to seek a path to live."

Jiang Fan looked up and said, "So the Grand Ancestor and Chengzu also relied on Precious Notes to drive out the Mongol Yuan. Wouldn't that mean the common people still could not hold onto their wealth?"

Pang Yu nodded. "The Grand Ancestor drove the Mongols out of the Great Capital. The Great Ming was newly established, yet there were still many places requiring military force. The court's fiscal expenditures were enormous, and it urgently needed sources of revenue. At that time, because the Mongols had exported silver, China's primary metal currency was copper coin. During the Hongwu period, the annual minting volume of copper coins was roughly one hundred ninety million wen — just a few wen per person. Such trivial coinage revenue naturally could not meet the expenditure needs, so the Grand Ancestor also chose paper notes as currency. This was the Great Ming Silver Note."

Pang Yu picked up a Silver Note from the desk. Written across its center were the six large characters 'Great Ming Circulating Silver Note.' Flanking them on both sides, in seal script, were the eight characters 'Great Ming Silver Note, Circulating Under Heaven.' The borders were also adorned with intricate patterns. This one had a face value of one string, and the paper was quite large.

"The Silver Note was first issued in the eighth year of Hongwu. At that time there were six denominations — the largest being one string, the smallest one hundred wen. The unit of account was copper coin. Transactions below one hundred wen could still use copper coins. In the twenty-second year of Hongwu, they began issuing Small Notes, in five denominations, the smallest being ten wen." Pang Yu looked at Zhou Yueru. She was the supervisor of the coupons, and he hoped she could understand the meaning behind paper notes and coupons, not merely know the techniques of manufacturing them.

"During the Hongwu era, expenditures were very high. From the very beginning, the Silver Notes lacked reserves, and they began depreciating the moment they were issued. In the ninth year of Hongwu, one string of Silver Notes was worth one dan of rice, and silver was also worth one dan of rice. By the late Hongwu period, two strings and five hundred wen were worth one dan of rice, yet one tael of silver could be exchanged for four dan of rice. If we take the price of rice as the benchmark, the Silver Note depreciated by sixty percent. If we take silver as the benchmark, the Silver Note depreciated by ninety percent. That is to say, if the common people stored their wealth in Silver Notes, only ten percent remained — the other ninety percent became the property of the court. This can also be called seigniorage. This wealth was the foundation that allowed the Grand Ancestor to sustain the war against the Northern Yuan."

"Then came Chengzu's accession. Besides continuing the campaigns against the Northern Yuan, Chengzu also undertook great construction projects in the Capital and other places, as well as Zheng He's voyages to the Western Ocean. Expenditures were no less than during the Grand Ancestor's time. When Chengzu took the throne, official salaries were converted to ten strings per dan — meaning the court acknowledged that the Silver Note had depreciated by ninety percent. A mere five years later, the tax grain conversion rate became thirty strings per dan — a further depreciation of sixty percent. By the forty-fifth year of Jiajing, five thousand strings of Silver Notes were worth just one tael of silver — a depreciation of five thousand times. Wealth stored in Silver Notes was no longer worth a single wen."

Liu Ruogu did a quick calculation and said, "If we reckon by that one-string note in your hand, my lord, it is indeed not even worth one wen anymore. No wonder the common people refuse to use them."

"People all seek benefit and avoid harm. Faced with such a loss of wealth, no harsh laws or severe punishments could continue to force the Silver Note into circulation. Yet since our dynasty's founding, very few copper coins have been produced. Official minting of copper coins was inefficient and costly; the court only produced small quantities. Private coins were mostly used in folk transactions, and even the forms of those private coins mostly imitated Tang and Song dynasty coins. Thereafter, silver and copper coins circulated among the people side by side."

Zhou Yueru was listening with rapt attention. What Pang Yu was explaining today touched on aspects she had never considered before. "Then why did silver come to be used more later on?"

"This silver coin is ninety percent silver. It is called the Spanish Peso. These two pillars on the reverse are called the Pillars of Hercules, representing the peaks on either side of the Strait of Gibraltar at the southern tip of Europe. But in fact it does not come from Europe — it comes from South America, which is precisely the main source of Great Ming's silver." Pang Yu picked up a silver coin from the desk. It bore two prominent pillars, but the craftsmanship looked far from fine — the edges were not at all neat, and it was not even a proper circle. "The Spanish conquered South America and discovered high-quality silver mines there. The Europeans needed to purchase our Great Ming's bulk commodities — silk, tea, porcelain, and the like. This silver entered China via the Spanish galleons through the South Seas trade. The same was true of Japan — their silver mines at Iwami, Sado, and Akita produced vast quantities of silver, which entered China through maritime trade. It was precisely this massive influx of silver that provided the foundation for implementing the Single Whip Law. The abundant silver exported by Spain and Japan became the settlement currency, bringing prosperity to global trade. Everyone's days were good."

The three people in the room stared blankly at Pang Yu. Unfamiliar place names and concepts kept tumbling from General Pang's mouth. They were absorbing too much at once and could not even formulate questions. In truth, what puzzled them most was how Pang Yu knew these things. One after another, they all thought of the legendary White-Bearded Immortal who bestowed knowledge in dreams.

Pang Yu was in full flow and had no idea what thoughts were running through their minds. "Under circumstances where Great Ming's overall production efficiency saw no real improvement, output remained basically constant — yet silver increased. During the period of massive silver inflow, in the Wanli era, four hundred Jiajing Gold-Backed Coins could be exchanged for one tael of silver — showing that silver had already depreciated. The price of rice, measured in silver, doubled by the early Wanli period, creating silver inflation. Holders of silver, to avoid the depreciation of their wealth, would purchase fixed assets like houses and farmland, driving asset prices to high levels. As long as the scale of silver imports could be sustained, houses and farmland would keep appreciating. Thus during this period, the gentry had an even stronger incentive to carry out land annexation."

"Do you know how those Europeans view our China?" Having said this, Pang Yu looked at the three. All three shook their heads at once.

"Those Europeans all believe that China is the wealthiest nation in the world — that once silver enters China, it never comes out again. They think China must already be fabulously rich."

Liu Ruogu pondered for a moment, then asked Pang Yu, "Yet my own feeling is that everywhere is short of silver now. As long as things are priced in silver, not only the properties in Jiangbei, but land prices across Jiangnan are all falling. I once proposed to you, my lord, that Bai Shun Tang no longer accept land deeds as collateral."

Pang Yu nodded firmly. "Ruogu's feeling is correct. Houses are one thing — after purchase there are no ongoing expenses. Farmland is different. It is itself a vehicle for taxation. The moment an ordinary person buys it, they must immediately bear heavy taxes — it can even be called a negative asset. Land prices will not only fall; in the future you may see farmland given away for free with no one willing to take it. One reason is precisely the change in silver inflows. Whether Japan or Spain, both needed to buy our products, yet had hardly any products they could sell to us. So their silver flowed one-way into China. This is called a trade deficit. The precondition for sustained silver exports is that the silver mines can provide stable output over the long term — otherwise their own countries would face a currency shortage. Spanish merchants had long been dissatisfied with Chinese goods seizing their markets, and as South American silver mine output declined, this dissatisfaction intensified. Around the time of the Tianqi Emperor's accession, Spain suffered a trade crisis. They were also participating in a war in Europe (Note: the Thirty Years' War), so fiscal expenditures surged. The long-term trade deficit became unsustainable, and the Spanish king began restricting silver outflows. The galleon trade plummeted. According to the information Weili gave me, previously about forty Chinese merchant ships entered Manila's harbor each year. By the second year of Chongzhen, only six Chinese merchant ships entered Manila. In the seventh year of Chongzhen, Spain further restricted ships from leaving the port of Acapulco in the Americas, primarily targeting our country. The output of Japan's Iwami Silver Mine, after peaking during the Wanli era, has been in a state of decline. If the original scale of trade were maintained, Japan's domestic economy would enter a state of severe deflation, and the economy would subsequently fall into a trough. Economic decline would affect people's livelihood and tax revenues, thereby threatening the shogunate's rule. Reducing foreign trade was the only option. The shogunate's seclusion was an inevitable event with economic motives. Its root cause was that Japan's overall production efficiency was lower than Great Ming's — once free trade occurred, a deficit was inevitable. So the shogunate began using the Red Seal Permit to restrict maritime trade, in order to reduce silver outflow. With the silver flowing into Great Ming drastically reduced, silver is scarce everywhere. What the court faces is silver contraction. Having no silver mines of its own to increase production, it cannot collect any seigniorage at all. So this Chinese emperor — the wealthiest in the eyes of those Red Barbarians — cannot even scrape together the silver to suppress the Roving Bandits."

Zhou Yueru's eyes sparkled. What she had heard today seemed to open up a whole new world. She looked at Pang Yu earnestly and said, "But so much silver already entered our Great Ming before. Why, just because those Red Barbarians have stopped the flow, are we so short of silver? Where has all the silver from those years gone?"

"The Mongol Yuan fell to the gap between rich and poor. Our Great Ming, after more than two hundred years, has also formed a rigid distribution pattern." Pang Yu swept his confident gaze over the three of them. "First, let us discuss the domestic flow of silver. Silver entered China from the southeast coast, arriving first in Jiangnan, the production center for goods. That was the region with the highest economic efficiency, causing Jiangnan to form an export-oriented commodity economy. The market drove farmers to abandon grain cultivation and convert their land to cash crops like mulberry and cotton, while grain came to rely on imports from Huguang and Jiangxi. Because of the cheap and convenient shipping along the Yangtze River basin, even after long-distance transport, the price of grain remained far lower than the income from cash crops. At the same time, places like Wuhu emerged, specializing in cotton dyeing and iron and steel — a regional division of labor formed along the Great River, and silver circulated within the Great River basin. The second was the Grand Canal, primarily carrying the court's tax revenues and Tribute Grain. This silver circulated along the Grand Canal. Tax silver came from all over the country and concerned everyone — this was a crucial link in redistribution. You are all familiar with the inner workings of the yamen. What farmers obtained from tilling the land was originally goods in kind; their daily lives were originally self-sufficient, with very little involving silver. But after the Single Whip Law, paying taxes required paying in silver. Merely in the exchange into silver, they would suffer losses twice over. Because of the nature of taxation, this distribution relied more on the exercise of power. The wealth created by farmers, through these links of redistribution, turned into silver ingots in the cellars of high officials and wealthy merchants. The wealth gap grew wider and wider."

Zhou Yueru seemed to recall the plight of Sun Tianxiu's family. She lowered her head and stared blankly at the tabletop.

"The gap between rich and poor causes silver to enter a state of sedimentation. The rich have money but limited consumption, while the common people have no wealth to consume. Thus the production and circulation of goods stagnates. After every trade falls into depression, everyone's income plummets, and they further cut expenditures, forming a deflationary cycle."

Pang Yu rose and walked to the map posted in the meeting room. "Regionally speaking, areas near these two water systems found it easier to obtain silver, and their economic conditions were therefore better. The court's silver was only enough to supply the Nine Borders; it lacked the capacity to allocate and regulate the economies of other regions. The silver at the Nine Borders would also flow back to the two water-system regions through commodity trade. The more remote the area, the harder it was to obtain silver — places like Shaanxi, Liaodong, and Guizhou, those far-flung corners. These places had weak economies and even weaker endurance. Once silver inflows decreased, survival problems emerged first, followed by the outbreak of chaos. These several regions respectively produced the Tartars, the Roving Bandits, and the She-An Rebellion. Apart from the weak governance in these borderland corners, economic decay related to silver was also a major cause. The rise of chaos everywhere greatly increased the demand for safe havens. Gold and silver inherently possess safe-haven attributes — everyone wants to hold onto more gold and silver for security. This causes even more silver to exit circulation."

Jiang Fan kept rubbing his hands together. The gaze he directed at Pang Yu held admiration, yet still carried a trace of doubt. "Then is there any way to change this situation?"

"First of all — war." Pang Yu rapped his knuckle on the Liaodong area of the map. "Take the Later Jin as an example. Because of the primitive nature of their society, their production efficiency is extremely low. Their grain is not even sufficient for their own consumption needs, let alone trade. The only other things they can offer as commodities are furs, ginseng, eastern pearls, and the like — all in very small transaction volumes. Their livelihood requires large quantities of bulk goods — ironware, cotton cloth, tobacco, silk, grain, sugar, and so on. Once they engage in free trade with our Great Ming, they would need to use silver to import everything from Great Ming. In less than two years, their silver would be exhausted. Therefore, this official deduces that if Huang Taiji wishes to open border markets with Great Ming, he will inevitably propose unequal trade terms. It is not that he is shameless and wants to take advantage of Great Ming, but that he has nothing left to exchange. If our Great Ming does not trade with him, the Later Jin will lack the materials to sustain their regime — and war becomes the only choice. As the climatic effects of the Little Ice Age grow more severe, the disaster conditions in the north will be worse than in the south. Whether the Later Jin or the Mongols, their impetus to push south will only grow stronger. If they cannot obtain supplies, they will collapse from within."

Liu Ruogu followed up, "And then there is your coupon, my lord?"

"Precisely because of the reasons I have just explained to you all — the silver is in the cellars of high officials and wealthy merchants. We are not the imperial court; we cannot solve the silver contraction everywhere. But our target is also smaller — solving the silver contraction in the territory we control. The coupons and money orders are not designed for the small folk who use copper coins. They are aimed at the primary holders of silver. At the very beginning, we relied on interest and the credit of the Restoration Society. After that, we relied on military force and control of trade routes to establish and expand our own credit, to capture a portion of the seigniorage, to secure ample economic support for the Anqing Battalion, and thereby to obtain the most powerful military force in this chaotic age — and military force can secure the expectation of everything in the future." Pang Yu returned to the desk, braced both hands on its edge, and looked down at the three people before him. "This is why, in issuing the coupons, time presses and we cannot delay."