Dev Diary 14: Money
What is money?
In Imperatrix, you use the same currency as vanilla to buy things and pay upkeep in the game. This is, in the context of Imperatrix,
wealth, and it represents buying power - the capacity to acquire goods and services. It is the universal unit of exchange in the game which is generated by labour and resource gathering, and exchanged by trade. It can also be destroyed by devastation.
Money, on the other hand, is a country-level resource. Countries use money as a store of wealth, both for their pops and, in the case of countries with public debt administrations, for their own government.
Every country can have its own currency. Some countries have their own unique currency, others share currencies across a currency union, while many do not have a currency at all at the start of the game, and manage their wealth purely through precious metal reserves and goods trading.
Having a currency gives a country the advantage of being able to
manipulate the flow of wealth. Once you have a currency, you can also set up a
public debt administration which lets the government create debt for itself - infinite money hack!!(
beware hyperinflation)!! Stronger currencies also have an international diplomatic impact and give trade bonuses which we will describe in a future dev diary.
Now let's take a look at the new (work in progress) economy GUI where you can manage your country's money.
Reserves
Money derives its value, as it did throughout the period represented in the mod (1815-1936), from precious metal reserve backing. All countries can build up reserves of gold and silver, whose values within every country will fluctuate based on production, demand and access to the market via trade routes and agreements. Building up reserves can be done by the state buying up metals mined within the borders of their empire, or from the market. Obviously, the former is cheaper.
These reserves are stores of wealth in themselves, which can be sold off in times of need to create usable wealth for the state. But beware, your precious metal reserves will inevitably fluctuate in value based on the global economic situation.
Pictured below, Great Qing maintains a reserve of
2,012,500 lbs of silver. They don't maintain a gold reserve because their currency is only pegged to the value of silver.
Because Great Qing does not have a public debt administration, the only way they can raise quick cash for government coffers is by selling off the reserve 100lb or 1,000lb at a time. They will get wealth equivalent to the current market value of silver within the Great Qing trade scope. When the state sells silver, it becomes available for merchants within the country to sell off or stockpile. That means that if a country sells off huge amounts of its reserves, it may actually have a temporary impact on the global economy as they depress the price of whatever metal they are selling.
Great Qing is targeting an acquisition of 5,000lbs of silver per quarter for its reserves. This is the target rate set by the government which then sets targets for regions to meet silver import quotas, paid for from government coffers. The actual rate of acquisition is 12,400lbs - much higher than the target - which is bolstered by domestic silver mining (which the state will buy up if it has a reserve growth target) and by pops selling off their cash due to
money supply deflation.
Circulating cash, Inflation and Deflation
There are many different sources of, and ways to measure, inflation. Imperatrix: Victoria represents this by tracking the different metrics of inflation.
Money supply
The amount of privately held cash - that is, money in circulation which is not on government debt ledgers - represents how much money is available for the population to spend. The amount of money in private hands needs to be enough to meet the quarterly cost of living for all pops, which is a factor of the value of your currency and the price of all consumer tradegoods within your country.
Any amount below this will cause deflation from money supply as pops do not have access to enough money to spend; as a result, demand for consumer goods will drop, slowing economic activity, but the reduced demand is paired with increased shortages as pops simply cannot access the goods they need. Goods shortages create maluses for your provinces and, ultimately, unrest and lower productivity.
If you are experiencing deflation, pops demand money and will sell off their precious metal to the state reserve in exchange for cash. That is, if you allow them. It is possible to
freeze your reserves and prevent pops from exchanging metal for cash, particularly useful if you want to control the flow of your currency during turbulent economic times. This happened many times in many places in the 19th century, and countries gradually trended towards permanently freezing their reserves, with the ability to cash in money for gold or silver becoming theoretical as states tightened control on central banks.
If you have too much cash in private circulation, it will cause
inflation.
The United Kingdom, for example, has 144% of the money that its pops need in circulation. As a result, the population wants to cash in £16,000 every month in exchange for gold from the central bank. However, Britain in 1815 had its reserves frozen due to massive sell-offs of precious metal and extensive money-printing which were both used to fund the Napoleonic wars. The reserves were only unfrozen in the next decade in our timeline. Freezing the reserves can upset pops because they can't exchange their currency for a perceived better deal.
Inflation from excess cash supply causes increased consumer goods demand, which comes with its own problems as pops end up spending more on essentials, potentially causing a wealth drain.
Circulating cash can enter or leave the country via trade. All of the tradegoods you import from abroad will cause your currency to leave the country, whereas exports cause foreign currency to enter the country. Whenever foreign currency enters the country, it increases your ability to mint new currency - as the government, you have a minting cap which you are able to supplement by melting down foreign coinage and recycling it into your own money, at the equivalent precious metal value. This is all wrapped up in the minting rate cap which is based on the amount of precious metal available to mint.
Reserve Exchange Rate
The controller of a currency (the main user of the currency, or the originator of the currency in the case of currency unions) may change the
reserve exchange rate, which is the value of currency required to purchase 1lb the precious reserve metal (which may be gold, silver, or a combination of both known as a "bimetallic" standard). This is the amount that can be spent by pops in order to cash in currency during periods of inflation, unless the reserves are frozen. It is the fundamental measure of your currency's value, as it was throughout the 19th and early 20th centuries.
Any currency's value in terms of
wealth is therefore calculated by the market value of the precious metals that back it, divided by the amount of currency needed to purchase a unit of that metal.
Changing this value is a way of controlling inflation and deflation, as well as combating debt, as you can increase or decrease the value of your currency as needed in order to pay off debt, or reduce the impact of inflation or deflation in the money supply. However, this is a politically expensive move, requiring political influence and impacting your stability whenever you make the change.
The influence cost and stability impact depend on the current value of your currency. A currency with a low exchange rate (i.e. higher value to gold or silver) is more politically risky to change than a currency with an already high exchange rate (i.e. lower value to gold or silver).
The real market value of the currency is not always the same as the official value set by the government. It is also affected by the reserve ratio, which is the percentage of money in circulation and in debt that is backed up by actual precious metal reserves. The lower your reserves, the lower the effective value of your currency as merchants' confidence in the ability to cash in that currency for reserve metal is lower.
Pictured below, due to enormous sell-offs of reserve metal during the French revolutionary wars, Britain has an absolutely tiny reserve ratio of only 0.17%
This would normally mean that the currency is only worth 0.17% of its official value, but because Britain has a public debt administration (more on this below), this is boosted up to 0.86%
This can also be seen in the French reserve ratio, which is 2.98%, but has an impact of reducing the currency's value to 14.83% of its value in gold (as the French Franc is backed by gold).
It is not always a bad thing to have a low reserve ratio. For one, gold and silver are not the most efficient ways of storing wealth, as you cannot directly control their market value, and you cannot easily just create them - so having huge reserves can be a waste of resources when you could make more money by trading away your precious metals, especially when their values are high. Additionally, a low reserve ratio can help counteract inflation, as a currency with a low exchange rate to precious metal can cause cash inflation, and encourage pops to rush to the bank to buy up gold and silver to cash in on a good deal as well as accelerating demand for basic goods.
National Debt
National debt is a special feature available to countries with a public debt administration. It can be used for good, to create wealth for your treasury quickly on-demand, but it can also invite the wrath of the hells upon you if you are not careful. With a national debt administration you are also able to sustain a higher currency value with smaller reserves; countries without a public debt administration must maintain a larger reserve or their currencies will devalue much more dramatically.
National debt can be created by the government whenever it wants. This adds wealth directly into your coffers, and increases your debt amount in terms of currency.
The value of national debt is tracked against your GDP. The higher the national debt vs. GDP, the greater the interest rate you will have to pay back on debt. As well as this, remember the market value of your money from above? Naturally, creating more money through national debt will decrease your reserve ratio, and therefore decrease the market value of your currency.
You must therefore balance taking out debt with growing your economy.
Low stability and war exhaustion will also increase your debt's interest rates, so if you plunge your country into chaos or a protracted war, you will end up paying more on your debts as the lenders start to worry about your ability to pay it back. Be careful about taking risky actions when you have a lot of debt, as the costs could turn from manageable one year, to disastrous the next year when the Prussian army is bombing your capital and you find yourself selling off precious state assets to pay for those airship replacements!
Another danger of national debt is while that
debt issued gives you wealth based on the
market value of your currency, the cost of repaying debt is based on the
real value of your currency, plus interest. If the value of your currency increases, debts will become harder to pay off. You can, of course, take the political loss of purposefully devaluing your currency's official rates in order to make it easier to pay off more debt.
Thank you for reading!
And thank you for your patience as we develop this huge mod. Rest assured, we are working towards a playable alpha that we can share with you, and we are burning down an ever-shrinking list of features to reach that goal. I'm very excited to release this to the public soon...
you can't rush art.
The currency system represents the penultimate economic overhaul for the mod. Next, we will need to finish off jobs and salaries, which are already partially complete and just need integration with the currency system.
In a future dev diary, we will talk about this new job system, and the impact of currencies on the international stage.
As ever, join our discord here to volunteer your help, discuss the mod and get occasional sneak peeks:
https://discord.gg/nbxgkwy
