The Ring of Fire and the Money Supply

by Sarah Wendell (Sarah is a fictional character who “wrote” this around 1634.) 

What is Money?

Once upon a time, back in pre-history, a person accepted something that he had no use for in exchange for goods or services. He did this with the intention of trading the item to someone else for something that he did want. That was the first step: but it wasn’t money, not quite, not yet. That first item accepted may have been a pretty rock, a seashell or a leaf. The best guess is that the item was something of aesthetic value. It was goods of a sort. Something about it had trade value. The next step, the one that made it into money, was when someone was persuaded to take something that had very little to no trade value in exchange for something that did have value. In effect, the something was sort of an open IOU. It was probably an accident. Someone; call her Anne, gave someone else; call her Betty, an IOU. Then Betty gave the IOU to a third person; call her Carol. When Carol showed up at Anne’s cave with the IOU, Anne honored it. Thus, money was born. Money’s mother was trade and her father was debt.

For something to become money it must meet two criteria: It must not be something that the person accepting it ‘wants’, and that person must have the expectation that it can be traded for what he does ‘want’. If you don’t expect that you will be able to trade it for what you want, you will not accept it. If it is something you do want, it is goods, not money. Here is the sneaky part. What the above describes is a debt, not a commodity.

That is all an item needs to become money. For an item to work well as money over any length of time, the item needs a third thing – scarcity – or more accurately, a controllable supply of the item.

Intrinsic Value

There is a common belief in ‘intrinsic value’, but it’s just that – a belief. There really is no such thing as intrinsic value anymore than there is ‘intrinsic beauty’. Value, like beauty, is in the eye of the beholder and not inherent in the thing. Anything can be used for money except especially useful things. Useful things eventually reach someone that has a use for them and fall out of the money supply. The use of goods as money, especially expendable goods, like tobacco in early America, or cigarettes in up-time prisons, is a good sign that an economy is not really working right. The use of goods as money is a hallmark of an economy of distrust. Mostly, this happens in dependent or primitive economies where trade is limited and not that complex. Using useful things as money always means that real money is unavailable or not trusted.

Money has value because people accept that it has value. If money is too easy to get, people will stop accepting that it has value. People often believe that gold and silver have been used as monetary metals because they have ‘intrinsic value’. In fact, their ‘intrinsic value’ is because they have been used as monetary metals for a long time. The first recorded gold coins needed a guaranty that the government would exchange the coins for goods before the coins were accepted. In this first recorded use of gold coins, the guaranty was ten goats per coin. The king had to make this promise to get people to accept the silly little pieces of yellow metal.

Before the Ring of Fire, I saw a movie called “Earth Girls are Easy”. A girl in the movie wore earrings made from her dad’s credit cards. Using gold to make jewelry is a bit like cutting up a credit card to make jewelry, or using hundred dollar bills as wallpaper. Doing these things advertises wealth. It doesn’t hurt that gold is easier to work than iron, but lead is also easier to work than iron. When we talk about the beauty of gold, well, we’re back to ‘beauty is in the eye of the beholder’. How much of that beauty is a reflection of perceived value? Gold was not chosen as a monetary metal because it had value. That happened later, because it was a monetary metal. The reason gold first became a monetary metal was that it was easy to mint and not all that useful. The reason gold stayed a monetary metal is that it had naturally occurring limits on the supply.

Limited supply can be achieved in a number of ways. The limit does not need to be natural. Another show I saw, either a National Geographic special or on the History Channel, showed a tribe in Africa, or maybe South America, as an example. This tribe used leaves as money. The leaves were scraped and dried by the older tribeswomen to make the money. In that case, it was the effort of the women that limited the supply. Additionally, restrictions on which people were allowed to scrape the leaves added to the limited supply. I think only widows were allowed to scrape the leaves, but I’m not sure. The trees on which the leaves grew were common to the region. This unnatural limit also acted as both work and an old age pension for the ladies of the tribe. Note that if the leaves had a medicinal value or were good food, the natives of that area would probably have found something else to make into money.

Gresham’s Law requires a law.

Gresham’s Law states that “Bad money drives out good” but Gresham was talking about a specific situation.

Gresham’s Law was formulated by Sir Thomas Gresham to explain to Queen Elizabeth I what was happening to the English shilling. Henry VIII had adulterated the English shilling, by replacing 40 percent of the silver in the coin with base metals. Of course, the adulteration was discovered and this ‘bad money’ drove out the pure silver shillings then in circulation. People would save the good shillings and circulate the bad ones; hence, as Gresham observed, the ‘bad money’ (Henry’s adulterated coinage) would be used whenever possible, and the good coinage would be saved and disappear from circulation.

For Gresham’s law to work, you need two kinds of money, one that is perceived as ‘bad’ and another that is perceived as ‘good’. You also need a law, or some other force, that requires the person selling something to accept the bad currency in exchange for what they are selling, and to accept the bad currency at the same rate that he would accept the good money. Don’t lose track of the importance of perception here. The perception of the populace in England at this time was that a high silver content was good and a low silver content was bad. This perception is what made the ‘bad money’ bad and the ‘good money’ good. Money is all about perception.

One other thing is needed for ‘bad money’ to drive out ‘good’. There has to be enough bad money in the economy that the ‘good’ money is not needed. If the total money supply is needed by the economy the ‘bad money’ and the ‘good money’ will circulate together quite well. In other words for ‘bad money’ to drive out ‘good’, you need to be in, or on the edge of, an inflationary situation.

Gresham’s law simply doesn’t work if there are two or more kinds of money trading in a free market. This is because the seller will not accept the ‘bad money’ or will only accept it at a lower rate. For those of us in the Ring of Fire to invoke Gresham’s law we would have to make a law that set the exchange rate and then we would have to enforce the law. We cannot enforce this type of law and have never tried to do so. My Dad does say that in the early days of the Finance Subcommittee, some people wanted to make this kind of law.

A better statement of Gresham’s law might be “People prefer to give bad money and get good money.” However; even that doesn’t describe what really happens. Different people have different views on what makes money ‘good’ or ‘bad’. Those viewpoints affect each other. When everyone seems to want a particular type of money, that perception will make that particular type of money worth more.

Money and Cash

In the tribe where the ladies made the money by scraping the leaves, the amount of money and the amount of cash were the same. That was not true in the up-time world, and it wasn’t true in Grantville the day after the Ring of Fire either. In the rest of Europe, at the time of the Ring of Fire, it was sort of true that the amount of money and the amount of cash were equal. Paper was being used, in the form of bills, invoices, and letters of credit. These papers mostly reflected coins sitting in a vault somewhere. Those papers that didn’t reflect coins mostly reflected goods in a warehouse somewhere. On the other hand, there was fractional reserve banking, so even before the Ring of Fire, quite a bit of the paper represented paper which represented paper which represented coins. {So I guess, when you get down to it, it wasn’t true that all the money was cash, in the rest of Europe either, at least not in the business world. Most people thought it was though, and a lot more of the money was cash then it was up time.}

Cash transactions were mostly not the way money worked in up-time America. Nor could cash transactions be the way money worked in Grantville right after the Ring of Fire. There simply was not enough cash to make it work that way. Cash in our case is both coins and pieces of paper, or bills. Money includes coins, bills and the numbers recorded in your bank account. The money in your bank account can be exchanged for either goods and services or cash. For the most part, money is exchanged for goods and services. While the amount of cash inside the Ring of Fire did put some limits on the amount of money in the Ring of Fire, it was not a one to one relationship. Instead, it was a flexible relationship that depended on how much ‘walking around’ cash people felt they had to have and what they could come up with in a hurry to act as cash.

Debit and credit cards were a blessing in the early days because they decreased the amount of cash that was needed by a pretty large factor. There were enough card readers that most businesses inside the Ring of Fire could have one. The fees for using debit cards were removed. The bank and credit union were encouraged to issue debit cards and people were encouraged to use them. Debit cards let people use money without using cash. This let us use less cash than we would have needed otherwise, at least inside the Ring of Fire. Since most of the transactions in American dollars in those first months were inside the Ring of Fire, money moved much faster within the Ring of Fire, which made what little cash we did have go farther. We also used cashier’s checks as though they were cash. The use of cashier’s checks also reached outside the Ring of Fire.

Inflation is a Cold. Deflation is the Plague.

The limit on the money supply must fit the overall economy. Too much money and the money will lose its value. Too little money and something else will take on the role of money. In the time it takes to find that something else, new businesses aren’t started and old businesses go broke. The amount of goods and services will try to match the money supply. The farmer pours his milk on the road because he can’t get a fair price for it. A hamburger costs a nickel but no one has a nickel. Almost no one, that is. For the people that actually have what little money there is, it’s a time of great power and the opportunity to manipulate their money into even greater wealth. That happened a few years before the Ring of Fire, at the end of the ‘kipper und wipper’ business.

There is actually a fair amount of flexibility in the system but most of the flexibility is on the inflation side of the equation. When the money supply gets high, people spend faster but this effect is naturally limited by how much money they have. Within reason, inflation actually has a positive effect on the economy. People spend money on goods and services that in turn employ the people that make the goods and provide the services. The amount of goods and services increases to try to match the money supply.

When the money supply gets low, people start hoarding their money. That takes it out of circulation as though it had been buried in the back yard. This in turn decreases the money supply even more, causing more people to hoard their money. The feedback in the system means that small scale deflation rapidly becomes large scale deflation. Meanwhile, the people that would have been employed in providing the goods and services that would have been bought with the money that is being hoarded are unemployed and not producing anything. Everything is cheap but there is less and less of it. Again, the economy tries to fit itself to the money supply.

Money and Speed

How much money there should be in the economy is also affected by its speed of flow. Up-time money flowed really fast. Within the Ring of Fire, it mostly flows pretty darn fast, too. Outside the Ring of Fire money moves a lot slower. That means we need more money for the same sized economy. If a dollar is used in ten transactions a day it’s the same as if there were ten dollars used in one transaction per day. When you put your money in the bank, that money doesn’t stop being used. Most of it gets loaned out and keeps right on being used in other transactions. Money in the bank is not removed from the money supply the way money in your pocket is removed from the money supply. When you use your debit card to pay the grocer, the money goes straight from your account to her account and is never removed from the money supply. When you use a dollar bill to pay a merchant who puts the dollar in his cash box and takes it to Magdeburg, that dollar is out of the money supply for a couple of days. It’s not much, but it adds up to the fact that for every dollar needed up-time for an economy of a given size we need several dollars down-time, because each dollar moves slower. There are fewer transactions per dollar per day.

That’s what all the business about fractional reserves means. When the bank loans out the money you put into it, that money goes back out into the economy to act in other transactions. This has the same effect on the economy as having more dollars. Money gets counted in weird ways. People start talking about the money supply and money starts getting counted several times. For example, Fred deposits a thousand dollars in the bank. The bank then makes a loan to Joe and Joe deposits the loan in the credit union. That money now gets counted as a deposit at the bank and at the credit union. Once the credit union has the money, it makes another loan and so on. If there is a ten percent reserve, the money ends up being counted a little less than ten times. Every dollar equals ten dollars or a touch less as it moves around the economy. It isn’t that there is more money or that there is fake money. It’s just that the money is moving faster and being used more constantly. The effect on the economy is just the same as if there were several dollars to every dollar there really is. This happened down-time too, just not so fast. The effect of the difference in speed is that as money moves away from Grantville and electronic banking there seems to be less of it.

Who gets the Money?

When you add money to the money supply, it is going to appear first in someone’s pocket, some institution’s vault or as an addition to some account in a ledger or on a computer somewhere. In the tribe where the ladies made the money by scraping the leaves, it appeared first, in effect, in their pockets. They spent it to support themselves. This provided for them and put the money out in the community. This system was nice for them and a convenient way for the tribe to support the aged and infirm. Before the Ring of Fire, the money first appeared in the pockets of the owners of the mints. These were the people who had acquired the right to mint money. In up-time America the money first appeared as an addition to an account in a Federal Reserve Bank. It also disappeared from there but we’ll get to that later.

That first use of new money is tremendously profitable for the person that gets it. Everywhere throughout time economies have needed some limiting factor. For the ladies of the tribe the limiting factor is the simple effort involved in making the money. If the money they make goes down enough in value they stop making it for a while and do something else more profitable. For the minters before the Ring of Fire, and even now in most places, the limiting factor is supposed to be the scarcity of the raw material, silver and gold. The minters are supposed to buy the raw material, convert it into coins and only make a little profit. Instead, they often debase the coins, so they can make more with the same amount of silver, and increase their profits. Even if they didn’t do this, it would not solve the basic problem. The amount of gold and silver you have to make money with depends on how much gold and silver is found, not on how much money the economy needs. With a gold or silver based money, the amount of money introduced into the system is, at best, loosely related to the size of the economy.

For the up-time Federal Reserve Bank, the limiting factors were a combination of things. Probably the most important limitation was that they couldn’t spend the money any way they wanted to. The Federal Reserve Bank could buy government securities or loan money to member banks, but that was about all. The only profit they acquired was the interest that was received. If they loaned too much money out, inflation kicked in and decreased the value of the dollar and therefore the value of the interest they received. On the other hand, if they didn’t loan money out they didn’t earn the interest. This also meant that in general, the inflationary effect happened before the profit occurred, not after.

There were other factors. The board of the Federal Reserve was politically appointed and hired on the basis of the overall health of the economy. The Board was not hired based on how much profit the Federal Reserve made. The people who received the interest weren’t the people who determined how much money to loan out. Money was only loaned to other banks which made it harder to do ‘sweetheart’ deals. The Board couldn’t loan money if no one was borrowing, which meant that they had to lower the interest rate to something the market would bear or loan out less money. They had to go to the Treasury to get the actual cash and they had to pay for that cash. Like the government, the Federal Reserve Bank had a number of checks and balances on it. Our Federal Reserve also has checks and balances, although they are a bit different.

Standards: Gold, Silver and Other.

While the ultimate determination of the value of money is ‘what people think it’s worth’, there are a number of ways to convince people that money is worth something. One way is to tie the value of money to something else. The gold standard says that one dollar equals a certain amount of gold. That doesn’t mean that it uses gold coins, it just meant that X amount of currency can be exchanged, for a specified amount of gold on demand.

The bank florin, which is generally called a guilder, of the Wisselbank van Amsterdam is based on a fixed silver weight of a reformed coinage as determined by a monetary ordinance of the States General of the United Provinces in 1619. This florin/guilder is used simply for reckoning or accounting purposes in the Wisselbank: all merchants who deposit coins, bullion, or paid bills-of-exchange (Checks) into the bank are credited with values reckoned in guilders. If you give the Wisselbank a pound of gold you get so many guilders. If you give them a sack full of debased coins you still get guilders, give them a check on someone else’s account and you get guilders. By the time of the Ring of Fire there were a lot of paper guilders floating around Europe and a lot of silver and gold, coins and bullion in the Wisselbank vaults. Wisselbank provided the basis for a silver standard paper money. This silver standard paper money was better than silver coins because you know how much silver a Guilder is worth and it’s fairly hard to be sure just how much silver is really in a silver coin.

Whether it’s gold, silver, tobacco, or goats, commodity standards have some real drawbacks. They are very dependent on the quantity of the commodity. They require a large reserve of the commodity, either in the money itself or the commodity stored by the issuer. That is, you must trade the commodity directly as with gold coins where the commodity is the gold in the coins, or the issuer of the money must have a large stock of the commodity, as in Wisselbank notes where for every note there is a weight of silver sitting in the bank. This means that the issuer is not in control of the amount of money circulating in the economy. No one is in control of the amount of money in the economy. It becomes an economy of random chance. The other problem is that the commodity takes on the value of money. When this happens, it tends to inflate the value of the commodity beyond all reason. This is a good reason for people to use monetary metals if they are going to use commodity based money. Monetary metals are not good for much else and if their value gets artificially inflated, the inflation does less damage to the over all economy.

The other standard for a money supply is the full faith and credit standard. This is often called fiat money because the standard is usually established by law. It is the hardest to get to work but avoids the problems inherent in commodity based money. It is not backed by a single commodity but by the full faith and credit of the issuer. Which means that the issuer can control how much money is in the economy by adding money gradually as the economy grows, or even shrinking the money supply if the economy shrinks. It can be used as an effective tool to encourage economic growth. It carries its own potential drawbacks, which are mostly focused on the temptation to issue money. If the issuer is corrupt or just desperate for money, he can create more money by just deciding to do so. Figuring out how to have a credit based money supply, without massive inflation, whenever the issuer had the need for a bit of extra cash, was probably the most important economic knowledge brought back with the Ring of Fire.

In most of Europe today the silver standard is dominant. Most transactions are based on silver coins. How much silver is in any of the coins is often uncertain. Germany went through a primarily fraud based inflation in the first years of the war. It was called ‘kipper und wipper’. ‘Kipper und wipper’ refers to the special scales they used to determine if a coin was the proper weight for the value it was supposed to have. The cost of the war meant that the princes had money minted like crazy, which caused inflation. Then, in 1622 the use of the ‘kipper und wipper’ money was outlawed. This regularization left thousands of people destitute. It also drastically reduced the money supply. This reduction caused deflation. There is a lot of distrust of money, minters, princes, and everyone involved in the creation of coins. This distrust could have worked either for or against us in those early days. As it happened, it worked for us. If it had worked against us, we would probably mostly be dead by now.

There are dozens of different mints that mint dozens of different coins each with its’ own value. Silver content was mostly regularized after the ‘kipper und wipper’. Still, types of coins change often over the space of a few miles, and the farther you get from where a coin was minted the less the coin is worth. There are letters of credit based on coins that are no longer minted. If a coin is no longer minted it cannot be debased; therefore, it is safe to use as credit. The ‘cream of the crop’, the most valuable coins, are the Amsterdam Guilders and the Venetian Ducats. Before the Ring of Fire both of these types of coins were hard to come by in Germany.

The up-time FED and our FED

In the United States of America the Federal Reserve System was a two tiered system. At the top was the Federal Reserve Board, seven board members appointed by the president and confirmed by the senate. The Board members were appointed for terms of fourteen years. The chairman and vice chairman were appointed for four year terms and were selected from the membership of the Board. The second tier was the Federal Reserve banks, which executed the policies of the Federal Reserve Board. They were the entities that actually loaned the money to the member banks.

In the New United States the Federal Reserve System is also two tiered, at least in theory. The top tier is the main Federal Reserve Bank, whose board is appointed by the president with the advice and consent of congress. This board is also appointed for fourteen year terms. The second tier is: “such subsidiary federal reserve banks as congress shall from time to time find it prudent to create.” Congress has not yet found it prudent to create any subsidiary banks. Congress won’t find it prudent to create any subsidiary banks either. With the recent change from the CPE to the USE the right of individual principalities within the USE to issue money is being moved to the USE government.

Since the USE government is adopting much of the up-time based money system, what will probably happen is that the New United States Federal Reserve Bank will become the Federal Reserve Bank of the USE. East Virginia, or whatever we call it, will get the first subsidiary FED bank. At that point, East Virginia (or whatever) will no longer have the right to print money, and neither will any of the other principalities in the USE. Instead they will get their new money from the main Federal Reserve Bank in Magdeburg.

Up-time, the Federal Reserve Board bossed the Federal Reserve banks. For instance, the Fed Board had, by law, the power to fire any officer of any Federal Reserve Bank. The Board had to give a reason for any firing, but there was nothing in the law that limited what that reason could be. Differences over monetary policy would do just fine as a reason. There were several regional Federal Reserve Banks, which were invested in, but not controlled by, the member banks. For a privately owned bank to become a member bank of the Federal Reserve System it had to buy stock in the regional Federal Reserve Bank proportional to the size of the member bank. Six percent of the member bank’s assets were the required proportion. If the member bank increased in assets it had to buy more stock. If the assets decreased the bank had to sell some of the stock. Up-time, stock in a federal reserve bank cost one hundred dollars per share. Each share paid a set six percent interest annually. In practice, member banks had to put up the seed money for the Federal Reserve banks.

The down-time Federal Reserve System is evolving to work a bit differently. We have the main Federal Reserve Bank and eventually we’ll have subsidiary reserve banks. The subsidiary reserve banks will probably end up being part of the same organization. They will be more like branches of the main Federal Reserve Bank, instead of separate banks. All the member banks will invest in the main bank, even if they deal with it through a branch. That will be up to the USE congress but it seems the logical way to do it.

Another important thing to remember about the up-time Federal Reserve System is that it was the product of a series of compromises made over decades. Someone would make a deal and the result would over time come to be the way things worked, with the power of precedent behind it. Then another deal would be made, but would have to work around all that precedent. Then it would all happen again on another issue. Some of the compromises made things more complex then they needed to be.

The down-time Federal Reserve is going through a lot of the same sort of changes. First with the informal reserve bank set up by the emergency committee, then the more formal Federal Reserve Bank set up by the New US government, and now the Federal Reserve System that the USE government is setting up. However; it’s all happened in just a few years, so there is not nearly so much precedent to deal with. We also have the model of the up time federal reserve system as a model of what we do need as well as for what we don’t need.

The Up-time Federal Reserve System had several ways to control the money supply. Some of these methods are applicable down-time. Other methods, which require a larger banking system to work properly, do not apply to the down-time system. There were thousands of member banks in the USA Federal Reserve System. The number of banks involved and the speed of monetary transfer from bank to bank made for a very stable monetary system. Financial disasters in one area could be compensated for in another area. Here in the USE, we started with two banks, the Grantville bank and the credit union. Up-time, instant monetary transfer was available everywhere. Here, we can only provide instant monetary transfer within the Ring of Fire. As the number of banks and the speed of communications improve, our reserve system becomes more stable. By the time the up-time Federal Reserve System was set up, there was already a great deal of public debt and an established market in those public debts.

In Grantville, we were trying to set up everything at once. We needed to finance both the government and the emergency projects the government needed. We also needed to establish markets for both internal and external trade in everything from food to securities. The up-time government already had a treasury department, but we had only the Finance Subcommittee of the Emergency Committee. The up-time government had the constitutionally mandated power to create money and borrow money. When Coleman Walker became the de facto Federal Reserve System, we didn’t even have a constitution.

One effect of this was that, for us, the reserve bank system is directly constitutionally mandated instead of a derived system based on other powers granted to the government.

It’s in the powers of congress “To establish a reserve bank and such subsidiary reserve banks as become necessary”. Our constitution also says “To mint coins and print money” rather than to “To coin Money”.

The way the reserve banks up-time and down-time create money is basically the same. In both cases, it amounts to the Fed writing a check. The money is then either loaned to member banks or used to buy government securities. To remove money from the money supply the Fed either sells securities or refuses to loan money to the member banks. That hasn’t happened yet, and it is not likely to happen anytime soon.

The Ring of Fire

The Ring of Fire dropped us into a situation that was as financially confusing as it was confusing in general. There were lots of different coins, each with its own value. Many of these coins were illegal and worthless, and there was a general distrust of coinage. We, the up-timers, had some decisions to make and we had to make them fast. The basic decision, from which all others would flow, was whether to keep the American dollar, or to abandon the American dollar.

The arguments for abandoning American dollars were based on the reasonable assumption that dollars were worthless without the government that had backed them up-time. Plus, the assumption was that the down-timers would not accept paper but instead would insist on coins with high silver and gold content. That second assumption proved to be wrong. In a way, the first assumption also proved to be wrong. The old US didn’t exist down-time but we brought the idea of the US with us.

The arguments for keeping the dollar were somewhat theoretical. Nothing like the Ring of Fire had ever happened before. It was an event sort of like a reverse gold strike. When a major gold strike is made one thing that happens is that the value of gold and therefore gold based money goes down locally so that eggs wind up costing eight dollars apiece. The effect is that of adding drastically to the money supply without adding to the products that the money can buy. The price of everything goes through the roof until the system can adjust. The Ring of Fire did the opposite. It added drastically to the amount of product available. If we had depended on the already scarce down-time money there would have been a disaster. There would not have been enough money to support the product that was suddenly available.

The closest analogy that the Finance Subcommittee could come up with was the ‘busts’. The ‘busts’ happened when market booms produced large amounts of credit money that suddenly disappeared when the boom went bust and the loans were called in. When that happened the economy had the same amount of product it had had the day before the bust, but a lot less money to pay for it. For instance, the stock market crash of 1929 was such a bust. In the depression that followed the market crash, prices dropped like a rock, but because of the lack of money to buy products and pay workers, unemployment reached forty percent in some places.

In the best case scenario the Finance Subcommittee could come up with, all the locally available money would get used up in the first few weeks. Prices would drop like they did in the great depression. The up-timers would end up selling millions of dollars worth of irreplaceable goods for a fraction of their worth. The worst case scenario was not really all that different. In the worst case scenario, the Finance Subcommittee looked at the effect on the wider economy. As the down-time money got used up, it wouldn’t just mean that the up-timers would get paid less. It would also mean that the down-timers ran out of money to pay other down-timers. The product of the Ring of Fire, sold at a pittance, would cause a general depression in the part of Germany that was within easy trading range of the Ring of Fire.

The Finance Subcommittee was afraid that unless enough money to match the influx of product that came with Grantville was introduced, and introduced fast, the lack of money would spell disaster both for the Ring of Fire and the surrounding area. I think they were right. In fact, I’m pretty sure the Finance Subcommittee and the bank didn’t add enough money to the economy, or didn’t set the value of our money high enough at first.

The Finance Committee made the decision to keep the system of American money, as well as to continue to use the up-time cash on hand. This meant that money would be backed not by any single product, but by the aggregate and projected wealth, as well as the “full faith and credit” of the United States. That decision was made provisionally within the first few days after the Ring of Fire. The need to make a decision quickly was caused by the need to reopen the stores.

The provisional decision to continue using up-time money and money systems was made less provisional when the up-timers realized that German merchants were familiar with the concept of notes as a means of transaction. Most Germans could read and most had seen and dealt with contracts of one sort or another. The concept of a piece of paper that was given in exchange for goods or services was not foreign to them.

Selling the American Dollar

In the first days after the Ring of Fire the Emergency Committee announced that bank accounts in the local bank and credit union still existed, that debts owed to them were still in force, and that electric bills, phone bills, taxes and fees paid to either the government or the town of Grantville or the emergency committee must be paid in American Dollars. If all you had was down-time currency you would have to get it exchanged before paying your bills. This came as a relief to most up-timers because it meant the money they had was still good for something. It didn’t convince all the up-timers that American dollars were good for much else though. There were quite a few people that thought we would have to go to a gold or silver standard. There was very little silver coin in those first days. The Emergency Committee also announced that miners, employees in the power plant and others employed by the government would be paid in American Dollars. The rate of pay stipulated in the agreements before the Ring of Fire remained the same. This announcement was met with less pleasure because few people believed that the down-timer farmers would accept paper for food.

Mr. Roth, the jeweler, had a supply of gold, silver, and cut gemstones. He donated almost his entire stock to give the bank monetary metals. Two weeks later, on the advice of Balthazar Abrabanel, Alex MacKay deposited the King of Sweden’s silver in the Grantville bank. Captain MacKay had the authority to dispense the silver as needed to pacify the area. He had already offered to pay the up-timers all or part of the silver if they would take the king’s colors. That offer had been turned down, but the offer of an alliance for which he would pay the expenses was accepted.

The Abrabanel’s had convinced Captain MacKay that a good way to facilitate the welfare of the area was to deposit the money in the bank of Grantville and change the better part of it into American dollars. This deposit, along with the Roth’s gift, gave the bank of Grantville a fund of downtime coins and precious metals. This fund could be given out in exchange for dollars on demand.

After consulting with the Abrabanel’s, the bank manager set the rate of exchange at two hundred dollars to the Dutch guilder with all other local coinage priced relative to the guilder. The guilder was used because guilders have a constant amount of silver. Mr. Walker was desperately concerned that he had set the dollar too high and that his small supply of down-time money and precious metals would be gone in a matter of weeks. That didn’t happen.

The Germans, even the local farmers, were quite used to the idea that you used the local money of wherever you were doing business. Besides, the Ring of Fire was a miracle and the people and things within the Ring of Fire were holy. Not everyone believed this, but there was enough belief that more people wanted up-timer money than wanted to avoid it. It also helped that several of the stores inside the Ring of Fire put up signs in English and German that said they only accepted American Money. Some of them did it for patriotic reasons, others because they simply didn’t want to mess with down-time money. Many did it because in the first weeks after the Ring of Fire a lot of up-timers got burned by the ‘kipper und wipper’ money that was still sitting around all over Germany. People would sell things for “good silver coins” and end up with mostly copper coins that were virtually worthless. Whatever the reason, the effect was that each sign became an ad for up-timer money.

The first big problem the Bank of Grantville had was not a lack of silver down-time coins, but rather a lack of up-time cash. No down-timer was willing to leave Grantville without a coin or bill that said “In God We Trust” right there on the bill or coin. If a dollar bill is holy, how much more holy is a twenty dollar bill? A lot of down-timers figured it was twenty times as holy. I know a lot of people that keep up-time money as good luck pieces. I’ve also heard more than one story of a life saved by evoking the power of the dollar.

The Battle of the Crapper turned the trickle of refugees into a flood, which relieved some problems and made others worse. Refugees were both a source of labor and an expense. The labor was used to mine coal, to build and improve roads and to build emergency housing. All too few of the laborers were used to produce products for export. That first summer, we were spending our capital goods to survive and tool up. In the months of June, July and August the American Dollar hovered right around $200 to the guilder. By August a few of the simpler, quicker businesses were off the ground and turning out products. In September the dollar had risen to $180 to the guilder in Grantville and the surrounding towns. Still, the dollar was simply not accepted beyond more than a day’s walk away.

In September of 1631, the Abrabanel extended family did two things to solidify the American Dollar. First, they transferred quite a bit of money to the bank of Grantville which added to the silver and gold reserves. Second, and more importantly they notified all their trading partners that they would buy American dollars anywhere in Thuringia at a rate of $180 dollars, or less, per guilder. They quite explicitly did not offer to sell American dollars at that rate. The effect of this was to put a floor under the American dollar at around $180 to the guilder. It meant that $180 would buy you a guilder but a guilder, in all probability would not buy you $180. If you didn’t trust dollars they were still worth at least $180 to the guilder.

In part this was to aid the New US, but only in part. The Abrabanel clan had looked at the industries springing up in Grantville and at the policies of the emerging reserve bank. Dollars were a good investment. The investment was risky if something happened to the Ring of Fire, but potentially highly profitable. The Abrabanel money that was deposited in the Federal Reserve Bank bought membership in the up-timer Federal Reserve System. This made the Abrabanel bank of Badenburg the third member bank of the New US Federal Reserve system.

As the amount of goods and services produced in Grantville and in the towns around the Ring of Fire increased over the winter of 1631-32, the number of dollars, in both cash and account balances, failed to keep up. Money, especially American Dollars, became hard to come by. By the spring of 1632, the economy in Thuringia was teetering on the brink of a deflationary crash. The Reserve Bank of Grantville lowered the prime interest rate by more than a point. The same day, in an obviously coordinated move, the Abrabanel’s announced over the radio that they were now buying American Dollars at a rate of $160 to the guilder. They also extended the area in which dollars would be bought to include Franconia. After the Croat raid in the fall of 1632, the range was expanded to include the CPE. This appeared to be a risky move because the amount of dollars now in circulation was enough that if they were all sold to the Abrabanel’s, the sale would break the family. There was very little danger of that happening, though.

Also in the spring of 1632 the New US dollars were introduced. Mr. Stone had a dye works by then. This dye works could provide inks that were unique. He also had a virtual monopoly on the inks and could have required the government to pay him a fortune. Instead, because Mr. Stone is Mr. Stone, he required a different kind of payment. Really, if you’re going to ‘hold up’ the government for puns, they ought to at least be good puns. If he was going to do this, he should have done it right. There had to be some way to get a fin on the five dollar bill, even if you had to put a drawing of the whole fish on the bill. As it turned out, it was like telling a joke where part of the setup is missing. The only good news is that Mr. Stone only charged a mildly exorbitant amount and promised to keep that particular green die for the new dollars and nothing else.

The introduction of the new American Dollars gave an example of the strength and limitations of Gresham’s law. There was a clear preference for “real up-time money” but the tendency to horde it was limited by the general scarcity. Because of the scarcity, we were no where near an inflationary situation. The new dollars barely made a ripple in the demand. The original up-time printed money did gradually fall out of general use but that’s primarily because they are already becoming collector’s items. Additionally, the bank has a policy of accepting these old dollars, but it does not re-circulate the old dollars. The effect of the newly printed dollars on the creditability of the old American dollar was a nine week wonder. There was a blip in the dollar’s price but no lasting damage.

From the beginning there were those who preferred down-timer currencies and those who preferred dollars. You could tell who you were dealing with by what currency he preferred to use. If he had both down-timer money and American dollars he would try to use the less preferred currency. This naturally tended to concentrate the types of currency along political lines. The experts, up-time and down-time, watched as attitudes gradually changed. From almost the beginning Grantville was a drastic value-adding economy. For every dollar that was spent on raw material, ten dollars was received for a finished product. This fact was somewhat hidden at first by the tremendous amount of setup costs. Because of the set up costs, in the beginning down-time money flowed out almost as fast as it was flowing in. However; much of those costs were paid by selling goods for down-time coinage, banking the proceeds and then spending American dollars in up-timer shops to produce the production machinery needed to manufacture something.

Silver flowed into the Ring of Fire and was used to buy dollars. The dollars went around a couple of times and were then sold for silver to buy stuff from outside the Ring of Fire. Gradually, more and more of the stuff bought outside Grantville was bought with dollars. This happened because the sellers were just going to turn around and buy Grantville products with what they received. We, Mrs. Higgins and the Sewing Circle, had always tried to use American money from the time Mrs. Higgins sold her dolls. Mr. Schmidt, once he had taken over HMSC, had been more willing to buy stuff with down-timer money, he was more used to it, but had always tried to get people to pay for stuff using American money and charged extra if people wanted to pay in down-time money. He told me he had been sold on American Money on his first ride through the Ring of Fire. To the greatest extent possible, he wanted all the liquid capital he had in American dollars.

In the fall of 1632 something strange started happening. People started asking for American money even when they weren’t planning to buy stuff from Grantville or the surrounding towns. People were taking American dollars to pay for totally down-time produced goods, as an investment. It made sense because having American dollars was like having a savings account that paid something like forty percent a year. Anyone who could afford it was buying American dollars and sticking them in the vault. I think a big part of this phenomenon was the daily quotes from the VOA. Anyone who had a radio knew what the American dollar was trading for in Grantville and that knowledge had an effect on what the dollar traded for elsewhere.

The investment money OPM got from Amsterdam helped a little because the bank felt that it would be safe to buy up more government securities with that money. This put more dollars into the economy. It was a lot of money. Most of those dollars bought raw materials for Grantville industry and then went into someone’s vault. The feedback effect was amazing. In a three month period in early 1633 the American dollar went from $100 to the guilder, to $25 to the guilder, then back to $70 and then sort of stabilized at around $60 to the guilder. The Guilder has been slowly dropping against the Dollar ever since. In effect, the people that bought dollars were investing in Grantville and the businesses that were developing out of the Ring of Fire. The best I can figure, so far something like four million people have bought an average of five hundred American dollars each, as security against a return of ‘kipper und wipper’ style inflation. This caused a real problem for the bank. It meant that American dollars were being taken out of circulation in a way that made the bank afraid to issue more. The fear was that a loss of confidence could flood the market with American dollars. By mid 1633, the American dollar had evened out in its normal trading area at around fifty dollars. The Abrabanel’s backing of the American dollar was no longer either necessary or possible. The offer to buy dollars was still out there, but no one was offering to sell them at that price anywhere in the CPE.

The American dollar’s trading area had been expanding from July of 1631. It followed up-time products and up-time companies. Everywhere that up-time road work went, merchants from Grantville followed. Once the roads got to where the Saale and Werro rivers became navigable, trade and the American dollar moved along those river systems. There were political barriers to the American dollar but they were generally less effective then the physical ones. The political barriers mostly disappeared with the formation of the CPE, at least within the CPE. As the American dollar got farther from Grantville it decreased in value. However; back in Grantville, the dollar was increasing in value. Around the Ring of Fire there was a growing island of prosperity. The American dollar was still one of the dozens of currencies issued by cities and minters around Germany, but by early 1633, the dollar was the strongest currency.

The early down-time Fed

In the beginning the Fed was Coleman Walker. There really wasn’t anyone else once the Emergency Committee decided to use the bank of Grantville as the center for the money supply. Mr. Walker was the chairman of the Finance Subcommittee and the manager of the bank. The job sort of landed on him. He was advised by Henry Dreeson, by the Abrabanel’s, and by Robert Aronian, from the credit union.

Two things limited the money supply. First was the limited supply of cash, and second was the fact that Mr. Walker insisted on maintaining the pre-Ring of Fire asset ratios. There was tremendous pressure in the first few months, July to September, to do things. The Emergency Committee didn’t have the money to do most of the stuff that absolutely had to be done. The bank and the credit union had reached their credit limits almost immediately. They had loaned out all the money that they would have been allowed to loan, up-time. Mr. Roth’s gold and Captain MacKay’s silver each helped by adding to the banks deposits. Later, when items were sold to merchants entering the Ring of Fire, it also helped that the money was deposited in the bank, at least for a while.

The cabinet wanted the Fed to buy securities, loans issued by the emergency committee. Mr. Walker wasn’t willing to buy very many of these securities. I’m not sure who was right. In a way, what I think was most right was the series of very public fights between the cabinet and Mr. Walker.

Every week or two, there would be another fight between Mayor Dreeson, who represented the president, and Mr. Walker. The Emergency Committee needed money. For Mayor Dreeson, the solution was government bonds and the issuance of new money. He had done it before up-time when Grantville needed cash for civic improvements, and the voters approved the measure, at least the bonds part. It wasn’t that there wasn’t enough wealth in Grantville to pay for everything that needed doing. It wasn’t even that the government wouldn’t have enough money. The government just didn’t have enough money right then. The coal mine was just getting started and most of the mine’s output was needed for the electric plant, The Emergency Committee was spending money to open up the new mine, and getting the designs for the gearing down of the power plant. The Emergency Committee was building roads and so on. ALL the stuff that the emergency committee was doing needed to be done both to keep us safe and to allow trade which would bring in taxes.

What the emergency committee was doing in those first days was not optional and everyone knew it. Most of it would pay for itself, and then some, over the next few years anyway. This fact cut no ice with Mr. Walker. He would not yield. He would agree that the expenses were needed and prudent and then point out that there was not enough money. As manager of the Bank of Grantville, he would agree that the loan was good and then point out that the deposits were not enough to support it. As the Fed, he would refuse to add to the money supply until and unless he could be shown solidly that the wealth in the Ring of Fire was enough to support it. Mr. Walker was desperately afraid that the down-timers would notice that American money was just paper, and sometimes even less than paper. Sometimes, American money was only accounts marked down in a ledger somewhere.

The down-timers had noticed that up-timer money was just paper. Oddly enough, they really didn’t care that much. No attitude is universal. There were those who didn’t trust American money because it was paper and not backed by gold or silver. Others distrusted American money because they distrusted up-timers or because the magic of the Ring of Fire frightened them. However, the prevailing view, in and around the Ring of Fire, was that American money was the next best thing to sacred.

The fights between Mr. Coleman and Mr. Dreeson, which were often public, had two major effects on the perception of American money. In the short term, these fights added to concerns about the American money. In the long term, the fights made it clear that the president could not just print money as needed. The fights made it clear that American paper would not be inflated for the convenience of the government. Solid evidence of economic expansion was necessary before more money would be issued. In the months between the Ring of Fire and the first election, Coleman Walker established himself as the protector, almost the chief priest, of the American dollar.

In a wider sense, the reluctance of Mr. Walker to expand the money supply represented a real danger to the economy of Thuringia. The American dollar maintained a price of $200 to the guilder but both dollars and down-time monies became hard to come by. There was noticeable deflation between July and September of 1631. The price of goods, especially down-time goods, dropped during this period. The Abrabanel deposits allowed the Fed to loosen up the money supply at the same time that the dollar started increasing in value relative to the local currencies. This allowed the bank of Grantville and the credit union to embrace slightly looser fiscal policies. The Abrabanel deposits also brought the Abrabanel Bank of Badenburg into the Federal Reserve System. It became the first down-time member bank of the reserve bank system.

After the first general elections, in early 1632, the First United States Reserve Bank was officially started. The board of the first Reserve Bank copied the up-time reserve board in that it had seven members appointed for fourteen year terms. However; the uptime restriction against being a member of the board and working for banks was placed in abeyance for the first term. There simply were not enough people for all the jobs, and for the first few years, membership on the Board would be a part time job, anyway.

The Croat raid and the creation of the CPE US had little direct effect on the New US Federal Reserve Bank. American Dollars were still one of many currencies in central Germany. The Croat raid did have an effect on the way the New US was perceived. One of the biggest threats to the viability of the American dollar was gone. Grantville would not be destroyed by an attacking army. When that realization sunk in, early in 1633, the dollar went crazy for a while. During that time down-time goods became amazingly cheap for a while. On the other hand, up-time products became horribly expensive.

In March of 1633 Ferdinand II, under increasing financial pressure, placed Gunter Von Liechtenstein in charge of the treasury of the Holy Roman Empire. In a move that startled almost everyone Von Liechtenstein, instead of repeating the ‘kipper und wipper’, introduced printed paper money to the Holy Roman Empire. This paper money is, in theory, tied to silver and exchangeable on demand for a set amount of silver, like the Wisselbank guilder. However, to exchange Ferdinand’s paper for silver, you have to be in the capital. Making such an exchange won’t gain you the king’s favor, either. Remember the movie “Time Bandits”, where whenever Robin Hood gave money to the poor one of his merry men would punch them? I imagine trying to exchange Ferdinand’s paper for silver is a bit like that. Ferdinand’s paper had little effect on the value of the dollar inside the CPE. Outside of the CPE, it hurt us. After ‘kipper und wipper’, people figure if a Liechtenstein can do it, it can’t be trustworthy.

In September of 1633 the Spanish put Amsterdam under siege. For a while, there was no access to the Wisselbank, and fear that the Cardinal Infante would, if the siege was successful, loot the bank. The fear of looting and lack of access dropped the value of Wisselbank notes and caused a second rush on the American Dollar. It took the business community of Germany all of five seconds to figure out that no one could come in and steal the silver or gold that backed the American Dollar because the American Dollar is not backed by silver or gold. It calmed down a bit after the Wisselbank was moved to Antwerp, but the dollar is still higher then it was before the siege.

That’s the way things stand now in the USE. There is a strong, partly religious belief that up-timers actually understand money and can actually manage a money supply made entirely of paper and bank notes without drastic inflation. This belief has bought us time to prove our selves, but at a price. We cannot afford many mistakes. Meanwhile the Federal Reserve System is going through its third change in as many years. This time it’s changing from New US Dollars to USE dollars and we don’t know yet how the change will be received. King Gustav is not well known for his economic ability.