Part II - Revolutionary Economic Policies
The troops, returning from a victorious conquest, were praised as heroes and the entire Kingdom of Aygonot celebrated with the King. While widows and orphans grieved for their losses, many soldiers took delight in their plundered loot, and formed a line to claim their wages as promised vis-a-vis the Gold Warrants issued on the field. For the first few days, the reserve of Gold in the Treasury fluctuated, increasing at first with the deposit of the King's Bounty, but then decreasing with the gold redemptions by returning soldiers. Knowing of the King's love for Gold, and his tendency to covet the levels in inventory, even that which was foresworn and committed, the Goldstein Brothers (the two factors of the Treasury) began to fear lest the King should become aware of the rapidly depleting inventory, particularly Donduit, the more reserved and conservative of the two brothers.
Then a strange phenomenon occurred. After the public victory celebrations wrapped up, many soldiers, primarily those from more distant fiefdoms, began to redeem Gold for Gold Warrants. Let it be repeated, rather than exchange Warrants for the promised Gold, individuals were actually exchanging Gold in their possession for the Warrants. Though odd at first sight, it is not a surprise that this began with the soldiers living far away from the Capitol, because of the persistent threat of roadside bandits. The notion that it was safer to carry paper than the physical gold incorporated a sense that the security afforded by an orderly kingdom outweighed the surety of physical possession of the tangible wealth. Further to the surprise of the Treasury, common merchants and town folk began exchanging Gold for Gold Warrants, even though only in modest amounts.
When Isaiah and Don audited the Treasury, Don was relieved, and Isaiah delighted, to find that the inventory level had barely dropped as a result of the war. In preparing a report for King Aygonot, the Goldstein Brothers were careful to include an assessment (albeit theoretical) of the value of the conquered land in addition to the inventory levels of physical Gold, thus showing a glowing report of the financial health of the Kingdom. Because the concept of Gold Warrants was new, there was some debate among the brothers as to how to account for the Warrants in circulation, but in the heady euphoria of the Kingdom's successful expansion, Isaiah won over a reluctant Don, and any accounting of the recently issued warrants were left off of the books.
Of course, having faced the prospect of a humiliating defeat, relief as much as jubilation created an intense conflict in the mind of King Aygonot. In an expression of gratitude, he called a private conference with the Goldstein Brothers and rewarded them with a generous token of appreciation – in the form of Gold Warrants, of course. He further inquired of them how he might further extend the success of this brilliant new economic policy, for he knew that it had played an indispensable role in the latest victory. Without depleting the Kingdom's reserves, he was able to boldly lay out a plan of conquest before his nobles, additionally eliminating the risk of transporting troop wages through hostile territory, and furthermore vanquishing the long observed calamity of the enemy enriching themselves by looting battlefield casualties or robbing the paymaster's wagon en route. So, was there a means whereby “proxy wealth” might be used to expand peacetime economic growth?
While acknowledging the merits of promissory notes in the battlefield, Donduit cautioned against issuing more Gold Warrants, envisioning future problems with counterfeit or disputed notes. He further pointed out that within the Kingdom, there was still a problem of theft and banditry so the warrants did not offer much additional security, duly noting that the warrants were only redeemable at the treasury counter so there wasn't any such problem without the kingdom. Finally, Don sternly warned of the temptation to over leverage the Warrants, that it would become easy to gaze at the impressive inventory of Gold Bullion and fail to see that a portion of it was committed.
However, Isaiah noted that the miraculous use of the Gold in the Capitol for use in locales at a great distance away without having to move the Gold was far too great of a discovery to squander because of hypothetical risks. Of course, in the current atmosphere of success that enshrouded the kingdom, Isaiah's arguments were much more exciting and in the end prevailed, particularly when it was observed that the reverse exchange of Gold for Warrants, even if nominally, was beginning to occur.
To wit, King Aygonot called a week long council of regents, gathering the lords of all the provincial fiefdoms. He even haled the foreign lords of the conquered lands to attend, which they did with mixed feelings of trepidation and hope. Following a tour of the Treasury, an awe inspiring privilege, even for those who had already witnessed the wealth of the Kingdom, the council convened and Isaiah was invited to present a set of new laws governing the Treasury. They were simple, but provided a solid outline that the Treasury would redeem Gold in value proportionate to a share designated upon the face of the Gold Warrants. Because, it was noted, soldier's issued a wage by means of a warrant, the warrants would be transferrable to next of kin, and others to whom the holder would grant. Because the soldiers of the King frequently enjoyed wagering bets (although discouraged, it was virtually unenforceable to ban such and it provided a distracting past time for troops that might otherwise indulge in libations and other unseemly conduct while away in battle), the warrants were also designated as a medium of exchange in lieu of gold within the theatre of war.
It was further proffered, that, for the purpose of raising an army, warrants could be issued, albeit at a discount rate. All parties present, though it was not outwardly discussed, recognized that over time, the accidental destruction of certificates, the loss thereof in the battlefield, and however unfortunate, the death of the warrant holder, would lead to a natural rate of redemption less than what was actually issued. This anomaly would only benefit the King directly, and the feudal lords had already witnessed that Gold Warrants were perceived by conscripts as having slightly less value than physical gold. It was therefore agreed that the King would issue to the Lords, Gold Warrants at a discount rate of 5% less than face value, meaning for every 20 ounces of Gold negotiated, the Lords would receive 21 Gold Warrants.
It should be noted that this compromise would not have been considered except that the Goldstein Brothers spent many hours by candlelight auditing the issuance and redemption of the Warrants, and in a final report authored by Isaiah, argued in conclusion that less than 90% of the Gold Warrants would be eventually redeemed, representing an immediate profit to the King, simply by issuing warrants in lieu of physical gold. At a margin of over 10%, it was possible for the King to agree to a split with his Lords, knowing that every issuance represented a statistical margin of at least 5% of the face value of the certificates. Isaiah further put forth an argument (fiercely opposed by Donduit) that in perpetuity, the non-redemption rate of warrants would likely increase to even higher rates, and would never need to be reconciled. This was far too nuanced for the King, especially in these prosperous times, but whatever arguments supported the model of proxy wealth were quickly embraced regardless of any coherent understanding.
As the conference was about to conclude, Isaiah requested yet another audience before the council. During the second to last day, reports from the Treasury came in, confirming a theory that Isaiah had silently formulated, namely, that the Gold Warrants might be effectively used as a broad medium of exchange, in other words an instrument of barter throughout the Kingdom. Recognizing the seal of the Treasury and the endorsement of the King on the Gold Certificates, local merchants, only slightly reluctant at first, began accepting the Gold Warrants for the purchase of goods and services from the troops, especially those that had travelled from the provinces. Further, to his delight, Isaiah observed that merchants began informally using the notes as a means of paying for supplies. Isaiah realized that with the exchange of paper certificates, there was a substantial increase in commerce because of the ease of which business could be transacted. Inquiring with the King's sheriff, the Sheriff of Aygonot, he further discovered that reports of theft and banditry had noticeably declined, though the sheriff cautioned that not enough time had passed to demonstrate a real meaningful trend, further proposing that the bandits didn't know what to do with this new sophisticated form of wealth and warning that they would no doubt eventually figure out a way to take advantage thereof. Of course, Isaiah ignored the latter caution while fully promoting the preliminary findings signifying a reduction in criminal activities.
So, standing before the King and his council of visiting lords, Isaiah presented a plan for wide spread adoption of the Gold Warrants, that they might be used for every form of transaction, during peacetime as well as in war, on the Battle Front and in the marketplace, for the purchase of any and all goods and services, and the repayments of all debts, both public and private. Furthermore, Isaiah proposed an assortment of denominations to accommodate transactions both large and small, to further encourage wide spread adoption. At Don's insistence, Isaiah included a provision that only the King could issue Gold Warrants,
and that the King further established a system of weights and measures, and established an assayers office in anticipation that the citizens of the Kingdom would begin converting their Gold to Warrants. At Isaiah's insistence, Don recommended his nephew Wayan Goldstein for the post, who was, in fact, Isaiah's eldest son.
In spite of the subtle nepotism (which was broadly tolerated and even anticipated), these reasonable guidelines were well received. However, there were a few of the Lords, particularly those from the annexed territories, that felt the scheme relied too heavily on the benevolence of the King and the trustworthiness of his stewards in the Treasury, without specifically mentioning the familial ties. Voicing these concerns caused a rumbling among the other Lords who echoed a demand for greater accountability and a stronger guarantee of redemption upon demand. They went so far as to suggest that an indifferent third party be responsible for maintaining, auditing, and guarding the Treasury.
Calling a short recess, King Aygonot met privately with the Goldstein Brothers. For the first time, the King listened more intently to Donduit than Isaiah, noting in contrast, Don's furrowing brow to Isaiah's over jubilant grin. Don proposed a monthly accounting report from the Treasury noting the shares of warrants in circulation, and moving the Treasury from the main castle to a new location within the Capitol to be guarded by a staff consisting of soldiers provided by each of the provincial lords.
However, Isaiah suggested that the Treasury remain as is, and noting with the potential flux of gold conversions, that the report be produced annually, and to protect the financial privacy of both the King and the Provincial Lords, that there be no disclosure of warrants in circulation. Anxious of the discord dividing the council, the King felt inclined to offer Don's proposal, and seeing the King waiver, Isaiah offered an additional incentive, that within his plan, the King offer not only a 5% marginal discount for raising armies, but for all direct transactions with the Lords, reminding the King of the early discovery that in excess of 10% of warrants were redeemed. Noting the hazards of guards in the treasury from without the Capitol, Isaiah suggested that the Treasury security be remunerated by a tax excised from the provinces, but guarded by men loyal to the King.
In the end, Isaiah's proposal had greater appeal to the King, and in theory, at least, was better suited to fulfilling the goals of the Kingdom without impeding the anticipated rate of economic expansion. Upon reconvening the council and presenting the compromise, the King was pleased to see the Lords embrace the marginal profits on all transactions granted by the Treasury to the fiefdoms. Furthermore, having already accepted the Warrants themselves were encouraged by the reports of merchants already accepting the warrants for commerce. Finally, having toured the Treasury, having briefly handled the Gold, they retained a strong sense that there was little risk involved provided the Treasury remain solvent and accountable to the King. In their minds, whatever reservations the Lords harbored with respect to the risk of paper warrants, they noted the current stability of the Kingdom, the burgeoning opportunity for profits, and their personal enrichment as their individual populations converted their Gold for Warrants.
At the conclusion of the Council, the mood, if possible, was even loftier than during the prior victory celebrations, because so many new innovations had been introduced not only for the ongoing expansion of the Kingdom through conquest, to bolster economic growth through transactional efficiency, and perhaps to cure social problems as well.
Of course, and perhaps foremost, the Lords were very pleased with a new revenue stream that cost virtually nothing, but presented a monopoly capture of an additional 5% margin on the conversion of Gold within their fiefs to Gold Certificates. When each returned to their own domains, they promoted the new plan and some, even with heavy hand, compelled the conversion of their gold to warrants, reaping the immediate 5% surcharge.
As we shall see, the immediate increase of wealth in the provinces amounted to 5% over night, with a promise of a residual flow of income. At the same time, the gold reserves in the Central Treasury would amass considerably in the same time frame, so much so, that an annex had to be built to store the incoming Gold. This introduced an era of unprecedented growth and numerous programs, both financial and social, were introduced which could dip into the Treasury.
... To be continued in Part III
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