Pitfalls of a fantasy commodity currency

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Pitfalls of a fantasy commodity currency

Postby jseah » Fri Jan 13, 2017 7:12 am UTC

I'm contemplating for my story a commodity currency system that was implemented as a solution to a lack of money supply (previously a currency of precious metals). Given that this is a magitech fantasy setting (or about to get there), the commodity proposed is crystallised magic.

This has a number of properties that avoid some of the problems of commodity currencies:
Fungible - magic crystals have a high level of uniformity in that the primary useful characteristic is weight (power stored is basically weight, crystals consumed when used; sum of smaller crystals are equal to one big one of equal weight)

Non perishable - crystals, enough said.

They are also easily tested and impossible to fake. (About as much as trying to fake oil)

The main drawback preventing direct use as currency is that they're low density, boiling a volume of water requires about 3-4 times the volume in crystals and some basic equipment.

So, the proposal is to have crystal backed notes as a currency. Failure modes? (an economic failure would fit right into the plot)
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Re: Pitfalls of a fantasy commodity currency

Postby Zamfir » Fri Jan 13, 2017 8:22 am UTC

Assuming that your scenario resembles our modern world: don't underestimate how much currency we have around.

M2 is typically comparable to a year's worth of GDP. In other words: if you want to replace M2 by a stored quantity of intrinsically valuable objects/commodities, you have to produce and save a full year's worth of economic output, and then don't use it. That's rather strong already, but it becomes more extreme if you concentrate on one particular type of object.

For example, M2 represents a few decades worth of electricity production. We would need to drastically expand our power generation capacity, just to fill the vaults every year to keep the money supply growing with the economy. Note that this is independent of the cost of power production. If the magic stones are cheaper to produce than our electricity, they will need to store more of it to have a liquid currency supply.

One consequence: your economy will be under constant pressure to find other sources of currency (and thereby free up the stored stones for other uses). Fractional banking is the obvious case, with the stones taking on the role of the monetary base. Now imagine a banking crisis, with a sudden spike in the demand for monetary base. It would suck all the magic out of the economy...

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Re: Pitfalls of a fantasy commodity currency

Postby Quizatzhaderac » Thu Mar 02, 2017 10:00 pm UTC

Okay, so the situation where a commodity is replacing a precious metal, sounds like it would be largely barter with that commodity used as a standard and with the more formal transactions. The crystals do have the nice quality of being able to find a buyer anywhere, but where people have a more established relationship with there business partners they are more likely to use some local good/financial instrument.

If the bills are directly and conveniently redeemable, then people will redeem them when they need fuel, depleting the money supply.

The low density would mean that the price of the crystals would naturally vary by location. In places further than average from the source either there will be a higher ratio of bills to crystals, or the monetary entity will need to expend resources enforcing it's fiat.

Also if the supply or demand of/for crystals isn't steady you get inflation or deflation.
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Re: Pitfalls of a fantasy commodity currency

Postby Xanthir » Sat Mar 04, 2017 10:36 pm UTC

In my own fantasy world I just have the god of commerce freely grant a cantrip that can convert between Basic Magical Currencies at a fixed rate. Gold/silver/copper are fixed to a precise 1:100:10k ratio by volume by this divine fiat, and the same cantrip can detect purity (and thus forgery); I assume arbitrage takes advantage of this to make the economics of mining line up with it. (According Wolfram Alpha, the real-world metal prices step down at roughly a 1:65 ratio, which is very interesting! I didn't expect gold/silver and silver/copper to actually be similar!)
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