How would you get a medieval economy to accept fiat currency?

Question

So a nascent interstellar civilization is exploring the local stellar neighborhood when they encounter an earth-like inhabited planet with a developing medieval civilization. The Arcadians are roughly at a 15-16th century level of development.

Both factions are humans, only separated by unknown means for tens of thousands of years.

The Arcadians are divided into various city states, kingdoms, empires and fiefdoms.

The Colonists meanwhile don't have a prime directive, but they have some restrictions keeping them from just conquering and colonizing the world. Or brute forcing their economic domination by flooding markets with mass manufactured goods and asteroid mined gold.

As well as various overseers keeping an eye on their shoulder to make sure their existing trade adheres to the spirit of existing restrictions.

So instead they decide to take things slowly, with one priority being tying the Arcadian economy to their own advanced and expansive financial apparatus.

However the Arcadians are familiar only with commodity based currencies such as gold, silver and platinum. How would you get a medieval economy to take trading in slips of carefully designed paper seriously?

Answer 1

Limited purposes at first.

Medieval societies did accept and use 'paper money' for specific purposes. In a way, there is a step between specie and fiat currency. Say that first, you had silver. At the end, you had a piece of paper. In between, you had a piece of paper saying 'I promise to pay you a pound of silver.'

A pilgrim could deposit money with the Knights Templar in the home country, get a letter of credit, and redeem that during the voyage. These letters were not standard amounts and not for consumer-to-consumer trades. (Being personalized was a feature, not a bug.) Roughly that time, banks developed as well. Both applications required customers who did have faith into the trustworthiness and logevity of the institutions issuing the paper -- not the sovereign, in both cases.

So what your colonists would need to do is to develop a reputation for honoring these slips of paper. Modern printing technologies would also make them forgery-proof. Once people who use money at all (i.e. not the peasants, if the setting is 'properly medieval') learn that the paper is good, it becomes money.

Over time, if they can control inflation, there will be an understanding that paper is better than the local specie (which may be debased at the whim of a monarch).

Answer 2

If you want to change the whole economy then it can't be done without also taking over the economy. But if it's just in terms of trading with them then it's just a voucher. Merchants have used these for millenia.

You purchase whatever you want paying in vouchers (no different from coinage), they buy from you using the vouchers. The convenience is that they can purchase at any of your stores using a voucher they can hide or put in their pouch instead of lugging along cartloads of goods to trade and worrying about bandits etc,. Or they can onsell the voucher.

The important bit is that they trust you to redeem the voucher when it's presented.

Answer 3

I'd recommend checking out David Graeber's Debt: The First 5,000 Years. It directly addresses this question of how monetary systems developed, and challenges the notion that the progression went from barter to money to elaborate credit systems; historical data suggest the progression often went the other way. One historical example included in the book is:

1. Form a state army and pay them in "money".
2. You'll need to quarter the army somewhere, so direct army members to pay community members "money" to stay in their homes.
3. Institute a tax that community members must pay to the state in "money".

So #1 creates the "money", #2 gets it to the community members, and #3 gives community members a reason to want "money" and trade goods for it (because if they don't have it, they can't pay the tax and will get in trouble with the state).

Answer 4

Is "medieval" in the question restricted to Europe in the Middle Ages between about AD 500 and about AD 1500? Or can if refer to Mesoamerica, India, Persia, China, Egypt, Japan, etc. during the period of about AD 500 to 1500?

Since your "medieval" culture in the title is supposed to be on another planet, and since your question says the Acadians are mostly at a 15th-16th century (1401-1600) level of development, I tis my opinion that "medieval" can mean like any civilized culture on Earth during the late Medieval or Renaissance period of 1401 to 1600.

How would you get a medieval economy to take trading in slips of carefully designed paper seriously?

The first paper money appeared in China about a thousand years ago, and thus was used by a medieval economy without any effort by extra terrestrials thousands of years more advanced to promote its use.

Jiaozi (Chinese: 交子) was a form of promissory note which appeared around the 11th century in the Sichuan capital of Chengdu, China. Numismatists regard it as the first paper money in history, a development of the Chinese Song Dynasty (960–1279 CE).

https://en.wikipedia.org/wiki/Jiaozi_(currency)#:~:text=Jiaozi%20(Chinese%3A%20%E4%BA%A4%E5%AD%90),(960%E2%80%931279%20CE).

The Huizi (simplified Chinese: 会子; traditional Chinese: 會子; pinyin: huì zi), issued in the year 1160, was the official banknote of the Chinese Southern Song dynasty. It has the highest amount of issuance among various banknote types during the Song dynasty. Huizi notes came on three-colour printed paper and their usage was heavily promoted by the government of the Southern Song dynasty, the Huizi were backed by 280,000 guàn of copper cash coins.1

Other than the Huizi issued by the central government regional varieties existed such as get Hubei Huizi (湖北會子) which was produced in a volume of 7,000,000 mín but only came in the denominations 500 mín and 1000 mín, the Iron-cash Huizi (鐵錢會子) came in denominations of 100 wén, 200 wén, and 300 wén and circulated only in Jinyang, the Silver Huizi (銀會子) of Sichuan was introduced in 1137 and was denominated in 1 qián and 1.5 qián. Other variants include the Zhibian Huizi (直便會子) and the Huguang Huizi (湖廣會子).

https://en.wikipedia.org/wiki/Huizi_(currency)

The Yuan Government revolutionised the economy by introducing paper currency as the predominant circulating medium.[citation needed] The founder of the Yuan dynasty, Kublai Khan, issued paper money known as Chao in his reign. Chinese paper money was guaranteed by the State and not by the private merchant or private banker. The concept of banknotes was not brought up in the world ever since until during the 13th century in Europe, with proper banknotes appearing in the 17th century. The original notes during the Yuan dynasty were restricted in area and duration as in the Song dynasty, but in the later course of the dynasty, facing massive shortages of specie to fund their ruling in China, began printing paper money without restrictions on duration. Chinese paper money was therefore guaranteed by the State and not by the private merchant or private banker.

https://en.wikipedia.org/wiki/Economic_history_of_China_before_1912#Yuan_dynasty_(1271%E2%80%931368)

In addition to small base-metal coins, the Ming issued fiat paper currency as the standard currency from the beginning of the reign until 1450, by which point – like its predecessors – it was suffering from hyperinflation and rampant counterfeiting. (In 1425, Ming notes were trading at about 0.014% of its original value under the Hongwu Emperor.)[206]

https://en.wikipedia.org/wiki/Economic_history_of_China_before_1912#Ming_commerce_and_currency

Thus there is an example on Earth of a country where paper money was used for about 600 years before the end of the period (AD 1401-1600) that you say the Acadian civilization is as advanced as. And that was without people from the sky who were thousands of years more technologically advanced advocating the use of paper money.

In the last few decades many advanced anti-counterfeiting features have been added to paper money in the USA and other countries which the natives would not be able to copy with late Medieval technology. Of course interstellar travelers would be centuries or millennia more advanced than early 21st century Earth. Thus if they gave their paper money the ability to talk in local languages that might be considered a rather low tech anti-counterfeiting method with their technological level.

And possibly for transactions involving a small number of high denomination bills both parties would have to say aloud in the presence of the bills that they were being paid from one to the other, and mention the serial numbers of the bills being paid. Thus each bill would know who it currently belonged to and if a thief tried to pay with it voice recognition software might enable it to say aloud that the thief was not the rightful owner.

Answer 5

Make the currency both useful and extremely difficult to reproduce. Gauge slips made out of hard/tough steel alloy for small amounts, inch/foot/yard standard rods for larger amounts (realistically, 25/250/1000mm but still something to which humans can relate), and mass standards for the really high-denomination stuff.

The side-effect of that will be that everybody will fairly rapidly agree on the relative value of things, since there will really be very little opportunity for somebody to sell short-measure. And it shouldn't be too difficult to get them to realise that that's because of the standards of both amount and currency with which they've been provided.

And always remember that http://www.princeton.edu/~pkrugman/interstellar.pdf, written by "oppressed assistant professor to cheer himself up", will serve to level the playing field.

Answer 6

The Brazilian economy had a long history of inflation, and lack of faith in the currency unit. In 1994 the new Real was linked to the Unit of Value which was linked to the cost of living index. The idea was that the cost of food could not inflate because the cost of living was based on the cost of food.

This is not really a fiat currency, but the bank does not store food to back its issue of banknotes. However, the concept would be familiar to Medieval people, who would have donated a tenth ('tithe') of their crop, or the equivalent for some other trades to the Church, which stored it in the tithe barn. The titles were used to maintain the church buildings, pay for the priests and administration, and provide for the poor of the parish, and the education of children.

It seems likely that you could issue a unit of currency that was based on whatever was deemed to be of equivalent value. This would probably not be livestock, where the price goes up and down during the year, and goes down in times of famine. This is how the UN often monitors conditions: if people sell their cow, the price of cows goes down, and this means things are bad. Something like corn should be stable provided there is something in the barn.

If you can issue vouchers or coins based on the right staple good, and apparently backed by the mass of real goods in the tithe barn, then I think people would have confidence in it.

The Medieval period (and in England up until 1826) produced a matching set of reciepts by splitting a tally stick. The Exchequer kept one half, and you kept the other half. If there was a dispute, the two halves were fetched and fitted together. The grain and the notches the formed the record should match. There was a wave of forgeries and fakes when tally sticks were replaced by paper documents.

I would imagine you could make a sophisticated value exchange system using tally sticks and a stable unit of value.

Answer 7

Step 1: Disguise your Fiat Currency as a Bullion Currency

While it is not strictly necessary to do this, it will speed up the processes if you can make the locals trust the intrinsic value of your money. Historically, paper money was the basis of fiat currency, but it was distrusted and failed the first few times we tried it because people KNEW that paper was not worth the value printed on it. That said, there are tons of materials an advanced civilization can use that carry no bias from the local perspective such that the locals can use it like a bullion currency, even if it is a fiat currency to the Colonists.

Take plastic for example. If a medieval person saw plastic, they would not know that it is "cheap". It was also not uncommon in the mediaeval period for different cultures to prefer certain metals based on if they were gold or silver standard; so, it would not be strange if your Colonials said, "We use the plastic standard here, you need plastic coins if you want me to give you a good deal."

And when they ask why one plastic coin is stamped with 1\$ and another is 20\$ just say because the 20\$ coin is made out of a valuable green plastic where as the 1\$ one is a cheap grey plastic. This will make since to them the same way that copper was often used in gold and silver standard states for lower denominations. You just have to be careful not to sell them any plastic goods in the same color as any currency coins.

Step 2: Use your superior technology to manipulate the market

Because of technology, your Colonial Merchants can produce things way cheaper than Arcadians. It might take an Arcadian 10 days of work to earn 10 silver coins to buy a shirt, but Colonists can produce 1000 shirts of a much higher quality for the same effort. So what you do is you also sell your shirts for 10 silver coins... OR 10 Colonial Dollars. Now you've fixed the purchasing power of the Colonial Dollar to the value of a silver coin. What you then do next is you start hiring the Arcadians for things and offer to pay them in either 1 silver coin a day or 10 Colonial Dollars.

This means that they can earn thier next shirt in 10 days or just 1 day! Any half smart Arcadian will accept the pay rate of 10 Colonial Dollars a day because it gives them a huge competitive advantage when buying from Colonials, as long as the colonials sell enough variety and regularity of goods that the Arcadians can live off of plastic money. Over time the demand to be paid in plastic will drive down the value of other currencies until it becomes generally true that a silver coin is actually only worth 1/10th of a day's labor. Once the monetary value of gold and silver drops bellow its actual trade value, locals will just melt down all thier old coins and sell them as commodities and only trade in plastic moving forward.

Answer 8

Establish reliability over generations

The key to a fiat currency is that its value is determined by the market of goods that can be purchased by it. Nobody will accept currency if they can't later trade that currency for goods and services.

This is a bit of a chicken-and-egg conundrum, but it can be kick-started. Reserve currency is a method of kick-starting such a thing because, in the absence of goods to purchase, you could instead trade the currency for whatever gold/silver/etc. is stored in the reserve. Note that the term "reserve currency" has shifted. It used to mean a currency that was backed by a reserve system, but now it means one that people have accepted as having a reasonably reliable value.

For your use case, you would establish a reserve system based on a commodity that is reliably marketable in the world you describe. You produce notes that can't be duplicated with their technology, but are readily recognizable. The notes will be preferentially traded and stored because they're easier to transport than the commodity.

Various attempts at this have been made, but they have all failed because they were supported by a reserve that was held by an unstable government. "Unstable" meant that the country's treasury was subject to ransacking by hostile entities like other governments. This form of ransacking was the real goal for most military actions.

Fiat currency didn't become viable prior to England's world supremacy. We didn't even figure out that it was possible until the early 20th century, after the US and England survived the first world war.

Thus, you would have to establish reliable exchange and maintain it for 2-3 generations until the people accepted that your currency wouldn't devaluate or collapse.

Answer 9

Or brute forcing their economic domination by flooding markets with mass manufactured goods and asteroid mined gold.

By not doing so. But rather trading goods and services in only fiat currency. If these services are valuable enough there's going to be demand for it. Now, getting this currency to the less developed planet - would be by trading for local goods with a mix of fiat currency and manufactured goods of 'equal' value to the more advanced culture.

Say nicknacks and local crafts for a mix of tools that they can't easily make themselves, or 'low' value items - (kind of like in Turtledove's Gunpowder Empire) - or better yet things that need maintenance, like a tractor - with some customers getting paid in fiat + items. Keep supply low and restrict fiat currency trade to some customers and not others. Then when someone needs their tractor looked over, or the batteries changed on their quartz watch, and they don't have fiat currency, they'll need to trade locally for it, which gives it value. Over time, people get used to the fiat currency having utility, and start using it internally and bob's your umcle.

Answer 10

This is quite similar to how modern society, familiar with fiat currency, accepted cryptocurrency. Although the concept is not understood by all, the herd mentality and the "benefits" of using it compelled people to subscribe to this new form of currency. Above answers are brilliant, I just wanted to point out this parallel.

Answer 11

If you dig into what was going on in the Mediaeval period (and before and after as well) you'll find that the colonists will simply fit right in and merely need to develop a reputation for honoring their debts.

Basically the currency situation was more complex than you might think. Minting coinage is actually pretty expensive, and most kings at the time tended to do it as little as possible. And yet recognizable coinage of known purity and weight makes trading outside of the local area so very, very much easier...

So there ended up being quite a lot of stuff in use. Gold was a good way to transport money over long distance due to its very high value per unit size and weight. At the same time though, it's so very valuable that using it for everyday transactions would require some very precise measuring equipment.

So there ended up being quite a bit of silver coinage as well. It's bulkier for a given amount of value, but that makes it easier to count for small transactions.

But... The minting process is expensive. So the king (and occasionally some merchants) tended to mint enough gold and silver for their own purposes, and that was it. It wasn't really enough to conduct day-to-day trade for everyone.

Which is where a lot of the copper coinage came from. Copper is even bigger and bulker per value than silver, but there are also a lot more copper mines, and if you're mining and smelting the stuff anyway that significantly reduces the cost of striking some portion of it into coinage. So copper tended to be locally struck in areas with copper mines, and how far it spread from there depended largely on the reputation of the people doing the minting. (Which is the same as for the king's gold and silver. Yes, they could debase their currency, but if they debased it too much more than their rival kingdoms people tended to figure it out and would trade the debased coinage at a discount to match.)

But what if you weren't near a copper mine? Well, metal isn't the only thing with value. Various non-perishable or, at least, long-lived foodstuffs also make decent money. But they're even bulkier than copper, and easier to damage, so nobody really wants to carry them around all the time.

But it's also far more efficient to build one, giant granary that's sealed well enough to keep the vermin and moisture out than it is for everyone to build their own, tiny one. So when the farmer brings his harvest in, it's just going to get poured in with everyone else's and he'll be given a chit for how much he's allowed to withdraw. (There were a number of ways to do this depending on the literacy level in the area and the expensiveness of various types of bookkeeping materials.) It was not uncommon for these chits to become recognized as currency and used for trading in the local area. So the idea of tokens that represent value rather than being value is something the natives will already be used to.

The part where you're going to run into trouble trying to introduce chits that don't have a fixed backing is trust. If a chit is worth a certain amount of grain or gold or silver or salt or whatever, that makes it really easy to tell if the person issuing them is cheating you. And the standard penalty in the mediaeval era for fraud was to draw and quarter the perpetrator. Obviously this didn't generally apply to the king, but even he had to be careful or his political rivals would use it to gather support, and that could end very badly indeed...

So the fiat currency you're trying to introduce will be accepted so long as the prices of the goods the natives want to buy from you remain relatively stable. But the number one reason governments want fiat currency instead of commodity currency is so that they can arbitrarily create and spend as much of it as they like... Which leads to unstable prices... And then they use threats of violence to force people to keep using it anyway. Since you've stated that that kind of methodology is off the table for use with the natives, you either effectively bind the value of your "fiat" to the commodities you're trading, or else the natives will simply quit holding it in their cash reserves. They'll just spend it immediately for durable goods or commodities that they can trade using their own money (or potentially will become their own money) and the cost of any inflating the colonists' distant, central government does of the fiat supply will be borne solely by the colonists...

Which... Historically that kind of crap ends up being grounds for a revolt since it's effectively a hidden tax...

In short, the advantages of "fiat" money are not the same as, and do not benefit the same people as, the advantages of "paper" money. And the natives of a world with a fractured, feudal society are not as abstracted from their money supply as we are today. So while convincing them to accept the latter would be relatively easy, convincing them to accept the former would be -- at the very least -- a generations long process. But it could also give rise to interesting plot points for your story.

If you want to make currency a central point in your story I'd suggest reading the sections of "Human Action" by Von Mises which relate to the different traits and attributes of money and the effects of credit expansion and currency manipulation. This will give you a good grounding for sorting out how the clash of the two cultures will sort itself out.

Answer 12

Via corvee labour

This might require more force than your colonists are willing to use but corvee labour seems like an easy way to go.

Pass a law that every citizen has to work for the state unpaid for two weeks every year. This was more widely used in ancient times but perhaps still within the realm of possibility for a fantasy mediaeval society.

Then, modify that so that each citizen must provide, say, 6,000 tokens to the state each year and that the only way to acquire such a tokens is via two weeks of otherwise unpaid labour. Each token represents about a minute of labour. You make the tokens tradable. Or rather, you do nothing to prevent people from trading the tokens, you only make them hard to forge. So the wealthier citizens start paying for people to work for them.

Quite quickly, you will get a full-time government workforce and the rest of the population paying for it via taxation. You will have to manage the money supply carefully because there will be additional demand for money as the system matures. People will want to start using the token as medium of exchange or for savings. But you have to manage fiat systems carefully in any case. An independent central bank is the usual, although not always effective, solution.

People complain about real-world fiat currencies not being backed by anything but they are wrong. They are not backed by a good (gold) but by a service (not going to jail for tax evasion). As such, you have to have the threat of force somewhere in the system to make them valuable. People in the USA use the US dollar as money because that is what their taxes are due in. So you will need to start taxing your populace to make fiat work. Since many people don't have much in the way of physical goods (taking a pig might cause them to starve) you will have to tax their time and bootstrap from there.

Answer 13

The same way ancient China got people to accept it way before the medieval period.

The government issues it to pay debts and ALWAYS accepts it to pay debts to the government. Some of the first paper currency was issued in 6-900s China as representative money and fiat currency in 1200's. It started as a representative of coinage, basically a check, but evolved into full fiat currency. The trick with fiat currency is always keeping the government from printing more than circulation can support and devaluing it. You need the representative middle step to get the populace to accept it to give the government time to build up trust that the value will be stable.

keep in mind there are other options besides commodity money OR fiat currency, generally there is a representative money middle step.