In Part 25, we saw President get his government into the banking business by shifting all of his government money into a newly created government-run bank that we are calling First Bank. President also implemented some safeguards to lower the risk of him losing this new revenue stream and his entire government savings in one fell swoop. These consisted of establishing a specie pool, establishing a minimum reserve ratio, and also giving himself the authority to suspend banking transactions temporarily in the event of a bank run or other financial emergency.
What happens next?
Something I have purposefully not yet acknowledged in this series is that, historically speaking, by this time there would have been a number of other exciting banking events in Avaria, such as bank runs that actually did culminate in a local or regional financial collapse, fraudulent banking practices, banks ceasing giving specie for various lengths of time, and myriad other unscrupulous business dealings.
Thus, realistically, the business practices and reputation of a bank is a big deal at this stage in the evolution of money. Consequently, Goldnotes from the different banks always end up being traded at different values according to the public’s image of the bank.
This would make for a very confusing monetary system! Can you imagine having a whole bunch of different currencies, all of which have different values, all being used at the same time?
I hope you can see where this is leading. It would make a lot of sense to simplify the monetary system by standardizing around a single bank’s bank notes. Importantly, this would make pricing and trade much more efficient. President knows this. And, for the first time ever, he has all the tools at his disposal to make it happen.
So how does he go about enacting it?
The obvious first choice is to standardize around First Bank’s Goldnotes. Not only would this be beneficial for First Bank (and, therefore, financially beneficial for the government) by strengthening First Bank’s presence in the financial community, but also First Bank’s Goldnotes are already, on account of them being backed by the full faith and credit of the government, seen as the most reliable Goldnote option. That is why First Bank’s Goldnotes have already started to become the preferred common medium of exchange.
Let’s wait until next week to discuss the specific laws that President enacts to make this transition.
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