Wind Rises in North America 1625

Chapter 527 Economic Adjustment (Part 1)

On June 25, the sky over Cincinnati (now Victoria Harbour on Vancouver Island) was crystal clear, and the sea shimmered.

A support fleet consisting of eight armed merchant ships, two supply ships, and three immigration ships slowly sailed out of the port one by one, under the watchful eyes of countless relatives, heading towards the distant south.

At the dock, the crowds of people seeing off their loved ones were bustling about. Wives held their children tightly, elderly mothers wiped away tears from the corners of their eyes, and young people waved excitedly to say goodbye to their relatives on the ship.

This is Xinhua's second large-scale military mobilization since the outbreak of the war more than two months ago.

With frequent reports of victories from the front lines—the army advancing into the heart of Spanish Mexico and capturing Guadalajara, the capital of New Galicia province, while the navy has completely blockaded the Spanish ashore, preventing them from setting sail—the Xinhua government decided to intensify its offensive and give the Spanish an even greater boost.

Therefore, the military was ordered to recruit 1,500 reserve soldiers (all of whom were veterans) from within the country, and then organize them into three mixed battalions and two artillery companies. At the same time, 1,300 local native auxiliary troops were also recruited.

After a brief period of restorative training, these troops were all loaded onto ships and set sail for the Spanish American theater, ready to expand their gains and exert even greater military pressure on the Spanish.

Among the officials seeing them off, Prime Minister Li Liang, Finance Minister Deng Zhichen, and Army Vice Minister and General Armaments Department Director Zheng Lihui stood on a high platform on one side of the dock, silently watching the fleet gradually disappear into the distance.

"Another batch of fine young men from Xinhua," Zheng Lihui sighed softly, breaking the silence.

Li Liang nodded and said, "I hope they can all... return safely."

Deng Zhichen pushed up his glasses, said nothing, but subconsciously touched his briefcase, mentally calculating again the additional financial expenditures, pension reserves, and potential chain reactions to the domestic economy from this expedition.

After the farewell ceremony, the three boarded a black carriage and returned to the city along the port avenue.

The sound of horseshoes striking the road was crisp and rhythmic, and the carriage swayed slightly with the undulations of the road.

"The war has been going on for over two months, and its effects are beginning to emerge," Li Liang began, his brow furrowing slightly. "Victory on the front lines is certainly important, but stability in the rear is the foundation for this war. My biggest concern is the economy and people's livelihoods. Old Deng, the Ministry of Finance must be under considerable pressure lately, right?"

Deng Zhichen took a document from his briefcase and adjusted his glasses: "That's true, Prime Minister. The pressure is multifaceted and is compounding. First and foremost, the complete severing of smuggling trade with Spain has led to severe underutilization of capacity in many domestic factories."

"As you know, over 60% of our products were originally sold to Spanish America through various smuggling channels, and some high-value goods, such as fine furs, high-end glassware, and chemical dyes, were even transshipped to Europe. Now that route is blocked, and the domestic market..."

He gave a wry smile. "We only have a mere 300,000 or so citizens, or to be precise, 340,000. But more than half of them are immigrants serving in the colonization period, provided with food and lodging by the government, and given only six or seven cents a month in pocket money. Forget about buying cloth or ironware, they even hesitate for a long time before buying a piece of candy. Their purchasing power is basically zero. Even if we add the hundreds of thousands of local indigenous tribes, their limited purchasing power cannot completely fill the huge market space left by the Spanish."

"Although Xinhua has not yet fully achieved large-scale mechanized production, relying on steam power, rudimentary machine production, and assembly line division of labor, the production capacity of our factories is still astonishing, far exceeding the consumption capacity of our own population, and even exceeding the digestion capacity of the surrounding indigenous tribes. The huge amount of goods produced are now in a situation where there is no market to absorb them, resulting in a sharp increase in inventory and stagnant capital turnover, which has seriously restricted the factory's reproduction cycle."

"Can't we extend credit to domestic residents for these stockpiled goods, or goods that the market can't absorb?" Zheng Lihui leaned forward and proposed a solution that seemed very straightforward to the military: "Let them use them first, and they can pay back the money later."

“In this era, there is no concept or habit of consumer credit.” Deng Zhichen shook his head with a smile, his tone tinged with helplessness. “Besides, most of those immigrants are just coming from their homeland. They are simple and frugal, and they don’t even have many coins in their pockets. Do you expect them to dare to buy ‘excessive’ goods on credit and engage in overspending? This is not only unrealistic, but it is also easy to cause credit risks and social problems.”

"What about Hokkaido and Outer Northeast China? They have at least two or three hundred thousand people settled there, so they can consume some local goods, right? Oh, right, what about the markets in North Korea and Japan? Shouldn't we give those a try?" Li Liang asked.

“Northern Taiwan and Outer Northeast China can absorb some goods, but they are still in the development and colonization stage, with no decent industry or working class. The immigrants are all dirt poor, with very limited purchasing power; at most, they can buy the most basic necessities.” Deng Zhichen sighed. “As for Korea and Japan, we haven’t opened their markets yet, so we can’t sell our goods at all. Unless…”

As he spoke, he glanced at Li Liang, the meaning of his words self-evident.

“Yes, I think that after we defeat the Spanish, we can make a move on Korea.” Zheng Lihui continued, “This peninsula kingdom is militarily in disarray, and its terrain is surrounded by the sea on three sides, with a small territory. It’s perfect for us to practice and sharpen our skills. If we can conquer it in one fell swoop, it will not only open up a market of millions of people for us, but also cut off the Qing army’s arm and compress their strategic space.”

“We’ll talk about North Korea later,” Li Liang brought the topic back on track. “Since foreign trade has shrunk, hasn’t fiscal revenue plummeted?” “That’s for sure,” Deng Zhichen nodded. “The fiscal and tax data for June isn’t out yet, but the statistics for the first five months show that government revenue is 30% lower than the same period last year, mainly due to a sharp drop in industrial and commercial taxes and profits of government-controlled enterprises; while expenditures are 35% higher than the same period last year, with military spending accounting for 60% of expenditures, plus subsidies for immigrants and relief funds for factories—not a single penny can be cut. With these two factors combined, the fiscal deficit for the first half of the year is likely to exceed 500,000 yuan, setting a record high since the founding of the People’s Republic of China.”

"Fortunately, it's just a fiscal deficit, not a fiscal depletion." Zheng Lihui tried to ease the tension and smiled. "With so many gold mines to support us, we'll never be short of money! At worst, we can increase the scale of minting and implement that... quantitative easing policy."

Deng Zhichen glared at him, a bitter smile playing on his lips: “Increasing the amount of currency minted and implementing quantitative easing sounds like a good idea. But the key issue is not whether we can create more money, but how we can effectively and safely distribute this newly created currency, ensuring it truly reaches the hands of ordinary people and that they are willing and able to spend it, thereby stimulating the economic cycle.”

"If the money is just circulating aimlessly in the hands of the government and a few state-owned factories and cannot flow into the broader private market, printing more money will only result in numbers on paper, and may even cause big trouble."

“Like in later generations, we can increase government investment, carry out public construction, or directly raise the wages and salaries of government officials and factory workers. Wouldn’t that be a way to spend the excess currency?” Zheng Lihui said. “You know, the currency we are currently issuing is not fiat paper money, but real gold and silver currency. It has value in itself, so there’s no reason to over-issue it, right?”

Upon hearing this, Deng Zhichen frowned even more deeply. He looked at Zheng Lihui, his tone tinged with helplessness: "Old Zheng, the economy, on the surface, is a matter of how much money we have, but in reality, it's about whether the entire social cycle of production, exchange, distribution, and consumption can operate smoothly. The root cause of our current predicament is not a lack of money, but rather a problem with the key link in this cycle—the market—which is causing money to 'not circulate.'"

“Old Deng, we usually each manage our own affairs, so it’s rare to have such an in-depth exchange,” Li Liang said gently, trying to make the discussion more thorough. “Why don’t you take advantage of this free time today to give us a detailed analysis of the many economic impacts this war has already had and may have, as well as what concrete countermeasures the Ministry of Finance has in place?”

Deng Zhichen took a deep breath, leaned forward slightly, placed the documents on his knees, and slowly said, "From the emergence of the conflict last July to the full-scale outbreak of war this April, the overall economic data over the past six months shows that the situation is quite pessimistic. The first and most crucial issue is that the 'sudden disruption' of the external export market has led to a significant 'relative overproduction' within our country."

"As mentioned earlier, more than 60% of the products from our Xinhua factory were sold to Spanish America and indirectly to Europe through smuggling channels. These ranged from small items like glassware and sewing needles to large metal ingots, all of which were hard currencies needed by Spain. Now that war has broken out, this trade 'lifeline' has been completely severed."

"Data from the Ministry of Industry and Trade shows that the average operating rate of more than 100 factories of all sizes in the country has plummeted from full capacity before the conflict last year to 50% now. This is what economists call 'the collapse of export demand.' Overseas exports have been cut by more than half. Even if the machines in the factories are running, the products produced cannot be sold. The inventory is piled up higher than the warehouses at the docks. The ironware and hardware from the machine processing plants, the wool and cloth from the textile factories, and the furs collected from the trading stations in various places are almost piled up outside the warehouses."

Zheng Lihui asked cautiously, "Since they can't sell them, can't the factory reduce production or even temporarily stop production? At least that would reduce waste of raw materials and labor costs."

“Reducing production capacity means reducing employment.” Deng Zhichen shook his head. “Right now, nearly a thousand workers in Shixing alone are out of work, and the situation in other places such as Fenzhou (now Nanaimo), Guangfeng (now Saanich), and Shunde (now Vancouver) is probably similar. If production is reduced further, these workers who have lost their income and their families will immediately become the recipients of full government relief, which will further increase the financial burden. This is a vicious cycle of ‘resource idleness’: machines are idle, workers are idle, and products are piling up, but we will not recover a single penny of the huge costs we spent on factory construction and the daily operating expenses to keep the factories running at the minimum.”

"As I just mentioned, the effective demand in China is severely insufficient, which makes the domestic consumer market extremely sluggish. It's not that ordinary people don't want to buy, but the vast majority of them are unable to afford it, or their deeply ingrained thrift and saving mentality makes them unwilling and afraid to engage in non-essential consumption."

"After all, Xinhua is still a small country with a small population and an economy based on agriculture and immigration. Therefore, among the three drivers of economic growth (investment, consumption, and exports), if exports collapse and consumption is inherently weak and lacks momentum, it's like a carriage with two wheels broken at the same time. Relying solely on government investment will not be able to move the carriage, and it is difficult to sustain."

"With trade severely disrupted and production heavily constrained, our fiscal situation has become seriously unbalanced. The huge risk of deficit and the potential for inflation are threatening our already fragile and immature economic system. Old Zheng said that we have gold mines and can mint more gold and silver coins to supplement the fiscal budget and expand government investment. This idea seems straightforward, but it has huge hidden dangers."

"What I want to tell you is that gold and silver currency are not 'useful just because they are printed.' There is a classic theory in economics called the 'quantity theory of money,' which states that within a certain period, the total amount of money in the market multiplied by its velocity of circulation is always equal to the total amount of social goods multiplied by the general price level."

"If, in the short term, the rate at which we inject newly minted money into the market far exceeds the actual growth in the volume of goods and services available, then each dollar will buy less, and the money will become 'worthless,' even if it is made of gold or silver, its actual purchasing power will decline."

"History provides vivid lessons. The so-called 'price revolution' that broke out in Europe over the past century was caused by the Spanish plundering huge amounts of gold and silver from the Americas and importing them into Europe, which led to a sharp increase in the total amount of money. However, the growth rate of commodity production could not keep up, resulting in a century-long and widespread surge in prices across Europe."

"If Xinhua were to do the same now, rushing to put newly mined gold directly into the market without regulation, our small economy, with only a few hundred thousand people and limited commodity production capacity due to market shrinkage, simply could not withstand such an impact. The consequences could be even more severe than those in Europe back then."

"For example, last year a pound of flour cost one copper coin, but this year it might cost ten. This is hyperinflation. When people's money becomes worthless, they will be even less willing to spend it, and the economy will only get worse. Even if we are cautious in minting currency, there is an even bigger problem: the money may not be effectively invested in the places where it is most needed."

As Deng Zhichen spoke, he gave the two men a weary, bitter smile, and continued, “In the pre-war period of a healthy economy, the money flow chain in the market was relatively smooth: the government minted currency and mainly put it into the market by paying for government procurement (ordering goods from factories), distributing military pay and civil servant salaries; after receiving the money, workers, soldiers, and merchants went to the market to buy various daily necessities and services; factories sold goods, recovered funds, paid for raw materials and wages, and then expanded production and hired more workers... thus forming a virtuous cycle.”

"But now, suddenly losing the huge consumer market of millions of people in the Americas and the even larger indirect market in Europe has led to our factories being unable to sell their goods for a time and not daring to ask the government for money to expand production. Once the factories can't operate, the workers with direct purchasing power will inevitably be severely affected, while the soldiers are all fighting and most of their pay is being saved and they dare not spend it. The money is stuck at the 'government to factory' stage and cannot flow into the hands of ordinary people to form effective purchasing power. No matter how much currency is printed, it will be useless. This is called 'monetary transmission failure'."

"Old Deng, now that you've explained the problem so clearly, you must have a plan for how to break this deadlock, right?" Li Liang asked calmly.
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(End of this chapter)