Taichang Ming Dynasty

Chapter 762 Fire Loss Returned to the Public

“The bank is an inner court directly under the Directorate of Ceremonial, and with someone as capable as Eunuch Gao in charge, we are naturally at ease,” Shen Guangzuo continued, managing a forced smile despite his fatigue. “However, before we finalize the implementation, I have a few questions I would like to ask Eunuch Gao.”

“Please speak freely, Mr. Shen.” Gao Shiming turned his head and excitedly gestured for him to speak.

"I'd like to know," Shen Guangzu asked intently, "how much 'fire loss' will your bank charge when exchanging silver and banknotes?"

"Fire loss?" Gao Shiming raised an eyebrow, a half-smile playing on his lips. "The Andingmen branch is so close to the Shuntian Prefecture government office, didn't Shen Dazan go there to exchange it?"

Shen Guangzu shook his head and said, "I've only ever had my servants go to the bank to exchange for cash. I haven't exchanged for banknotes yet." Shen Guangzu was a third-rank civil official, and his monthly salary alone amounted to nearly twenty taels of silver, but he no longer needed to live off his salary. After the official salary was converted into banknotes, he only tentatively had his servants take the banknotes to the bank once to see if they could be exchanged for cash.

"Even if you've never redeemed a banknote, you should know that there's a notice board in the hall." Gao Shiming continued to steer the conversation along this line.

"He probably didn't see it." Shen Guangzu frowned slightly.

“I saw the notice board,” Zhao Shiyong suddenly interjected. “I saw it near Zhengyangmen.”

"Oh?" Shen Guangzuo turned his head. "What did you say?"

“If I remember correctly,” Zhao Shiyong thought for a moment, “it seems that if one-tenth of the silver is in loose silver, then there is no loss on copper coins. I just don’t know if it’s the same in other branches.” Zhao Shiyong looked at Gao Shiming.

“All branches of the Sun and Moon Bank follow the same procedures for redeeming silver notes and collecting fire loss.” Gao Shiming was a little annoyed by him, but still continued. “If it’s official silver, whether it’s newly minted Taichang silver from the palace or pure silver minted by local governments, one tael of silver is exchanged for one tael of silver note, with no fire loss. But if it’s privately minted silver ingots, or trimmed silver, or even silverware and jewelry, then fire loss will be charged at a rate of 10% to 30% depending on the purity. If the silver has too many impurities or is of too poor purity, then we have no choice but to refuse it.”

Shen Guangzu nodded thoughtfully, then asked, "Copper coins don't have a fire loss fee. What's the exchange rate? How many copper coins can be exchanged for one tael of silver?"

“Copper coins are also currency.” Gao Shiming rolled up his sleeves and took a sip of tea. “As long as they are genuine official copper coins, they will still be exchanged according to the ancestral system, at a rate of one thousand copper coins to one tael of silver, and one tael of silver to one tael of silver notes.”

“Eunuch Gao, forgive my bluntness,” Zhao Shiyong interjected again, “didn’t the bank discover that there were arbitrage opportunities in the exchange of silver and copper?”

Gao Shiming rolled his eyes through his sleeve, not wanting to pay him any attention, but Shen Guangzuo chimed in at the opportune moment: "Arbitrage? How does it work?"

“As Eunuch Gao just said,” Zhao Shiyong gestured with his chin toward Gao Shiming, who was drinking tea with his face covered, “the loss on the exchange of loose silver for notes is at least 10% and at most 30%. We will calculate based on the lowest loss of 10%. This means that if people want to exchange one tael of silver for notes, they need to put out at least one tael and one mace of loose silver.”

"As far as I know, in the capital, silver has always been more valuable than copper. Even in normal times, the ratio of silver to copper coins has never been lower than one tael of silver to one thousand copper coins. And when it is necessary to pay summer taxes and autumn grain with silver, one tael of silver can even be exchanged for one thousand one hundred, or even one thousand two or three hundred copper coins."

“Even at the lowest possible rate, that is, one tael of silver to one thousand copper coins, the one tael and one mace of loose silver needed to exchange for one tael of silver notes would only amount to one thousand one hundred copper coins. In other words, a shrewd person would prefer to first exchange the loose silver for copper coins at a local money shop, and then take the full amount of copper coins, which would not incur any losses, to the bank to exchange for silver notes. By doing so, at least ten percent of the losses could be avoided.” He spoke faster and faster, practically dancing with excitement:
"If the exchange rate between silver and copper coins were higher, for example, one tael of silver could be exchanged for 1,100 copper coins, then someone could first exchange their silver for copper coins, and then take the copper coins to the bank to exchange for silver notes. After cashing the silver notes, they could then use the cashed silver to buy copper coins in the market. In this one transaction, they could make a profit of hundreds of copper coins! I wonder if the banks have thought of this?"

"Hehe. Zhao, the Censor, is indeed shrewd." Gao Shiming chuckled dismissively after hearing this. "However, if Zhao can think of this arbitrage method, others can too. Besides, those money shops and brokers that hold copper coins and profit from exchanging them aren't fools. Once this policy is implemented, the silver-copper ratio in the market will naturally fluctuate and adjust accordingly. With many people arbitraging against copper, the price of copper will naturally rise. Over time, the market will find a balance, and this arbitrage opportunity will disappear. I'm sure that after the policy has been in place for a while, there will only be two silver-copper ratios in the market: one tael of official silver to one thousand copper coins, and one tael of loose silver to nine hundred and ten copper coins."

Zhao Shiyong thought he had outmaneuvered Gao Shiming, but Gao Shiming's casual rebuttal left him speechless. He couldn't help but say, "That's true. But since the bank knew there was an arbitrage opportunity, why didn't it adjust the exchange rate between copper coins and silver notes from the beginning, in accordance with the market?"

"Will the bank suffer any losses as a result?" Gao Shiming asked in return.

“Loss.” Zhao Shiyong was taken aback. “If we collect less copper coins and let speculators in the community make money, isn’t that a loss?”

"It's just a pittance. It's normal for prices to vary in the market. If the government's policies fluctuated with the market prices, would there be no order in the world?" Gao Shiming smiled arrogantly.

In fact, many people had already noticed this arbitrage opportunity when the emperor drafted the discriminatory exchange rate between silver and copper notes. Some shrewd eunuchs had even begun to scramble for copper coins, profiting by trading between banks and the market. When the Western Depot learned of this, they reported it to the emperor and even specifically asked him to arrest the people involved. However, the emperor's reaction was unusually calm—let them exchange the coins; it would be good to collect some copper coins.

Ultimately, even without the involvement of silver notes in this process, the imperial court's loss would only be the potential loss due to fire damage. As long as the banks stopped exchanging the received copper coins for silver in the market, there would be no real loss.

Zhao Shiyong was speechless, taken aback by Gao Shiming's words. While the logic was sound, Gao Shiming's nonchalant yet slightly arrogant reaction still displeased him. He even considered asking if Gao Shiming had already profited from the situation. However, Zhao Shiyong restrained himself, refraining from indulging in a verbal battle, and instead cupped his hands in a flattering gesture: "Hehe, Eunuch Gao is right. No wonder you are highly regarded by the Emperor and work at the bank."

Gao Shiming waved his hand. "Zhao, the remonstrator, is too kind."

In fact, even if Zhao Shiyong had asked the question, albeit tactlessly, Gao Shiming could have answered calmly. He wasn't exactly naive, but he was shrewd enough. If any of the top eunuchs in the Directorate of Ceremonial were to use this loophole to skim profits, he might have joined in, but since none of them were, he didn't care about such a small gain. Gao Shiming pulled himself together, preparing to continue discussing policy details with Shen Guangzuo. But before he could speak, Zhao Shiyong, his mind racing, threw out another question: "Eunuch Gao, if I may be so bold as to ask again, are the smallest denomination banknotes your bank currently issues all one tael?"

Gao Shiming really didn't want to deal with Zhao Shiyong anymore, and said somewhat impatiently, "Yes. The smallest denomination is one tael." Gao Shiming saw that Wang Yingjiao and Shen Guangzuo also had curiosity on their faces, and after a slight pause, he added, "In addition, there are five taels, ten taels, twenty taels, fifty taels, one hundred taels, and two hundred taels. I only have these seven denominations on my counter. It is said that there are also five hundred taels and one thousand taels woven with gold and silver threads, but I have never seen such huge notes."

“The smallest denomination is one tael,” Zhao Shiyong asked. “Then how can ordinary people use these silver notes to pay taxes?”

"How do we pay taxes? Ha!" Gao Shiming seemed not to understand Zhao Shiyong's meaning, or perhaps he was simply getting impatient. "How else can we pay taxes? Just exchange the cash for silver notes and hand them over to the tax collector, isn't that enough?" As he spoke, Gao Shiming glanced at Wang Yingjiao and Shen Guangzuo. He thought to himself, "This guy is so overbearing, aren't you going to do anything about it?"

Shen Guangzuo was also a guest, so of course he would speak up, while Wang Yingjiao, who was in charge, stood there thoughtfully.

“No,” Zhao Shi waved his hand. “Eunuch Gao, you don’t understand what I mean. The lowest price for a bank note issued by your bank is one tael. And the annual poll tax for an adult male is only four or five qian of silver. That’s just a few fen of silver per month. How can the common people possibly pay such a small amount? They can’t possibly scrape together a one-tael note to pay a few fen of tax, and then have the government give them change, can they?”

Gao Shiming was taken aback upon hearing this, and subconsciously considered the question, but he quickly realized that this was not something he should be concerned with. He turned to Shen Guangzuo and threw the question at him: "Prefect Shen, what do you think of the matter that Censor Zhao mentioned?"

Shen Guangzuo turned his head to look at Zhao Shiyong and asked, "Zhao, you shouldn't have paid the poll tax in the capital, right?"

Zhao Shiyong said matter-of-factly, "I have official rank, why should I pay any poll tax?"

Dingyin, also known as Dingyaoyin, Dingyiyin, or Yaoliyin, was essentially a form of monetized corvée labor. It was a tax levied by the government to replace corvée labor. Theoretically, male adults only needed to pay Dingyin to avoid corvée labor. Zhao Shiyong, being a scholar with official rank, was exempt from corvée labor and therefore did not need to pay Dingyin.

Shen Guangzuo picked up his teacup, took a sip, and slowly said, "So you probably don't know that most of the tax in the capital is collected by the 'shopkeepers' and 'cashiers' of various neighborhoods first, and then handed over to the Shuntian Prefecture Office after the amount is rounded up."

“In other words,” Zhao Shiyong reacted quickly, immediately grasping the key point, “the Shuntian Prefecture government did not directly collect the poll tax from ordinary people. Instead, it collected it from these tax-monopolizing ‘shopkeepers’ and ‘counter-keepers.’ Even if the silver tax was changed to a ticket tax, they would still go to the bank to exchange for silver notes and then use these silver notes to pay the tax?”

Shen Guangzu nodded silently and put the teacup back.

"What about the tax surcharge?" Zhao Shi asked Shen Guangzuo after a moment of silence. "These 'treasurers' and 'cashiers' collect all the tax revenue and don't have to bear the tax surcharge themselves. They must pass on the tax surcharge incurred from exchanging banknotes to the common people, right?"

“Zhao, the Censor,” Shen Guangzu smiled wearily, but a shrewd glint flashed in his eyes. “Even without the bank’s involvement, the ‘fire loss’ still needs to be collected. When the Shuntian Prefecture collects taxes from the tax collectors, it adds a certain ‘reimbursement fee,’ and when the tax collectors distribute the taxes to their subordinates, they add another layer of ‘collection fee.’”

Shen Guangzuo looked at Zhao Shiyong and waited for a moment. Zhao Shiyong did not disappoint him and said thoughtfully, "Release the tax, collect the tax, and exchange the tax! This means that from now on, the tax surcharge generated during tax collection will be transferred from the Shuntian Prefecture to the bank?" He subconsciously looked at Gao Shiming.

Shen Guangzuo sighed softly and nodded helplessly: "Yes."

If we must delve into Shen Guangzuo's "selfish motives" in opposing the tax reform policy, then this is the crux of the matter. Even considering only the capital city, the number of registered adult males required to pay the poll tax exceeded 100,000. In other words, if we calculate at five qian of silver per male per year, the annual poll tax alone would amount to a staggering 50,000 taels.

Even though most of it had to be turned over to the national treasury, the Shuntian Prefecture government had always been able to obtain several thousand taels of extra income from the surplus of the fire tax during the collection process, which was used to support the government's expenses. If the bank were to take away the fire tax in the middle, then this part of the Shuntian Prefecture's semi-gray income would be gone.

Shen Guangzu couldn't help but look worried as he gazed at Wang Yingjiao at the head of the table. Wang Yingjiao nodded knowingly, then turned his gaze to Gao Shiming and said, "Eunuch Gao."

Gao Shiming narrowed his eyes slightly, turned to the side, and respectfully replied, "What instructions does Minister Wang have?"

"The matter that Zhao Shiyong was concerned about just now," Wang Yingjiao gestured in the direction of Zhao Shiyong, "Yanfu and I have actually discussed it as well."

"Is what Minister Wang is saying about the Shuntian Prefecture's fire tax revenue being transferred to banks because of the change to collecting silver notes?" Gao Shiming chuckled to himself, but didn't pretend to be confused.

“That’s right.” Wang Yingjiao nodded. “We’d like to know what the bank’s thoughts are on this.”

“Minister Wang, Prefect Shen.” Gao Shiming’s formulaic smile faded slightly. “The ‘fire loss’ is the loss incurred when smelting silver. Collecting the fire loss is to compensate for this loss. Now that Shuntian Prefecture has received silver notes that can be handed over and used directly without the need for smelting, it naturally no longer needs to bear this loss and should no longer collect the fire loss.”

Wang Yingjiao frowned slightly, but still smiled: "Eunuch Gao, let's be frank. The name 'fire loss' originated from the losses in smelting and casting, but over time it has become an important source of income for the prefectural government. The daily expenses of the Shuntian Prefecture, and even some temporary funerals and reliefs, such as the nine-altar ceremony held a few days ago by Shang Jingying, the former head eunuch of the Imperial Horse Administration, are all supported by various shady practices, including fire loss. If this income were lost, where would the Shuntian Prefecture find the money to cover these expenses?"

(End of this chapter)