**Chapter 79**
**Central Bank and Navy (6)**
After the bond sales went smoothly, my father intended to use the 10 million pesos for naval development, as originally planned, but I stopped him, saying I had a plan to make more money with it.
At the time, I briefly explained the plan and got his permission, but now that the bill had been passed and preparations were nearing completion, I decided to explain it to my father in detail.
‘My father needs to know this so he can avoid any mistakes when running the country.’
The introduction of paper money and the gold standard had many advantages, but the biggest advantage was that the seigniorage was greater than that of metal currency, and they could issue more currency than the amount of metal they held, which meant they could make more money. I explained this in a simple way.
“So, the more large-denomination currency you issue, the greater the seigniorage will be.”
“Yes, Father. The cost of minting a 5 peso note or a 50 peso note is almost the same. But its purchasing power is 10 times greater.”
“Then, issuing larger denominations would be good.”
The advantage of seigniorage that paper money had was more noticeable when compared to metal currency. Silver coins, which actually contained silver, had a minting cost and purchasing power that were almost the same, so the seigniorage was very small.
“I’m only planning to issue up to 50 peso notes for now. It’s because there are side effects to issuing too large denominations.”
“Side effects?”
“It’s easy to use for crime, and there’s a risk of causing inflation. And even if we distribute and issue 5, 10, 20, and 50 peso notes appropriately, it doesn’t cost even 500,000 pesos to issue 10 million pesos worth of banknotes, so the seigniorage is already sufficient.”
“I see. But paper money means that people can go to the central bank and demand to exchange the banknotes for gold. If that happens, won’t there be no seigniorage?”
“That’s right. But that happens when the government’s ability to pay loses public trust. Our government has huge real assets compared to other powerful governments, so its credibility is high, so you don’t have to worry too much.”
“Hmm… We need to carefully set that ‘reserve ratio’ you mentioned.”
“Yes, I’m planning to set it at 25% for now. The US also has a range of 15% to 25% in each state, but 25% is the most common, and since we have a single central bank system, we need to set it more conservatively.”
Even in the US, it was the banks that were equivalent to the central banks of each state that had this kind of reserve ratio. Ordinary banks had no legal restrictions, so they were maintaining ridiculously low reserve ratios.
If they had 10% of the money deposited by their customers, they were considered a conscientious bank, and 5% or less was common. This was corrected only after they experienced an economic crisis later. The Mexican Empire was in a similar situation, but I’m planning to make commercial banks hold 15% of their legal reserve requirement, starting with the establishment of the central bank.
‘We can slowly lower the reserve ratio as the economy becomes more sophisticated, but it’s safer to operate more conservatively now that we’re based on the gold standard.’
“Okay. That’s good. Now, all we have to do is decide who will be on each currency?”
“Yes, you just need to decide whose faces will be on the 5, 10, 20, and 50 peso notes. Or, it doesn’t have to be people, it can be anything that symbolizes our Mexican Empire.”
“No, people would be better. Let’s see…”
Agustín I pondered for a moment and wrote names on the document.
“My face should be on it. There’s no better way to make people recognize my face.”
In an era without media, most people didn’t know who the ruler of their country was or what they looked like. That’s why they put the ruler’s face on coins.
“Yes, that’s probably best.”
This method was actually very effective, and it’s no exaggeration to say that there was no one in the Mexican Empire who didn’t know Agustín I’s face.
The emperor’s authority, which had been as light as a feather in the early days of independence, had grown stronger day by day. It was partly due to his efforts to stabilize the country, but it was also due to the fact that everyone knew the emperor’s face on the peso.
‘If the country had been a mess, it wouldn’t have helped, it would have just brought insults, but since the country’s situation is getting better day by day, it’s been a big help.’
“Then, it would be good to put your face on it too. It’ll help to make people recognize your face early on. And for the other two, it’s best to use ‘Miguel Hidalgo’ and ‘Vicente Guerrero’.”
“Father Hidalgo is fine, but Vicente Guerrero? Are you sure?”
Miguel Hidalgo y Costilla was a Catholic priest. He called people to his church in Dolores and called for an army to fight against Spain (the Cry of Dolores), and the Mexican War of Independence began with him at its center.
It’s fine to put Father Hidalgo, who is already considered a founding father, and who is already dead, on the banknotes, but Vicente Guerrero?
After Agustín I, who had been loyal to Spain, changed his mind and decided to become independent, he negotiated with the leaders of the independence movement and established the Mexican Empire. Vicente Guerrero was one of those independence leaders.
He’s still alive and in the army, and he’s a republican, isn’t he?
My father, as if to say there was nothing to worry about, said.
“Vicente Guerrero, it’s undeniable that he contributed to independence. Putting him on the banknotes could show inclusiveness and help with national unity. And if his evaluation goes up, my evaluation will naturally go up too.”
“…I see. Alright. Let’s decide on that.”
Before Agustín I changed his mind and decided to become independent, he had served as a Spanish officer and had ruthlessly suppressed the independence forces.
It wasn’t a good thing from the perspective of the Mexican people, but it also meant that he had defeated the army led by Vicente Guerrero, who was a leader of the independence movement.
‘At least in terms of military ability, he’ll have to be recognized. So, is the last and most important step left?’
“Will it be okay if the government buys the gold you have to keep in the central bank?”
The government had also been collecting gold, but it was far from enough to issue banknotes of this amount. My father knew that I owned a huge amount of gold, so he asked.
“No, if we do that, it might cause problems, so it’s better to do it in the form of public purchases for a certain period. If we’re going to implement a full-fledged gold standard in the future, we need to secure the gold circulating in the market beforehand.”
“That’s good. So, we’ll buy as much as we can from the market, and if there’s a shortage, we’ll buy yours?”
“Yes, on the last day of public purchases, I’ll sell the amount of gold I need.”
I need to buy 10 million pesos worth of gold. I’m only planning to pay the current market price, so it won’t be easy to collect 10 million pesos worth of gold. I’ll buy gold at a reasonable price, and if there’s a shortage, I’ll sell mine to make up the difference.
‘It’s beneficial for me too. If I’m going to sell this much gold, the price of gold will inevitably fall, but I can sell it at a fixed price, even if it’s only a portion.’
With this, all the preparations for issuing currency were complete. The printing press and banknote technicians were already prepared before the bond issuance.
I had scouted banknote technicians from England beforehand, and he and Locke Precision Machinery collaborated to build a printing press.
They paid special attention to preventing counterfeiting, one of the biggest drawbacks of banknotes, because England was the leading country in banknote technology at the time.
My father’s decision was conveyed to the Ministry of Finance and the central bank, and public gold purchases soon began.
***
The Mexican Empire government purchased gold until 10 million pesos was spent, at the current market price.
This was done again through Rios Bank branches nationwide, and it drew a greater response than expected.
Since people who mined gold in California had increased, a large amount of gold was circulating in the market, and many people who had been holding onto gold because of the falling price were now selling it.
“Is this price fixed? You mean you’ll buy as much as I bring at this price?”
“Yes, that’s right.”
“Okay, wait a moment. I’ll be right back! I’ll bring it right away!”
The government was able to purchase 4 million pesos worth of gold during the two-week public purchase period, and the Crown Prince sold the remaining 6 million pesos worth.
While public purchases were underway, banknote issuance began.
“Money is printed so quickly, it doesn’t feel like money anymore.”
Agustín I said that, watching the banknotes being printed at the central bank’s printing house.
“Yes, we need to print 40 million pesos worth of banknotes this time, so even if we print them in such large quantities, it’ll take a while.”
“We need to protect the gold bars well, but I think we need to protect this printing house and warehouse where we make these banknotes thoroughly.”
“Yes, we need strict security.”
The cost of minting 40 million pesos worth of banknotes, which was a small amount in terms of proportion but hundreds of thousands of pesos in total, was to be borne by squeezing the remaining administrative budget.
We could have paid for it with the money we sold the bonds, but the goal was to issue as much currency as possible. The result was the issuance of 40 million pesos with 10 million pesos worth of gold as reserves. It was a truly enormous amount.
It would become more familiar over time, but this was the first time in Mexican history that such a huge amount was involved. The emperor ordered that the gold, the printing house, and the banknote warehouse be guarded as thoroughly as the imperial palace.
He even visited several times to show that he was paying attention, so no one dared to touch it, and fortunately, no theft or embezzlement occurred.
The government, having secured the budget, invested part of the funds in its original purpose, naval development.
“What? You’re going to pay all the construction costs at once?”
John Ericsson, CEO of the Mexican Shipbuilding Company, asked.
“Yes, and we’re planning to adjust the budget so you can hire more workers than originally planned.”
The naval officer in charge of communication with the shipbuilding company said confidently, straightening his shoulders, unlike before.
Ships were being built slowly at the Veracruz shipyard. They had started, but there wasn’t enough money in the naval budget to buy all the materials, so they were building them slowly, buying materials slowly with a small workforce. They were even building only in the large docks.
“…Now I’m finally motivated to work.”
John Ericsson, inwardly thanking the Crown Prince for solving the financial problem, began using the generously allocated budget.
A large amount of materials and manpower were invested at once, and warship construction began to proceed much faster than before.
The government placed orders for all the medium and small docks at the Veracruz shipyard.
The budget used so far was only 2.1 million pesos.
The large dock cost 1.1 million pesos, including 300,000 pesos for a ship of the line and 400,000 pesos each for two monitor ships, and 1 million pesos was spent to fully operate four medium docks and five small docks.
“…There’s more money left than I thought. Let’s go ahead and build the third and fourth shipyards.”
It was an order to build two more, adding to the second shipyard being built on the Pacific side, for a total of four harbors and shipyards.
“Yes, Your Majesty. And how about increasing the naval training budget and expanding the workforce in advance to train them thoroughly?”
It was a suggestion to train naval officers and sailors in advance to match the rapidly expanding Mexican Empire fleet.
“Oh, that’s a good idea. Prepare the necessary budget proposal.”
“Yes, thank you, Your Majesty.”
The Crown Prince said that he would use half of the 40 million pesos for something else, but even the remaining half was too much to spend only on the navy.
It was finally the moment when the Mexican Empire navy began to expand.
This is fire
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