Persian Empire 1845

Chapter 68 Currency Reform
The British loan arrived at this time; bankers are indeed quick. £300 million, half of which was to be used for military construction, and the other half to be distributed among different departments.

Construction is proceeding smoothly, and even if Nasser al-Din is impatient, he doesn't expect Iran to become a world power tomorrow. The rest is up to time.

Tehran's newspapers always have something new to report each time they're published, which becomes a topic of conversation among the citizens.

Since last year, Tehran has introduced some machines to produce textiles. The exquisite fabrics have attracted the attention of the wealthy and powerful, who have been buying the machine-made cloths, while artisans are also looking at the machines and wondering whether they should buy one to try it out.

Groups also reached new heights of activity, including the largest progressive association and industrial federation, as well as cultural societies formed by the Ulima and economic societies formed by the royal family. These groups were diverse in composition, with members mainly consisting of enlightened citizens, landowners, bureaucrats, and members of the royal family, as well as intellectuals who had opened their eyes to the world.

These people in Tehran and Tabriz often discussed foreign affairs. Some thought the economy was good, some thought the military was good, but most thought the ideology was bad. Why kill the king? Wasn't that insubordination?

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At this time, the government was also carrying out its most important financial reforms, and the printing plant in Tabriz was expanded due to increased demand for the riyal.

But the worst-case scenario unfolded as the massive reform spending led to a significant increase in the supply of riyals. This caused the riyal to depreciate rapidly over the next few months, falling from an initial exchange rate of 8 riyals to 1 pound to 10 riyals, a drop of 25%, and the downward trend continues.

Amir is extremely busy, and the previous declaration to regulate the financial industry has, to some extent, curbed currency devaluation. However, the true value of the riyal still needs to be determined.

"My lord, we have figured it out. The devaluation of the rial should not have been so severe, but some people in Tabriz took advantage of the exchange rate between the rial and the toman to exchange large amounts of rial, which led to the devaluation of the rial."

Every country has its speculators. Some people in the Qing Dynasty used the exchange rate between silver and copper coins to acquire more copper coins, which they then used to make copperware, resulting in profits of more than ten times.

Of course, Iran doesn't have that much in return, but it's still at least twice as much. Amir couldn't believe that anyone would profit from the national crisis under such circumstances. No, they must be eliminated.

“Send a letter to the governor, ordering him to personally purge the speculators. If he fails, I will report to the Shah to have him dismissed.”

Amir was getting anxious; he had finally recovered, and now this had happened again.

He also learned a great deal about central banks and currency, and List gave him a lot of advice: paper money is a monetary symbol issued and enforced by the state to replace metal currency in performing the function of a medium of exchange. If paper money is issued indiscriminately without being limited by the amount of metal currency needed for circulation, it will inevitably cause a discrepancy between the actual purchasing power of paper money and metal currency, resulting in the devaluation of paper money, i.e., inflation.

Previously, when the riyals were issued in Tabriz, banks had £10 as reserves to maintain their value. Now, to issue enough riyals to support the entire country, at least £200 million is needed. To further increase revenue, the expert panel approved a land tax reform proposal, which incorporated a monetary system for tax payments and the principles of tax fairness.

The reform plan completely abolished the original land tribute system, and all land was renamed arable land. The basis for taxation changed from harvest volume to land value. The land tax rate was 5% of the land value, and the tax rate was no longer affected by the quality of the harvest. Land taxes were now paid entirely in cash.

Implementing the monetization and unification of land rent collection not only meets the needs of the development of a commodity-money economy, but also effectively avoids the impact of good and bad harvests on government fiscal revenue, reduces the cost of rent collection and storage, lowers various risks, and provides a stable source of revenue for economic development.

Relying solely on land taxes is insufficient; the biggest challenge lies in economic development. Cities are relatively better, as the domestic economy is accelerating, and cities are the main drivers of economic growth. Appropriate local policies are sufficient. However, economic development in remote areas is much slower. In some places, it's simply stagnant. Even if officials want to make an effort, they don't know where to begin.

Many factors constrain regional economic development, including transportation, resources, climate, geographical environment, and population. In comparison, the easiest problem to solve is actually transportation; at worst, it can be solved by building roads. With sufficient investment, this problem can be resolved sooner or later.

In rural areas, don't assume that growing cash crops will be more profitable. It's still the 19th century, and people's living standards are limited. Apart from a few high-demand industrial raw materials, most cash crops are not suitable for large-scale development.

High-value-added agricultural products have very little market demand in this era; ordinary people simply cannot afford them, and there are too few people with purchasing power.

The current situation does not allow Amir to proceed with financial reforms slowly; it must be swift. Therefore, he submitted his financial proposals to the Shah.

He pointed out that the depreciation of paper money and the rise in silver prices triggered inflation. However, the depreciation of paper money was not entirely due to increased money supply, but rather to insufficient government reserves and speculation by certain individuals. The insufficient government reserves were, in turn, caused by a trade deficit. The root cause of the trade deficit was insufficient resources, which in turn stemmed from improper use of currency and poor capital flow.

Amir suggested: "The most urgent task at present is to determine the method of using currency, accumulate positive currency, replenish the funds for withdrawing paper money, revitalize products, and achieve the goal of restricting imports."

To increase gold and silver reserves and establish a paper currency exchange system, industrial modernization and trade balance were essential. Based on this premise, and in conjunction with List's suggestions, Amir proposed that fiscal consolidation should focus on "the method of using money," accumulating positive currency and withdrawing paper money.

Specific measures included the establishment of the Central Bank of Iran, the Savings Bank, and the Industrial Bank. Amir's plan was to place the Central Bank under the government's management, with its functions including government fund disbursement, general business operations, and foreign exchange.

Savings banks pooled idle funds from various regions to recover and supply funds, while facilitating residents' savings; industry banks facilitated capital utilization, revitalized local products, and promoted the development of agriculture, industry, commerce, and transportation, thereby establishing a monetary and credit system.

To support this plan, the government allocates approximately 200 million riyals annually from its fiscal revenue, using a portion of it directly to buy back banknotes, while using the remainder to purchase gold and silver to replenish its reserves. Simultaneously, it will vigorously combat currency speculation, allowing the riyal's value to slowly recover once the domestic situation stabilizes.

(End of this chapter)