Wolf, Spice, and Currency: The Economics of Wolf and Spice

   By Nomad (is not an economist) Otto
    At the suggestion of BigN, and because there hasn’t been much to blog about, anime wise (Zetsubou continues and is frequently funny, Wolf and Spice continues, and doesn’t suck, Mne..something was a pretty good ova, for basically being a story of tits and explosions, nothing else is starting before april) I’m going to talk about what the hell is going on in Spice and Wolf, in terms of the great currency plot. This post doesn’t really have much to do with anime in general, and might tend to sound like a lecture you’d hear from your TA, but is useful if you’re trying to figure out why people are doing what they are. I’ll begin with a discussion of what money is, and, from there, I’ll move on to discuss the three different types of currency, and why the economics of Wolf and Spice are the way they are.
 Chiaki doesn’t like the following post, and you might not either, so be warned
1) What is money?
  Ask an average person, and you’ll get an answer like “money is what you buy things with.” This is true, but misses the point, because it assumes two things, for one, what buying is, and for two, why you can use money but not other things to do this thing called buying. So, let’s start off by looking at what buying is. To buy something means, generally, to exchange a good or service for another good or service. For example, you can buy a sandwich with a couple of bucks (sandwich for money), buy time by making promises (Not getting hurt now for theoretical services or goods in the future), etc. Fundementally, buying is barter, a system by which you exchange item A for item B.
The reason why you can buy things with money, rather than pure goods, is because a pure barter system sucks. For example, right now I’m paid money to grade papers. In a world without money if there are people who sell groceries who need papers graded, I’m set. If there aren’t people who fit the above condition, I can’t exchange my good/service for what I want, and, so, I starve. So, basically, the idea of money is that it’s something that everyone wants, so I can exchange my service for money, and then the money for whatever I want, and the person I buy things from can exchange that money for something else that they want, etc. So, if I wanted to make a currency, I’d want to pick something that everyone wants.
Let’s create a perfectly hypothetical currency, Nomadic Robot Dollars (Nrds), and try out a bunch of different variations to see what kind of thing makes a good currency. Since we know that it needs to be something that everyone wants, I’m going to pick bacon. Everyone loves bacon, so, it follows that bacon should make a good currency. Of course, it doesn’t, mostly because bacon rots and is no fun to carry around in your wallet. So, for a currency, we should pick something that everyone wants, doesn’t go bad, and is easy to carry around . There are a couple of things that fit that description, so, because this is an economics example, I’m  going to pick something like little pieces of paper with my face on them (Be it known that my face has been known to cure cancer because of sheer awesomeness).
 Renge Agrees
There’s a probably with these Nrds also, because if I had a scanner and a printer, and assuming that any piece of paper with my face on it was good, you could make a whole bunch of these and buy whatever you wanted, and everyone else would do the same, and, eventually, even though I’m awesome, no-one would be willing to exchange pictures of me for bacon or whatever because they could just as easily make their own pictures. So that’s no good. How about if I made only pictures printed on a certain paper (which I would restrict the manufacture of) actual Nrds? Well, that’d work pretty well, everyone wants it, it doesn’t go bad, it’s easy to carry around, and you can’t make it yourself. There’s only one problem, and that’s determining how much a picture of me is worth, in units of Blts. One picture of me where I’m facing the side has less pure awesomeness than a full on face shot, and there’s all sorts of gradiations in between. How is a shopkeep going to determine how many Blts to give to someone who hands him a picture?
 In the event that I was Taishi, this might be a picture on the currency
2) Types of currency
    This is where the two types of currency come in. The first is fiat currency, which basically works by some government saying “a unit is worth so much because I say that’s how much it’s worth.” This is the currency we currently have in the US, and throughout most of the world. A dollar is worth a dollar because the government says that it’s worth a dollar and everyone else says “okay.” But let’s say that you don’t like having money that’s just based on say-so, because, for example, no one else thinks that a dollar has any worth, after all, it’s just a piece of paper, and you have more than enough pieces of paper. You’re going to have to use a different system.
Another system, which I’m going to call “representitive currency” is slightly different. Each unit is worth so much because it represents a certain amount of something that you have, but aren’t carrying with you, either because it’s a pain or because you can’t. A check is representitve currency, because it represents a number of dollars that you have back in your bank account. Similarly, I could base a currency on something weirder, like the right to get a handshake from me. It doesn’t really matter, in most cases, what the thing is representing, because people aren’t likely to exchange currency for what the currency represents. This is the way we used to do things in the US, when we were on a gold standard.  The disadvange of this system is that you’re not supposed to issue more currency than you have items that the currency represents, so, for example, if there are a lot of people being born, and not much gold being dug up, the number of dollars per person is reduced, and, so, by supply and demand, the value of the currency goes up (this is called deflation, and is generally bad, because it means that people who take out loans get screwed).
But let’s say you think I’m a lying scumbag, and don’t actually have enough handshakes, or gold bars, or whatever lying around, and so your currency isn’t backed by anything. The solution to this is to actually demand whatever the currency represents, rather than going through the currency as a medium. I’ll call this and “actual currency.” For example, let’s make all our coins out of gold. The problem is, (in addition to inflexibility of the money supply, like above) of course, that if I hand you a gold coin, it’s hard to tell if that coin is pure gold or lead with gold mixed in.  Therefore, let’s have whoever is issuing a gold coin put some sort of mark on the coin, which certifies that it contains this much gold. Voila, we have a coin-based currency!
The problem, of course, has now come full circle. We demand a coin, but we have to trust that a coin in worth so much because the manufacturer puts their mark on it saying that it’s got so much gold, which is sort of like fiat currency, except that you can actually check later if a coin has x% gold or not, provided you have proper measuring instruments.
 Sensing Mistrust….
3) Spice and Wolf
    In the show, coins are assumed to be two different types of currency. First, within a country, the coins act as a representative currency, in that they represent claims against the wealth of a kingdom. Because the value of a coin issued can be more than the value of the wealth which it represents, nations derive a benefit, called seigniorage, from making coins. Bascially, for every coin issued, a nation makes money, provided that people want the coins. Outside of the nation, the coins act as an actual currency, in that they’re valued by the amount of precious metal that makes them up. This means that if nations want to make the most money via seigniorage, it’s in their best interests to make the coins as pure as possible.
    That is, of course, in the long term. Since it costs some amount of money to make a coin (more the purer a coin is), in the short term, a nation can make a lot of money by changing it’s currency to be less pure. However, once the market realizes that a coin is less pure, the value of the coin in the market drops, so fewer people want the coin, or, the people who want the coin want more of them for the same thing, and, so, the value of the seigniorage drops. At the same time, the value of all coins bearing that mark in circulation drop, because it’s hard to tell if a coin is a new coin or an old coin, and, so, they’ll demand more coins of that type in general in exchange for a good. The opposite happens if the content of a currency rises; existing coins rise in value, but, until then, the nation takes a hit in the way of seigniorage
  You can, however, delay this from happening if other people also have an interest in the value of a coin remaining high, say, merchants who buy a lot of them, and who don’t want to see their investment lose value. These merchants will work to keep the value of the coins high, generally by not telling people that the metal content of the coins has dropped, and, so, a nation can make money for longer by lowering the metal content of the coins. This is exactly what the conspiracy is trying to do.
     By conning people into buying lots of the coins, by saying that the coins are going to rise in purity (meaning that the coins are going to rise in value), they can keep people buying the coins for longer and make more money doing so. That isn’t the really hard part, unfortunately, because when I first heard about the response to this proposal, it made no sense.
The basic response that our hero etc. cooked up was to buy MORE of the coins in response to the pending devaluation, which generally only makes sense if you subscribe to a bigger fool theory (basically, they then turn around and sell the coins before the devaluation, which should make them a lot of money if the rumors about a currency purity rise were going around). However, in general, the bigger fool theory is garbage, because it assumes that there’s someone more stupid that you, and that’s not always the case. If the currency devalues too soon, your left holding the bag and you end up in a bad way.
 The Ouran group follows my train of thought
However, the solution to this paradox was revealed in ep 5. where they talked about getting access to the mines and tax rights of the nation after the devaluation. The basic idea is to accumulate the coins before the currency is devalued, and, then, to make the nation exchange their coins for actual stuff. If it’s before the devaluation, the coins will still have a lot of value, and, if the nation doesn’t have much in the way of easily  exchangeable wealth, like, say, gold bars or whatever, the nation against whom the claim is made is going to have to give up other, more valuable stuff, like, say, mining rights or what have you. This only works if you can accumulate enough of the coins so that the nation has to give up money producing resources in exchange for the soon to be devalued coins, which means that you make a profit. That’s my current theory, anyway.
I hope you all learned something from this little excursion into the world of economics, and, even if you didn’t, I made a post, so I feel less guilty about not updating very much. Go forth and enjoy Spice and Wolf with your newfound knowledge!
 Kamina gets it now, and so should you!

14 Responses to “Wolf, Spice, and Currency: The Economics of Wolf and Spice”

  1. 1 Seto January 1, 2010 at 9:26 pm

    Hi, I know this is an old post but I’m still pretty lost at what exactly is happening in episode 5.

    1. Okay I see that the representational value of the Silver Coin was actually decreasing in Spice and Wolf but the Swindler said that the Silver Coin was increasing so that the swindled merchants would stockpile the coins. This is the part where I get lost, how exactly does the swindler earn his money? If he buys it after the value decreases, it would be the same as exchanging his money anywhere. If he buys it before, that’s obvious, he’ll lose money.

    End of First Question.

    2. The other part I became lost at is the part in which the Main Character and his partnered company makes their money. How exactly do they earn money by stockpiling the Silver Coins and using them before they devalue? Shouldn’t they just convert the silver coins into a different currency and keep it’s base value even after the coin depreciates?

    -What I’m trying to say is… Let’s say the depreciating coin is called Coin Y. Coin Z is the same coin but in the future as depreciated. We’ll name a constant called coin X which is a coin whose value remains stable or it can be goods. It just represents the amount of “money” they have.
    Coin X: Stable Currency
    Coin Y: Undepreciated Silver Coin
    Coin Z: Depreciated “Coin Y”

    Okay, this is what I’m getting at so far, the Company retains a certain amount of Coin X. They convert all of their Coin X into Coin Y. And spend the Coin Y to buy the rights before Coin Y is depreciated into the value of Coin Z, right? However, isn’t the representational value of Coin X the same as the amount they used as Coin Y? In short they still used the same amount of Coin X to buy the rights by converting all their Coin X into Coin Y. makes no difference that Coin Y is about to depreciate into Coin Z. They still had to stockpile all those Coin Y by using all their Coin X.

    Here’s an example. Let’s say Coin Y is worth 2 Coin X. And rights are worth 10 Coin X. Coin Z is worth 1 Coin X.

    10 Coin X –>5 Coin Y –>1 Rights
    is the same as waiting and spending their money after the coin depreciates.
    10 Coin X –>10 Coin Z–>1 Rights

    They still spent the same amount of the amount of goods they retain in both scenarios. What am I exactly missing here?

    Thanks for reading,

    • 2 Seto January 4, 2010 at 8:48 pm

      I’m guessing I shouldn’t be worrying about an answer huh? Old blog post anyways. 😦

      • 3 Persona June 6, 2010 at 2:11 am

        I think it’s because the nation from whom you’re trying to buy the rights want the offer in coin Y and not in coin X, though you both offers are equal in real value.

        The reason is that they want to melt down all of coin Y, and use the same amount of metal to make a greater number of coin Z, thus giving themselves more value before the public catches on and the per coin value starts to drop.

        As for how the swindler benefits, he can get rid of his soon to be depreciated coin Y, no?

        I don’t know if I’m remembering correctly but isn’t he paid to spread the rumour by the nation? The reason can either be like Nomad said, to make merchants overinvest and keep the purity drop a secret for longer. Or it can be (if I remember correctly, I think in the anime they said…) so that the nation can recollect more of the coins to melt down by buying them off of the merchants. That would create less of a fuss than recalling from the general public.

  2. 4 Persona June 6, 2010 at 2:12 am

    BTW, Nomad, the second paragraph in response to ZeroBlade really helped me understand the rest of your post!

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