Jordan Kouzmanoff
patreon
Dev Diary #16: Inflation
🕑 Added 2022-11-05 14:36:05 +0000 UTC
Hello and welcome to the 16th development diary of Grey Eminence!
We’re back with another entry in our ongoing series of dev diaries dedicated to the economy: this time around, we’re taking a look at inflation. It’s one of those mechanics that you might not think much about if you don’t get excited by economics - and that’s perfectly understandable, which is why we’ve designed it to fit with our optional complexity design paradigm! Nevertheless, inflation has a very important effect on every country’s economy, so understanding how it works and how you can interact with it will help you achieve your economic goals.
Sources
Let’s start by going over where inflation might come from in an economy. We already mentioned one of the biggest culprits in the previous dev diary on the budget: minting. Every country, by default, creates a small amount of money out of nothing (proportionate to its GDP) via minting. This money is deposited directly into the country’s treasury and it represents real-life phenomena like currency issuance, seigniorage and debasement, which we do not model separately.
While minting cannot be disabled, it happens on a small-enough scale that it can’t become a problem on its own. We’ve balanced it to be roughly in line with the historical inflation rates experienced by Medieval economies (around 1-3% per year). Once you unlock the paper money technology, however, you get the option - via the budget UI - to increase your rate of minting significantly. This, of course, will provide you with an immediate spike in revenue, but if left unchecked, excessive minting might result in hyperinflation (more on that in a second).
The second big source of inflation is the mining of precious metals. Historically, gold and silver were the two elements at the heart of most currencies during Grey Eminence’s 600-year timespan (fun fact: up until the 19th century, silver held a vastly more prominent position than gold as a currency standard). Due to their lack of major industrial uses - and the fact that unlike other consumer goods, precious metals aren’t really consumed per se - we’ve chosen not to represent gold and silver as trade goods.
Instead, gold and silver mines directly produce money, which is deposited straight into their owner’s treasury (or as local wealth, if the mines happen to be owned by the local population). The fact that precious metal mines might be owned by non-state entities puts you, the player, in an awkward position where you might have to deal with the effects of inflation caused by a local elite mining too much gold or silver. In other words, precious metal mines are prime targets for expropriation of property, especially if you’re looking to break the power of said elite.
The silver mines of Tyrol were the largest in Europe throughout the Middle Ages. Their vast wealth would contribute significantly to the rise of the Habsburg dynasty of Austria when they eventually inherited the lands of Tyrol.
Effects
So, what are the actual effects of inflation? We’ve mentioned before how Grey Eminence uses a single universal currency, so things like exchange rates aren’t present in the game. Instead, we model inflation as a stealth tax on the population: each year, the value of local wealth of all social classes is reduced proportionally to the rate of inflation. In effect, sources of inflation - be they minting or precious metal mining - erode the purchasing power of the population. For now, we have decided not to apply inflation to the national and elite treasuries for the purposes of simplification (otherwise you’ll have to calculate whether it’s actually worth it to get +X from mining gold if your entire treasury will decline by Y% per year), but we might include this feature pending balancing.
Now, the most obvious negative effect is an increase in discontent, which can lead to popular rebellions. Inflation on its own can’t trigger a rebellion outright: the discontent needs something else to latch onto. Nevertheless, since people virtually always have something to be dissatisfied about - like internal politics or famine - inflationary discontent can still remain a threat to the stability of the country.
Of course, the real downside to inflation is that it eats away the wealth of your population. Destroying local wealth might not seem like a huge deal - and, to be fair, to many governments in the mid 14th century, this erosion really won’t be felt as a loss of revenue, since their taxation is entirely delegated to elites - but the drag that inflation can cause on an economy will add up to a significant opportunity cost over the centuries. Ultimately, successful countries are those who foster a consumer economy and that becomes very difficult with high inflation (and nigh impossible with hyperinflation).
Speaking of hyperinflation, let’s discuss what it is and what its extra effects are: we define hyperinflation as annual inflation above 100%. This might seem like a high threshold to reach - and, to be clear, it is - but in desperate times you might find yourself relying on the printing press for longer than you would’ve liked. Periods of hyperinflation greatly increase the existing discontent from inflation and also unlock the possibility of inflation-fearing factions to form: in other words, during hyperinflation inflationary discontent can lead to rebellions on its own. These factions will aim to forcefully shut down the printing press and close down precious metal mines, in addition to demanding nasty things like wealth redistribution.
Moddability
Despite being one of the smaller economic systems, we’ve nevertheless invested great efforts into making it as moddable as possible. As we mentioned previously, it’s possible to apply the effects of inflation to other money pools beyond local wealth (e.g. elite and national treasuries). In addition, for the extremely brave among you, it’s also possible to try retooling inflation to function as it does in the real world by adding national currencies and exchange rates, though - fair warning - that’d be a very tall task. You can add more events than the ones we’ve included or you can disable inflation (and minting and precious metal mines generating cash instead of goods) if you so desire.
That’s all for today, thank you for reading! We’re continuing development at a steady pace and look forward to increasing this pace starting next year. We’re greatly indebted to you for your ongoing support, so thanks for helping make Grey Eminence a reality! Stay tuned for the next dev diary on December 3 and don’t forget to join our Discord and Subreddit, and to follow us on YouTube, Facebook, and Twitter.
