The Great Chinese Gold Sponge

One of the great puzzles of medieval economics is why it works at all. Essentially the European economy, if you are standing at the border of China and looking westward, is an elaborate method of shipping gold and silver to China in exchange for spices. Medieval European understood this. What they did not understand was that the price of Gold remained stable over hundreds of years. That, frankly, makes no sense at all.

Gold is not consumable: that is, you do not use it up so that you need more. Therefore, once you have it, you should want it less. Therefore, after the Europeans first send ten tons of gold eastward, the price should drop, so that you need more gold to pay for the same amount of spices. It does not. If anything gold gets slightly more expensive over time. The other possibility, that there is a limitless demand for gold, makes no sense either, because that just means the price should start very high and fall as Europe meets it. Steady prices and insatiable demand, coupled, make very little sense, and so, the European economy makes very little sense.
Now, there are ways of making this make sense, and we discuss them as plot hooks in the book. We don't however, say what was really happening: what the real source of the gold sponge is.

The gold sponge effect occurs for two reasons, in China and India, which are not modelled in Europe. Gold is used as a commodity, and gold is used as a method of storing value. In Europe, neither of these is really true.

Gold in Europe is used as a commodity: it is consumed to make things, and these things are used by people. In China, in period, however, the link between gold and the idea of a medium, for exchange is far weaker than in Europe. Gold is not money. Gold is the stuff you make jewelry and furniture out of. This means that gold is consumed, in the sense that it is turned into jewelry, rather than staying in circulation. That is, gold sinks into the ruling class of China and vanishes, because its function is to demonstrate capacity for conspicuous consumption. Unless there is a sudden sacking of a city, to liberate its gold, then there's no reason for this gold to circulate, and the gold does not make you want less gold, or the same gold at a lower price. The ability to get more gold, and give gold as presents, affirm the character's status far beyond gold's actual usefulness. Remember that what is being traded for the gold are spices and silks which are surplus to that which is required by the noble class off China. That is, there's no real opportunity cost to the ruling class of China to get all this gold, and no real opportunity lost to refuse to get it. It's precious, and reserved for certain nobles, but it's not "money" in the western sense.

In both China, and more especially India, having gold is one way of storing your money. Money that is stored goes out of physical circulation. Although it continues to circulate as credit, the gold itself just gets put away in storage. Its function is to wait for disaster, and provided disaster does not strike, it stays out of the economy, in some cases, for hundreds of years. That is, gold flees the economy as a form of insurance.

Now, C&G offers some more mythic reasons for the Asian Gold Sponge, but it is important to recognise that Hermetic magi both know how the European economy operates and, likewise, know that it shouldn't work. There's an incongruity in Asia that should make it crash. If Marco Polo goes to China in Mythic Europe, he will make matters worse.

Polo says there is gold -everywhere- in China. Given that gold is valuable because it is scarce, it makes even less sense. He also notes that gold is never used as a currency in China. When you turn up, the Khan makes you hand over all of your treasure, and gives you pieces of paper which merchants will treat as money because he says so, and he's willing to kill anyone who refuses his scrip. So, gold is everywhere and actually, there's only -one- customer. After Polo, the gold price makes even less sense than before.