Kind of an odd question about gold exchange rates

[LordEntrails]

I got the impression that he was simply assuming that anyone who tries to pay him in non-British money must be foreign - which is why he asks Mr Weasley if he is, despite Mr Weasley having no obviously foreign accent:


“Help me, Harry,” he muttered, pulling a roll of Muggle money from his pocket and starting to peel the notes apart. “This one’s a–a–a ten? Ah yes, I see the little number on it now….So this is a five?”
“A twenty,” Harry corrected him in an undertone, uncomfortably aware of Mr. Roberts trying to catch every word.
“Ah yes, so it is….I don’t know, these little bits of paper…”
"You foreign?” said Mr. Roberts as Mr. Weasley returned with the correct notes.
“Foreign?” repeated Mr. Weasley, puzzled.
“You’re not the first one who’s had trouble with money,” said Mr. Roberts, scrutinizing Mr. Weasley closely. “I had two try and pay me with great gold coins the size of hubcaps ten minutes ago.”

Well, asking if someone who doesn't understand the basic currency is a foreigner is much more polite than asking if an adult is stupid or mentally disabled. Because from the muggle's point of view, what other possibilities are there?

[snowblizz]

What you are describing are things I agree with. I just don't agree that that meant gold was a unit of currency. It was a very refined form of barter, not unlike using bullion for backing IOUs.

Everything is a refined form of barter if you want to go there. IOUs backed by bullion is exactly what all modern currencies were between the late 1940s and 1974.
Some special words are used about trading specific things for specific things to make it seem better (I blame Adam Smith, he liked to think he was at the top of the development pyramid) but that doesn't change the fundamentals much.

I do, however, disagree with "a great currency in an economy that cannot sustain fiat money." I'd need an example of that, because I honestly do not know of any economy that has ever run on non-fiat currency for any significant length of time (say, at least a couple of generations). Now, I am not particularly versed in the medieval trading city economies, and thus maybe they did, but a very (very!) brief search suggests to me that even in Venice, Genoa etc. the unit of currency was fiat, and again, gold was used only in major transactions.

All of the pre-modern world. All of medieaval times. All of the Renaissance. All of the early-modern period. Some rulers made brave attempts at fiat money. Usually in times of crises when they needed money. They all ended in massive inflationary/deflationary crises because the state couldn't enforce complience, couldn't resist temptation to game the system to their advantage (the one who gets to make the money is infinitly rich until someon asks what it's worth) and because the understanding of the reactions of humans and markets was not very developed yet. We only have truly fiat money in the modern world when the state could compel you to aquice. And despite all of this for long stretches of periods what you would likely claim is a currency and not barter, was in fact just a substitute for gold currency until 1974.

I would turn the question around. Where can you find evidence for a fiat currency outside the modern world that actually persisted for a couple of generations?

Also important to note, you seldom have just the one system operating. You had IOUs, bank drafts, ledger transactions and regular gold, silver and other coins being used as means of exchange from high medieaval times in Italy.

But the medieaval (european) world again had no fiat money. There was no authority who could infuse value in an item that wasn't intrinsically valuable, to say this is worth something because I say it is, and I'll exchange something for it indefinitely. You had gold coins, some of which were trusted more than others (I forget if the Florentines, Genuese or Venetians were the most stable coinmakers), and thus had more value because it was expected that the issuer had not tamprered with the coins at issue at least. As most kings were wont to. You had silver coins worth a certain fraction of gold coins. And sometimes copper coins worth a fraction of that. The latter of course tend to be fairly large because their metal values was low. One of the more ludicrous examples being Swedish 1600-1700s copper coins weighing up to 20kg or so because they represented a gold daler. Even these circulated, but mostly as payments to foreign entities, you would call it barter. Fiat currency requires trust and noone trusted even in goldcoins and weighed them. Usually different coins (currencies) were worth less the further out from the issuer you got as trust in them decreased.

At the end of the day there only two ways to do currency, fiat currency that has subjective value and a non-fiat currency with objective* value.

*although am willing to discuss the objectivity of e.g. gold value, why exactly is it so desirable really? etc etc etc

Which brings me back to my claim that they are not a currency. Currency is a medium of exchange, and gold, especially in pure form, wasn't used as such. It was used to back financial claims, and in exchange for massive purchases, but it wasn't a unit of currency any more than owning an acre is a unit of currency. No-one ever seriously intended gold to be used as regular currency (aside from maybe Diocletian, and we all know how well that turned out... and even he set prices on the basis of the denarii, which was fiat).

The two underlined lines is where you contradict yourself. You cannot claim gold cannot be part of a currency and then say it was used in the exchange of goods. If gold only was ever used straight sa barter there'd be no point in making coins. Romanized Europe was however very very in love with the idea of coins and currency. The barbarians just cut off and weighed precious metals.

The problem really stems from D&D treating goldcoins as we would $100 bills. Goldcoins were absolutely used as money, and people were rich enough to go around with purse of them. Which was about as common then as someone with a wallet full of $1000 bills today. That doesn't mean they'd not also have a lot of silvercoins on them and some coppers for the poor.

And this, I think is the key point, which I think reveals that we don't disagree on the fundamentals, just in the definition of the terms. Yes, I agree that the $1000 bill is not used for every day transaction. It "fails" as a unit of currency. Except it doesn't, because it is not intended as one. It is, as you point out, a storage of wealth, not a medium of exchange. Sure, it can be used as one in very specific circumstances, but then so can a car or a house.

There's no fundamental difference between a £1 gold coin of ye olde days and $1000 bill today. Don't let the fact we now start at the small number throw you. The origins of currencies tended to work the other way around we start with 1 big one (usually a gold coin) and then everything else is fractions of that.

In fact basically all modern currencies are based on the idea of 1 something worth a number of fractions something. We just sorta swapped it around. £1 was a huge sum. So is $1000. We can see that in the remnants of the € $ £ being worth 100 cents/pennies. And that use of pennies tends to fade as inflation moves us along. Until we get to point where we decide we liked it better with less zeroes.

Please note that my whole point here was that the galleons in HP are unlikely to be pure gold because they are used in every day transactions. They change hands all the time. That is what tells me that they are unlikely to be pure gold: because gold is never used in that way, even if they took the time to press it into coin shape.

Beyond that, I think our entire disagreement comes down to definitions, in which case, by all means we can agree to disagree. Arguing from dictionaries is dumb, and I'm fully prepared to accept that it is me using the words wrongly, if it comes to that. I do like to separate coins between unit of currency/medium of transaction and wealth signifiers. The distinction in reality is likely far more fuzzy than it is in my head.

Grey Wolf

Well I think you are grossly misrepresenting the complexity of a medieaval economy too. And vastly overestimating the use of actual fiat currencies historically. My position on the HP thing is that it runs on movie money and is as fruitless to discuss as the magic sytem.

[Grey_Wolf_c]

All of the pre-modern world. All of medieaval times. All of the Renaissance. All of the early-modern period.

False. Ludicrously so, in fact. I already pointed out how: for example, in Roman times, a denarii was fiat. It did not contain its worth in silver. Instead, it ranged from like 50% silver to sub-5% silver, despite being valued as 100% silver, its face value. It was fiat money. Any currency that is debased - i.e. pretty much every currency throughout history - has been fiat, to the best of my knowledge. Certainly "All of the pre-modern world. All of medieaval times. All of the Renaissance. All of the early-modern period" that I have cared to examine ran on fiat money, backed by the promise of gold or silver, but not actual gold or silver.

Grey Wolf

[snowblizz]

False. Ludicrously so, in fact. I already pointed out how: for example, in Roman times, a denarii was fiat. It did not contain its worth in silver. Instead, it ranged from like 50% silver to sub-5% silver, despite being valued as 100% silver, its face value. It was fiat money. Any currency that is debased - i.e. pretty much every currency throughout history - has been fiat, to the best of my knowledge. Certainly "All of the pre-modern world. All of medieaval times. All of the Renaissance. All of the early-modern period" that I have cared to examine ran on fiat money, backed by the promise of gold or silver, but not actual gold or silver.

Grey Wolf

Debased coinage is not fiat money. The hint is in the name. It's debased. It's not supposed to be like that. It's supposed to have a certain amount of precious metal to give it value. And people would not trade with it at face value. Hence the inflatory problems at the later stages of Imperial Rome. If the denarri would have been a true fiat it would have been struck on brass and everyone would gladly have traded on it secure in their trust that the Emperor kept up the value if money.

This is one of the ur-examples of why economies ran on non-fiat currency and specifically valued coins (eg weighed them) in transaction.

Furthermore if it is backed by gold or silver it is *not* fiat money.

This is from Wikipedia.

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value

A debased fiat-money is a factual impossibility because fiat money has no intrinsic value to debase.

[Wardog]

I only encountered this idea in one fanfiction(I forget which.) In that one, Harry talked about using the muggle currency to buy silver in the muggle world, then exchanging that bulk silver for sickles at Gringotts.

I vaguely remember hearing about someone doing something like that in real life:

IIRC, medieval Europe mainly used silver currency, because gold was too rare to be practical. But in North Africa, gold was more plentify (and correspondingly lower value than in Europe) and was used as a currency. The chief tax collector (or other high-ranking minister) in France hit on the idea of collecting taxes in silver, taking the money to North Africa, exchanging it for gold, bringing the gold back to France, selling it for silver, handing over the tax money to the king, and pocketing the profit.

He did very well out of it, until he was found out and executed for treason.

[Rockphed]

I vaguely remember hearing about someone doing something like that in real life:

IIRC, medieval Europe mainly used silver currency, because gold was too rare to be practical. But in North Africa, gold was more plentify (and correspondingly lower value than in Europe) and was used as a currency. The chief tax collector (or other high-ranking minister) in France hit on the idea of collecting taxes in silver, taking the money to North Africa, exchanging it for gold, bringing the gold back to France, selling it for silver, handing over the tax money to the king, and pocketing the profit.

He did very well out of it, until he was found out and executed for treason.

I suspect his problem was that he pocketed all of the profit. Kings tend to get upset when people try to take advantage of them.

[Tyndmyr]

Precisely. Despite the king not being any measurably worse off, he felt used and probably pissed.

The same would likely translate to the goblins of the Harry Potter world if this scheme were uncovered. Is it fair? Meh. But it's potentially an interesting plot if it goes sideways.

[Wardog]

I suspect his problem was that he pocketed all of the profit. Kings tend to get upset when people try to take advantage of them.

That, and I think France was officially at war with the people he was trading with.

[warmachine]

This is a bit of an offshoot about a harry potter discussion. In fanfiction one of the less common ways harry gets rich is he takes his trust vault of galleons, melts them down, sells the gold off, then exchanges it for more galleons in an ever increasing money making scheme. This works because everyone involved in magical banking is stupid and galleons are worth 5 english pounds per coin despite theoretically having like a thousand bucks worth of gold in each one. The question i wanted to ask was, how far would this have to go before it basically crashes the world wide gold market? How many tons of gold would it take to completely tank the value of gold?

The gold market wouldn't crash. The manufacturers of galleons would go bankrupt before any significant price change happened.

Unless I'm missing something and galleons can be created out of thin air. In which case, it would have already happened as the manufacturers flood the gold market themselves. Because people are greedy.

[Traab]

Heh, all this talk of economies and currencies is reminding me of yet another harry fic which was pretty crackish but at one point the main characters basically destroyed the magical economy. They caused a run on the bank by letting the brits know they could get interest on their accounts if they went to literally anything but a goblin bank, the goblins stripped bare the gold from the accounts that didnt close to pay off the ones that did, including the ministry, so the ministry tried to use paper money which touched off a mini riot because no stores would accept it "and its too rough to use as toilet paper" which triggered a few more plots that just kept digging the hole deeper as minister fudge tried desperately to find a solution that wouldnt involve him and his administration hanging from the nearest lamp post.

[NichG]

There's a difference between having an internally inconsistent wizard economy and having an economic gradient between the wizard and muggle economies. In the first case, you can design a pattern of trade which, dealing only with Gringotts, instructs them by their own rules to just hand you money for nothing.

Having cheap gold with respect to muggle money makes sense if, by and large, the wizarding community lacks any sources of muggle money but still has occasional demand for it. However, the wizarding community is something like 10000x smaller than the rest of Britain, so the demand for muggle money would tank long before the external valuation of gold did.

Of course, we can just as easily go wild and speculate about circumstances which would support Gringotts valuation in full equilibrium.

The bigger problem, as MoR points out, is the gold/silver ratio.

[Grey_Wolf_c]

The bigger problem, as MoR points out, is the gold/silver ratio.

That is only a problem if you make assumptions with the explicit purpose of finding a problem. As the Giant says, if your assumptions lead you to "see" plot holes, change your assumptions.

Grey Wolf

[NichG]

That is only a problem if you make assumptions with the explicit purpose of finding a problem. As the Giant says, if your assumptions lead you to "see" plot holes, change your assumptions.

Grey Wolf

Problem, in the sense that a trader running at those rates would suffer an inefficiency which others could systematically make profit against.

Problems don't automatically constitute plot holes - it's when the response to those problems deviates from established characterizations or facts. We can easily believe that the wizarding community, as small as it is, can exist far from economic equilibrium on the basis of wizards holding classic nobility stereotypes like 'economics is something for poor people to worry about'. But it does represent an explicit plot opportunity for someone to then come in and exploit that vulnerability.

And in the context of HP, this seems fine - the entire series is an ongoing story about how people's fear of thinking about deviations from 'the way things have always been' gets them into trouble and as a whole makes their society approach the brink of collapse from the actions of a dark lord who is willing to step outside (if just barely) some of those assumptions and traditions holding that society together.

Vulnerability to arbitrage is in a way more self-consistent to the setting and plot than if they had sophisticated protections in place. But it does set up the opportunity for telling stories like MoR in that setting as well.