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Xachariah comments on Harry Potter and the Methods of Rationality discussion thread, part 13, chapter 81 - Less Wrong
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I wonder if the exchange rate of 1 Galleon = 17 sickles = 493 knuts is fixed by law or a floating exchange rate that just happens to be currently at that value. Perhaps that would explain the unusual ratios that are in use.
Does anyone know what countries did back when coins were actually made of precious metals?
Mostly - fail.
For a detailed explanation, I recommend "The Big Problem of Small Change" - Thomas J. Sargent, François R. Velde published in 2002 isbn 0-691-02932-6
A common strategy was to ignore the problem and hope it goes away. It didn't - see Gresham's law - bad money drives out good. Another strategy was to debase the more valuable coins (make them of less pure metals), which has approximately the same effect.
All of which leads to "economic hardships" on the poor, which sounds a lot nicer than "the poor died in droves."
It seems strange, but the idea of a representational currency, coins that you can officially exchange for a fixed amount of gold, is actually a relatively recent invention. Not to be confused with fiat money - coins that you can't officially exchange for anything.
Edit: Did you mean "how did countries set the exchange rate in the old days?" If so, then typically the government reserved the right to mint coins, and the exchange rate was set by law.
No, you and Alsadius answered my question perfectly. It was more of a "oh god is this as collapse prone as it seems at first glance" question.
I guess the wizard world really is just jonesing for a total economic collapse.
Monometallic systems run by honest authorities are actually relatively stable. I don't think they're as good as a fiat system run by honest authorities, because the price can fluctuate for reasons unrelated to actually being money(supply shocks of the sort that wrecked the Spanish economy in the 16th-17th centuries, new industrial uses, etc.), but they're not crazy. Multimetallic(or, really, any multi-commodity) systems are just completely insane - the pegs are set without regard to economic reality, and they work exactly as well as any other time government attempts to impose its will on economics.
The only times that monetary pegs have ever worked for any length of time are either when economic change is very slow(pre-Renaissance), or during the Bretton Woods period from 1945-1971, when there were strong capital controls to minimize arbitrage opportunities, and when all the central banks of the world operated together to defend the pegs. And even Bretton Woods collapsed after 25 years, mostly because the speculative attacks were getting too intense to fend off. Otherwise, you can only defend a peg by making them literally the same, like the Euro.
I don't see fiat as something the wizarding economy can jump straight to. First they have to be sold on the idea that money is a medium of exchange, and that the ability to exchange it is it's primary value.
Representational money doesn't have to be mono-metallic, it could represent a basket of metals, or a basket of any commodities for that matter.
Oh, of course not. Harry's arbitrage attack, assuming it happens at sufficient scale, will either shift or destroy the Galleon/Sickle/Knut pegs(edit: or, if Gringott's has a bigger bankroll than the muggle economy, it'll shift the muggle prices to the Gringott's ratio), but it won't cause the wizarding economy to go fiat. If nothing else, do you really trust Lucius Malfoy in charge of the Federal Wizerve? I just have this debate as it relates to RL politics on a regular basis, so I threw in the side note.
Edit: I should also add, a basket of commodities can work very well. That's the method we use to calculate inflation, and it's quite stable.
It varied. Some countries used a bimetallic standard with fixed exchange rates, some used one as the standard and let the other float. There's even been trimetallic(gold/silver/copper) at times.
It's actually been a political issue which of those to use more recently than you'd expect(and no, I don't mean Ron Paul) - the 1896 US Presidential election was fought in significant part on a Democrat plan to move to a bimetallic standard away from straight gold, which was in the day an inflationary move designed to help indebted farmers. If you've ever heard of the "Cross of Gold" speech by William Jennings Bryan, that was it. A couple decades earlier, though, the US was bimetallic, and routinely had one metal or the other sucked completely out of circulation by prices changing faster than the official exchange ratio, as is to be expected of a system with fixed exchange rates and no capital controls.
The history of how to abuse commodity money systems(both from the public's perspective and from the minter's) is long and actually rather fascinating. If you ever hear someone talking about how gold is stable and can't be abused, you can feel free to laugh at them.
When did we stop honoring silver notes, again? Wasn't it in the 70's?
I can't speak to silver, but I know that gold had two important dates - there was 1933, when FDR banned private gold ownership, and then there was IIRC 1971, when Bretton Woods collapsed and Nixon formally ended gold convertibility. For the decades in between, gold notes were formally convertible, but not to ordinary citizens, only to banks(generally, foreign central banks).
The ban on gold wasn't indefinite, IIRC. It doesn't much matter though.
It wasn't repealed until the Ford administration.
June 24, 1968, if you trust Wikipedia.