How was the exchange rate determined between different commodity currencies?

E.g., country X mints gold Zorkmids, each weighing 5g, and country Y mints gold Zennys, each weighting 8 grams. When Ms.XX travels from X to Y, she exchanges her Zorkmids for Zennys, and when Mr.YY travels from Y to X, he exchanges his Zennys for Zorkmids.

Ignoring seigniorage and debasement, they should exchange 8 Zorkmids for each 5 Zennys (plus the moneychanger fee, smaller in a large town during market, larger otherwise - how large, BTW?).

My question is: how was the aforementioned exchange rate (8:5) affected by the non-physical circumstances I neglected?

E.g., relationships between X & Y - war vs. peace, amount of trade/travel between them.

What if the king of X imposes a ban on exporting gold coins?

How would that affect the exchange rate? What could the fluctuation be? E.g., can one lose 20% of value because of the exchange rate?

What if the king of Y declares the existing 8g Zennys "invalid" and issues "new Zennys" of 6g - have something like that ever happen? (this is not debasement, the new coins have a new name, new stamp &c). How would that affect the exchange rate of the "old Zennys"?

Obviously, melting one type of coins and minting the new one (don't you need the kings permission to do that?) is an arbitrage opportunity which would limit the fluctuations of the exchange rate. How much?

If it matters, I am interested in, e.g., these times and places:

  1. "3 musketeers" - 17th century Western Europe
  2. 2nd-5th centuries common era Middle East (Judea & Babylonia)
  • 4
    A pound of gold is a pound of gold... – user13123 Sep 5 '16 at 7:10
  • 2
    I don't think it's really true that the value of these coins was equal to the value of the precious metal they contained. It was only roughly equivalent. Sometimes the value of the metal would become greater than the face value, which would give people an incentive to melt the coins down as bullion, causing a shortage of currency. To prevent this, it was sometimes necessary to debase the currency. It's also not obvious to me whether it's meaningful to think of precious metals in that era as having a well-defined market value. That assumes an efficient market, which probably didn't exist. – user2848 Sep 5 '16 at 15:28
  • @HorusKol: only if you have means to check that it's actually a pound of gold. – sds Sep 5 '16 at 16:19
  • 1
    The point of specie is that it is worth at least the value of the commodity metal. Local rulers can debase the currency to inflate the face value and can implement policies that impose a transactional tax on foreign currency. Can the King of X do ...? Yes, if he is an absolute king or has the support of his people and it isn't prohibited by physics. Either I'm missing something or this is tautological. – Mark C. Wallace Nov 11 '16 at 19:27
  • 1
    @MarkC.Wallace: I edited the q. to replace "can" with "what if". My question is: *how far the exchange rate has reasonably been from the theoretical 5:8"? – sds Nov 11 '16 at 20:09

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.