Money and Money, can two different currency types be realistically maintained in the same economy?

Question

For the purposes of this question I want to look at Medieval-ish Fantasy environment, something in the classic vein of a Dungeons and Dragons setting, with humans, other races, (I don't have an exhaustive list but definitely Elves and Dwarves are in there), a little magic, and technology that does not post-date the late Renaissance. I want to understand whether, in such a setting, a precious metal based commodity currency and a fiat currency, backed only by the long standing and well earned reputation for scrupulous dealing of the local merchant houses, could co-exist for long, multi-generational, periods.

When I say co-exist I mean that the two currencies spend identically while not actually being formally pegged to each other; the idea is that one set of coins are made of bronze, silver, and gold and have traditionally derived their value from their metal content. In fact they still do in areas where the guilds don't have regular traffic. In civilised areas, a total zone no bigger than modern Europe, they're treated as equal to the Guild Merchant's denominational coins, which are made in a similar but different style and usually from cheap cast iron.

For the "story" to work these currencies need to be able to have co-existed without major fluctuations for a couple of hundred years; is this realistic or are there either A. issues with the way the currencies will interact or B. basic differences in the way the two currencies will react to either external or internal economic pressure that would cause them to destabilise much quicker than that?

To recap:

• two coined currencies, one in precious metal, one in base metal backed by the promises of trusted institutions.

• one-to-one exchange rate.

• Medieval Fantasy setting with little magic.

• how stable is the two currency system?

Answer 1

I don't see why not

Disclaimer: This answer heavily depends on the definition of same economy. This answer also does not claim that a fix 1-to-1 exchange can be maintained.

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You already mention that the classic coins derive their value from the actual value (usefulness) of the metal they're made of (similar to e.g. the likes of hacksilver) - this is great, thus the coins are basically bullion to some extent.

You also state that there are stretches of land where your merchants do not have much business, thus these areas have an active need for currency that they trust - this is pretty much a given with the coins that are traded by their material value.

Now to your merchant-coins. As you say, they are backed by the guilds and merchants of the area. Wherever these factions are actively trading and doing other stuff their coinage will be used for currency. The stability of that currency comes A) from the fact that it is actively used and moving between people, and B) from the fact that guilds & merchants will insist on using it - to the point where some of them will not even accept the value-based currency (or only take it at a loss for the person buying wares from them).

Cities will spawn districts where money-can be exchanged. While it is unlikely that the exchange-rate will be a stable one-to-one, there is nothing that should prevent the exchange-rate staying mostly stable over the time of decades up to a century - unless your guilds/merchants royally and coordinatedly screw things up.

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The important thing for those two currencies to co-exist is the size and relations of/in the area where they are used, yet even that is not really that much an issue. If you look back only some 500-1000 years you will find that most areas in medieval Europe had their own currencies or such, usually based on the next biggest city's markets (which also often decided upon the units of measurements used in the region and so forth)

Answer 2

Not only is it possible, it has actually happened at various times and places throughout history and on small scales continues to happen today.

Probably the best studied example of the phenomenon is the era of free banking in Scotland, 1716-1845 [1]. During this time three major banks and a number of smaller banks in Scotland all issued currency. The notes were all denominated in pounds and all redeemable in specie (i.e., gold or silver), but only from the issuing bank. The key to the banks' profitability lay in getting the notes to circulate among the public for long periods of time before their eventual redemption. The system appears to have been relatively stable, without dramatic fluctuations in the convertibility of notes from different banks, and despite crises such as the Napoleonic Wars in the early 19th Century, right up until the system was ended by legislation in 1844-1845.

Another example of multiple currencies existing simultaneously was the period known as the "Free Banking Era" in the United States, from 1837-1864. During this time, the regulation of banking in the United States was left to the states, which generally allowed banks to issue their own currency [2]. The system was in some ways less stable than the Scottish system, inasmuch as bank notes, though denominated in a common unit (the US dollar) often traded at a discount to their nominal value, depending on factor's like the bank's reputation and the distance from the bank's headquarters to the site of the transaction.

Today we still see some instances of parallel currencies, mostly in the form of local currencies. Wikipedia has a list of examples, including the Calgary Dollar and BerkShares (which circulate in western Massachusetts) [3]. BerkShares are a particularly interesting case, as they are issued and redeemed at a discount to face value (95 cents on the dollar), but trade for full face value [4]. Unfortunately, there doesn't seem to be any information available on how many BerkShares are in circulation, nor any estimates of transaction volumes.

So, to summarize, it is possible for multiple currencies to coexist. Historically, it often happened through competitive issue, while today it mostly occurs as local, limited-purpose exchange systems. I think it is significant that in both the Scottish and US cases the system was ultimately ended through legislation, not from any intrinsic lack of viability. To me, that suggests that banks (or perhaps guilds, in your case) will tend to issue currency if not prohibited from doing so, and that such systems tend to be robust over periods of several decades or longer.

[1] Free Banking: The Scottish Experience as a model for Emerging Economies, World Bank (1995)

[2] Wildcat Banking, Banking Panics, and Free Banking in the United States, Federal Reserve Bank of Atlanta (1996)

[3] https://en.wikipedia.org/wiki/Complementary_currency#List_of_complementary_currencies

[4] http://berkshares.org/how_to_spend

Answer 3

Yes they can

You won't be able to maintain the 1:1 exchange rate though.

Modern economies run on the currency that governments issue. Governments will only accept payment for taxes in the currency they issue (ie, the US government is never going to accept payment in Russian Rubles.) It is this obligation to pay taxes (backed up by monopoly-on-violence) that makes fiat currency valuable at all. It's a tool for paying taxes.

Medieval Europe had several governmental or governmental-ish bodies: The King, the Church and the Guilds.

Clearly, the King is only going to accept payment of taxes in coinage that he issued. Why would he accept someone else's currency as that diminishes his claims to sovereignty. Everyone in the realm has access to this currency because it's the official currency.

The Guilds can also issue currency in the form of coupons or stamps that represent some amount of services. This guild currency would be used internally for keeping track of debts and services. When tax time arrives, it can be traded for official government currency.

For someone who doesn't belong to the guilds, the guild currency is still useful as it can be traded for a known quantity of services, say one guilder is enough to replace all four shoes on a horse.

Over time, the exchange rate between guild currency and governmental currency will fluctuate as changes in national economics make currency more or less scarce; and as the services by the guilds grow more or less valuable to normal people. I don't see why this kind of arrangement couldn't last hundreds of years. Even new kings and governments won't matter as they issue new coinage to match their needs. As long as the guilds keep their internal currency sufficiently useful that everyone will use it alongside the official currency, then the guild currency can survive for long periods.

Example

A village has a method of exchange based on seashells except for the fisherman. He won't trade for seashells because he can't use them for anything. He will only take boar bones. (Who knows why, he's just weird.) Should this become a tradition that the fishermen are always paid in boar bones, then we have concurrent currencies.

Answer 4

Cuba does not only allow USD, but also (has/had) two local currencies. (CUC and CUP). It isn't one-to-one, but it is a fixed currency rate (currently 1:25).

At least in this case the government has to regulate it to keep the rate "static" but you can do this obviously.

Both currencies had coins and paper money. (CUC is being officially abandoned by 2013 but is still a valid currency) And were available at the same time without major issues.

Answer 5

This is a fundamentally unstable situation - you do not have two currencies here but four (gold, silver, copper/bronze, and the token of no inherent value). The implications of which are an entire area of academic study.

The fundamental problem of a trimetallic currency is that the value of gold, silver, and copper coins change as the underlying values of the metals involved fluctuate relative to each other. This hasn't stopped real-world empires in the past from implementing it, but keep in mind that the relative values are inherently unstable. When copper becomes relatively scarce (from a copper mine being exhausted, an increased need for copper pots, improved daily trade activity among the peasants in a distant town driving up the demand for small change, or even if silver plates and bowls just go out of fashion) the exchange between copper and silver shifts, likewise when a new gold mine opens up or some neighboring kingdom makes a big tribute payment or some astoundingly rich guy from Mali decides to take a tour through your territory, it drops the relative value of gold. This is before we even get to unscrupulous people debasing the coins themselves.

Stick to small silver pennies - lower value than gold so you're not trying to keep track of grains of dust, but most people can still use them for simple trade goods. For buying the small stuff, silver is soft enough to cut with a good knife - just put the knife across the coin and give it a whack to split the coin in half, or even do that a couple more times to split it into 8 pieces (history provides a great guide about what is truly workable).

Trying to match different metals together in a fixed ratio is itself an exceedingly difficult problem, much less maintaining a fixed exchange rate with an inherently valueless token. Tokens need to be trusted to hold a value and be readily exchangeable for what people actually want to buy else they wouldn't accept it (or they would demand a significantly higher price in tokens to cover the risk). Why would people choose these tokens over a coin they know has an inherent value for trade?

Forgery becomes a problem for the guild (and for people themselves as they don't want to risk accepting a token only to have the guild reject it).

Individuals prefer payment in the best possible currency for them - if they cannot trust tokens, they will not accept them (without significant price adjustment). You will likely struggle to come up with a compelling reason for people to trade in tokens instead of metal coins or barter with other trade goods. Even if you manage to somehow establish a fiat currency as trusted by the population as much as an actual store of value, fixing its value in terms of a metal (without actively trying to fix an exchange rate - a difficult task which has bankrupted many countries) will likely prove impossible.

Answer 6

In theory it could... but it would be unlikely.

over time one currency would win out over the other, both could still work, but it comes down to usefulness...

For simplicity's sake and to suit the OP's demands i'm going to say a commodity currency is copper or silver coins and the fiat currency is a magical handshake, as apparently the word paper money is unacceptable, but these could be anything stone tablets, bronze axe heads (this is a real historic thing people!!!) or cookies... ok so maybe not cookies.

Lets say an Apple is worth 1 Copper coin, and is also worth 1 magic handshake. and i need to go and buy 10 apples, then i could carry a purse (remember people in medieval times it was called a purse no matter the gender holding it!!!) with 10 copper coins, or maybe 1 silver or however the commodity would work, when i could carry 10 magical handshakes... one has weight and is obvious to thieves (big heavy purse) the other is light, is easily put in a pocket without lines or stretches in clothing... so why would i buy things with the coins?

on the flip side, if it was raining anti magic then the magic handshake could disintegrate, i could pull my hand out my pocket and drop the magicalness and not notice.

There are pros and cons to both systems, but eventually as time went on one would win out as the peoples preferred choice, one that they would carry instead of the other, but also have the other for when it was needed. (but would it be needed) now if you wanted the commodity system to be much more valuable then the fiat system, that might work, an Apples costs a magical handshake, but a copper coin could pay for a few bags of them. people would store their money in the commodity, but it would be impractical to pay for small items in so they would exchange some for the magicalness of the handshake so they can go down the market.

Or flip it so that the metal coins would be far too heavy to pay for the big items or wagons full of goods so the fiat currency is used for that

The only other thing i can give you to consider is that it is only in the last hundred years that pretty much the entire world truly gave up the commodity currency, previously all currencies were backed by gold. but it was too valueable to carry around so we used paper money (yes this is a drastic over simplifcation)

So in short, both currencies being together and over roughly equal value, probably not, both exisiting together but of drastically different value, then yes is possible, as there are numerous countries around the world that accept dollars instead of their own currency, same with euros in the countries surrounding europe

Answer 7

Consider the silver certificate, an early type of US fiat currency,

Facilitate commerce.

These certificates could be turned in for silver money. It says at the top that the corresponding amount of silver was in the vault and this piece of paper represented ownership of that silver.

If I live near the vault, and it has never failed to redeem these coupons for the silver, then I probably feel like the coupon is as good as the silver. If I am in Timbuktu, the locals there might not be comfortable with taking a coupon that can only be exchanged in the US, and might hold out for the actual silver.

So too your systems. In the region where the merchant houses are a familiar presence, the fiat currency makes transactions easy - especially for larger sums where the metal is heavy. As one gets farther afield, people are less familiar with these merchants and so less eager to accept a certificate with their backing.

In the region, travelers will show up with commodity currency and use it or exchange it for fiat money on entry (for their own convenience or by law). Persons leaving to trade abroad might change out some or all of their currency before leaving. Of course a small surcharge is levied on these exchanges. The merchant houses might charge more for a commodity currency transaction.

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Theft prevention.

One might expect a commodity currency like pennies to be used by all persons for small transactions - a meal, paying a porter etc. Large transactions would be the province of fiat currency, and persons using fiat currency would be expected to be wealthy persons. In a medieval society your social class was obvious by your dress, manner and speech. I can imagine a society where such persons use fiat money among themselves.

A middle class person like an innkeeper or animal trader would keep fiat currency because it is safer to keep gold and silver in the vaults of the house issuing the currency. Such a person would use fiat currency only for large transactions with wealthy persons.

An underclass person attempting to use fiat money or redeem it for silver would be met with suspicion. On attempting to use or redeem such currency this persons might be made to account for the provenance of the fiat currency. I can imagine a scenario where I sign and put my seal on a high value bill that I have paid to a lower class person. I could imagine a scenario where such a person is detained as a "guest" at the merchant house where he went to redeem the fiat currency while a runner or pigeon is sent to the rich person who purportedly gave him this bill, to confirm the story.

Such a system makes it more difficult for common robbers to rob rich persons.

Answer 8

The fundamental problem here is that there needs to be a reason for both to survive. This is touched upon in dot_'s answer, but the reason behind it is not.

If the two currencies are in direct competition then one will gradually grow in prominence and the other will fade from use. For example the fiat currency gradually replacing the commodity one is a common thing to happen. During that process both could well be used at the same time but it is not stable, eventually one will completely replace the other.

That's because the two existing is not a stable system, in general people want their currency to be accepted as widely as possible so the most popular currency would over time become more popular.

So there needs to be a reason why some people need one currency, but some people need the other currency. dot_'s solution is to have each one used in different areas, and that is certainly one way forwards and could be effective.

Other options though would be to have them used on different scales. For example merchants might use the fiat currency notes for huge transactions like purchasing ships and buildings. They aren't used for smaller transactions though where the precious metal coins are still used. Your average man on the street would never even see a paper note, it's worth more money than he sees in a year, but they would be frequently used by traders and speculators etc.

In our world the dividing factor is often geopolitical. Different governments issue different currencies and in their country that coin is accepted. You could break that down further though and have different towns each issuing their own currency.

Perhaps the fiat currency is the "legal" one and expenditure using it is tracked, but there is a strong black market economy which uses the coins.

Those are just a few ideas off the top of my head but hopefully they illustrate what I mean. In order for two currencies to exist long-term in parallel all you need is a reason for both to exist. They each need a niche in the economic ecosystem where that one is favoured over the other.

Answer 9

In medieval Europe, international merchant banks created a currency they used among themselves, so they could settle interbank debts without depending on the (frequently-debased) coinage issued by local sovereigns. I highly recommend Felix Martin’s book Money: The Unauthorized Biography for the details of how this system worked (and how it fell apart).

Answer 10

Bad Money Drives Out Good

Economists call this Gresham’s Law. Historically, when a country’s money was theoretically a precious metal, and it tried to debase its coinage (such as mixing the silver with lead), people knew what was up. If the debased coins would buy just as much, but had less intrinsic value, they would spend those instead of the coins that contained more silver, the same way people don’t spend collectable coins or mail letters with collectable stamps, when there are more common ones with the same face value.

Similarly, when countries tried to peg their currency to two precious metals at once, like when the United States tried to peg the dollar to both gold and silver until 1853, what happened was that one dollar’s worth of gold was worth a little more than one dollar’s worth of silver on the market, or vice versa, but the US government would trade you gold for your silver at a loss, with the taxpayer’s money. So people did that, and only silver would circulate as currency while gold was exported or melted down.

All countries that tried bimetallism first abandoned either the gold or the silver standard in practice, then made that official, then abandoned the other. Today, countries either peg their currencies to a bigger currency that they do most of their international trade in, or to nothing at all.

There were sincere arguments at the end of the 1800s for bimetallism, but modern economists would not find any of them convincing today. The people who supported that policy weren’t stupid, but they had different goals, assumptions and examples in mind than we do.

Supply Shocks Happen

A separate but related problem is that sometimes someone discovers a new gold mine, or a treasure fleet carrying silver from another continent sinks. Both of these things would put the supply and demand of gold and silver out of whack, and would normally lead to the same amount of gold being able to buy less silver. In fact, the only thing that could prevent that from happening is if someone bought the right amount of gold or sold the right amount of silver to maintain the exchange rate.

But What Could Make it Work?

That’s what you really wanted to know. Here are some ideas that might help, only some of which involve magic:

Immortal Speculators

You know all those dragons or gnomes or what-have-you with their giant hoards of gold and silver? Whenever the market value of gold drops below sixteen times the market value of silver, they think that gold is a bargain, and sell some of their silver to buy gold. They don’t release all their gold coins into circulation, causing a vicious cycle where gold gets even less valuable, making even more people want to spend it instead of their silver, because so much of the gold and silver is in the hands of people who hoard it and speculate on it, rather than spend it.

Maybe they used divinations to foresee what the future exchange rate of gold and silver would be, then bought whichever metal was currently cheaper than that, so it become a self-fulfilling prophecy.

It’s a Drop in the Bucket

Piddly little things like gold rushes and dragonslayings don’t have much effect on the market price, because the real markets are underground, where the Dwarves, Gnomes and Kobolds trade all the gold and silver they’ve mined over the centuries. If there’s some local fluctuation that makes your silver able to buy more gold than it could in the Hall of the Mountain King, some enterprising arbitrageur trades silver for gold, takes the gold up to the Gnomes, and trades it for more silver than they started with. The Gnomes don’t want to, or are unable to, or are not allowed to, buy things from the surface with all that gold and silver. So they don’t export their precious metals and they don’t cause inflation on the surface. The Gnomes have so much gold and silver relative to the surface that nothing that happens up there makes much of a dent in their stocks.

Magic Gives the Currency a Natural Value

If there are spells that create gold and silver, or spells that consume gold and silver, then that might establish their relative supply and demand. Perhaps gold is sixteen times more expensive than the same weight of silver because alchemists can create sixteen times as much silver for the same investment, or maybe silver is more valuable because it kills certain monsters.

The Price is Fixed By Law

The Great Pact of ancient times bound the Gnomes to buy from and sell to us at the same price in gold and silver, forever. If there were ever a surplus of gold and a shortage of silver in the land, we would choose to pay the Gnomes in gold and ask for silver.

Why Would it Have Changed?

That’s how it’s always been. A piece of gold has always been that size and always been worth sixteen pieces of silver. Everybody knows that. I guess people sometimes try to cheat and take advantage of the simple folk, but not enough to make a difference, thank the gods. Maybe it’s because gold is more rare, and always will be. Change the prices? Are you mad?

Someone is Manipulating the Currency

Okay, you got me, this wouldn’t really happen unless somebody were actively working to maintain the exchange rate of one gold piece to sixteen silver pieces. But who? And why? Maybe there’s one culture that uses gold for money, another that uses silver, and someone’s manipulating the economy to keep the exchange rate from rising or falling—think China or Norway.

Answer 11

Yes there is one way to fulfill all your criteria but only by violating one of two mutually exclusive premises, But what you describe already exists.

The only way for the 1:1 exchange rate to be stable is for the merchant money to be fixed and based on the value of the common coin, in which case it is representative money not fiat. Whether or not the merchants have the the commodity money to back up their iron money is irrelevant, it is still representative. It is basically paper money without the advantages of paper (portability), which does make one wonder why it would arise but that is a different matter.

As this has been used repeatedly for hundreds of years it is quite stable and was fairly common in countries without a state issued currency. In this case the merchant guild is acting as a bank, which was actually fairly common for merchant guilds and one of the main reason they formed. This guild needs to possess a LOT of power however because their currency offers no advantage and is far less easy to spend. A copper coin is worth its weight in copper everywhere and an iron coin is just as difficult to transport. But IF they are powerful it could be something they invented to help monopolize a particular type of trade.

You can actually still see something almost exactly like this used today, they are called postage stamps. At one time postage had to be paid in postage stamps, and postage stamps were often exchanged as if currency and can be used as legal tender in several countries to this day (UK and US). All you need to do to make your system work is make the merchant guild only accept their coins for certain services.

Answer 12

If you have a merchant guild large enough that buys and sells things important enough, and that always accepts either their fiat currency or bullion, and pays for things using a combination of the two, it could work.

The merchant house would have to have lots of discipline and economic power. If the currency in circulation outstrips their ability to provide goods at a price people want to pay, then people will no longer want their currency and its price will fall relative to bullion.

If they managed to pull this off over a century or more, use of their currency would spread within the lands where they hold economic power. If the economy grows faster than you can get ahold of bullion, this could be a huge benefit, preventing a economic choking of trade from lack of coinage.

The problem I have is that this position is ridiculously powerful. They can, at an point, harvest a percentage of all of the wealth held by anyone with those coins by simply printing more (and devaluing the currency). Maintaining that level of power and never using it is going to be difficult to believe in anything short of a head of state of a secure superpower with a functioning internal tax network; such an organization already has the resources of the entire society available to them and no pressing need to expropriate them in the short term.

Answer 13

One way to keep it stable is if they are typically used for different things.

To stop one currency from "overpowering" the other, they need some form of backing. Let's say, for example, Church and State.

The Church of the major religion only use "natural" currency - they have metal coins whose value is based of the metal that makes up the coins.

The State uses a Fiat currency, with paper or cloth notes. They have some metal coins for small denominations, but these contain far less metal than their worth.

Now, Merchants tend to use the Fiat currency, because it makes large payments easier - and also because you have to pay your taxes with it. But farmers, lumberjacks, and other jobs that take place away from large cities or Government centres stick to the Church currency - for one thing, they can use it to pay for religious services, and for another it's simpler - this coin is worth this much, because that's what it's made of. There's no need to "trust" those poncy City-dwellers, or their disreputable Politicians.

This means that different products are being produced in areas that use the different currencies: Lumber or Stone for construction, food from farms, and wool or cotton for clothing are all "ChurchCoin" products. Exotic spices, well crafted objects, furniture, and clothes - those are all "GovNote" products.

There will be some places that do direct money-changing, but a lot of the "pegging" of the currency will be based at the "I can buy this for that price with these coins, and sell it at another price for those coins" layer.

There will be fluctuations in price, but an inability for the different areas to create the items they are 'importing' at a comparible price (no fields in the cities, etc) along with minimal conflict between the currency backers (since you don't have 2 countries squaring up for a fight) should minimise this, and potentially lead to a convention of the exchange rate being treated as fixed.

Answer 14

There are many places in the world where more than one currency is in common circulation; for example in border areas it's common to have multiple currencies circulating.

Before the US Revolutionary War the supply of cash was limited and people used anything they could get their hands on; Spanish doubloons were perhaps the most trusted and least discounted currency.

There are even unofficial currencies widely honored; the example I'm most familiar with is Canadian Tire money in Canada, discount coupons issued by a ubiqitous department store which were often accepted as cash.

However, the big stumbling block is exchange rates. In areas with government controls on currency it's common to see black market exchange rates swing widely afield of the official rate. (This gets much worse in authoritarian countries where there are official stores that only take official currency limited to foreigners, as the extreme example.)

Here is the US the official exchange rate between gold-backed and silver-backed currency caused political strife in the 1890s as people had vested interest in a higher or lower exchange rate.

Answer 15

It can amongst the people as long as you can pay taxes in both currencies, that is key.

The problem will be within the banks, and the control they have over the currency to adjust its value. Banks prefer one currency and over time will push for there to be only one.

A really good example is pre independence America when they still used to pay taxes to the UK crown. America had started to develop it's own independent currency for trade (pre dollar) which the European banks did not like so to end its use they stated that taxes could only be paid in pounds. That killed the currency

Answer 16

Yes - It's possible

Scarcity and Trust are the underpinnings of the Fiat Currency. The guild has the capacity to maintain a long-term, stable value by not flooding the market with currency or doing anything to shake the public trust.

Keeping a one-to-one exchange rate with the Commodity Currency will be harder. A sudden fluctuation in the scarcity of the commodity could cause a major disruption (see The Spanish Price Revolution, caused by a rapid influx of New World Gold.) The easiest way would be if the guild controlled all of the mines and could regulate production of the commodity. Cartels aren't your thing? Then the guild needs to maintain a reserve; buying the commodity when it is plentiful, holding it off the market, and releasing it when it is rare. This could be achieved by issuing bonds.

Answer 17

Britain has had official coins for quite a while, and in previous centuries, these coins typically contained precious medals such as gold or silver. In the 17th and 18th centuries, there was also an unofficial promissory note system, where someone would give someone a piece of paper promising to pay X amount of money to whoever brought it to them.

These notes would be transferred and used like currency, so if you have given friend X a note indicating that you owed them a pound, a complete stranger might come to you with the note a couple years later, expecting to be paid that pound. The value of these promissory notes were a bit like bonds, where the value of the note depended on how likely that the person who issued the note would actually honor the note. These notes were usually valued less than the official coins with precious medal because they were just promises, so a 1 pound note might be used to pay for something that was 80% of the value.

This system slowly evolved into bank notes, where it was mainly banks who issued the promissory notes, with each bank printing their own notes. People used these bank notes along with coins, and the banks were usually reliable enough that the notes were valued equally with coins. That's where there was an economy with two equal currency types.

Eventually, the government started issuing promissory notes as well that could be exchanged for precious metals and the non-governmental bank notes slowly fell out of favor. After those notes were trusted and valued, they eventually became fiat currency, where you could not exchange them for precious metals.

As long as someone regards something as being valuable, and they are willing to trade goods or services for it with the expectation that someone else will accept the same thing in payment, it can be used for currency

Answer 18

We actually have this situation in switzerland.

Our standard currency is CHF of course. This currency can be used every where and is the only swiss currency which is internationally acknowledged.

Alternatively the canton of wallis just recently launched an own currency called "Farinet", which only can be used at certain places in wallis. The purpose of this currency is of course to strengthen to local economy.

A much older parallel currency (1939) is "Reka". As Farinet, Reka exists to strengthen the national tourism/economy.

Answer 19

Anytime that trade grows outside of local government you will have multiple currencies. Look at the Roman Empire. In what is now Israel, the temple tax had to be paid with silver sheckles, while roman taxes were paid with roman coins.

Another example: When Spain started hauling gold and silver back from the new world by the ship load, much of it was minted into coins, triggering massive inflation in Spain. That money seeped across the borders (war is expensive) and you had lots of Spanish money circulating through Europe.

At the borders both currencies will be in common use. You see that today on the Canada US border, where either currency is accepted at restaurants, ski-hills etc.

Now a days most currency is electronic. Converting to the local currency is automatic. At one point I had a checking account that I could write US or Canadian denominated cheques by prefixing the amount with US$ or CAN$

But if it's supported by physical currency, especially coinage, which lasts a very long time, you can have both currencies circulating. In trade centres, you may have enough currencies that you end up weighing money.

The stability depends on the governments involved. Having to weigh each coin is a pain, so for the purposes of trade, it's worth while to standardize currency. The easy way to do this is for the government to buy non-local currency, and issue local currency. This is a problem if the non-local one has a lower intrinsic value than it's nominal worth, but for silver and gold of reasonable purity it works well.

Money is a matter of faith. I think you could introduce a new currency into your culture quite easily:

• Pay people in some new coin.

• Have stores where they can use the new coin easily to buy stuff.

• Eventually, people will start using the coin for transactions between themselves.

  It helps if the coins are beautiful. Consider the effect of coins made of synthetic sapphire which can be made in a raft of colours, is much lighter than metal coins, and would outwear them by substantial factors.

  The stability of the exchange rate depends on the relative numbers of each currency's tokens in circulation. If one becomes less common, it's value is likely to increase, if it is required for certain transactions. This could be used as a means of subverting a country: Introduce a new currency, make it popular by creating stores or services that can only done with that currency, then either withdraw it from circulation, or flood the market with it.

Coins usually cost more than their face value to make, at least the non silver and gold ones. My recollection that the nickel costs about 7 cents to make. But a nickel is used tens of thousands of times.

During World War II, the price of copper got high enough that it was worth melting down pennies for their metal. For several years the US mint struck steel pennies.

Answer 20

Another historical example is that of Russia.

In 17th century the government needed more money for their wars, so they started issuing copper money along with already existing silver coins. Their plan was "brilliant": copper coins were declared to be of equal value to silver coins, but only when they pay you for your work; you, however, have to pay your taxes with silver coins. So, eventually, all silver coins would be extracted from the population. Not surprisingly, it led to inflation, counterfeit copper coins, an even deeper financial crisis and, eventually, to the Copper Riot.

Later, in 18-19 centuries, there was the assignation ruble, which circulated in parallel with the silver ruble. There was no one-to-one exchange rate, the market value of the assignation ruble was lower than of the silver ruble. That system was sort of stable, existed for nearly a century, then it was reformed to something similar. There was also the golden ruble in circulation during all that time, but bimetallism was not uncommon in other countries as well.

Answer 21

You can do have a pegged currency.

https://en.wikipedia.org/wiki/Fixed_exchange-rate_system

Of course one currency will depend on the other in this situation. This is similar to how in some countries you can use the local currency, or the US dollar and both are acceptable. Often (but not always) this is because one currency is fixed to another.