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There are two worlds of more or less equivalent technological level, say a difference of only a few decades and no more than 50 years. A first contact event occurs and after the hoopla dies down trading starts.

Initially, barter is the primary form of trade but this quickly becomes cumbersome.

How would the two economies first establish a currency exchange and exchange rate?

Some commodities are similar and occur in similar quantities, particularly minerals gold, iron etc. Other commodities are unique to one civilization or the other; plants and animals unique to each planet, unique tech developed by one and not the other.

Some restrictions:

  • Both planets have one currency or at least a dominant currency (like the USD)
  • Neither planet is in a "dominant" economic or technological position.
  • Travel between the planets takes a few days
  • There is a moderate level of trust in business dealings but it is not clear how laws apply to off worlders on each planet.

Ideas I've toyed with:

  • comparable commodity-based exchange, ie. gold standard type exchanges, but this seems archaic for technologically advanced worlds and would anyone really want to transport heavy gold out of the gravity well of a planet
  • some type of crypto type exchange, but this seems problematic with distance and not very conducive to trade as the price fluctuates
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    $\begingroup$ So they have bartered for quite some time, yes? So a merchant on planet A knows how much the goods he got from planet B are worth on planet A, and they can esily find out how much they cost on planet B. And vice-versa, of course. What is the exact difficulty in setting a rough initial exchange rate and then letting the market fine tune it? $\endgroup$ – AlexP Sep 7 at 17:59
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    $\begingroup$ Gold-backed trade isn't archaic. Gold is a good currency: rare, resistant, divisible, can't be created out of thin air nor faked. Of course it is heavy but if you are doing interplanetary trade you alredy solved the problem of launching heavy cargo into space. Until both parts establish something like SWIFT to act as a clearing house you will have to ship gold around, like the manilla galleons taking gold from Mexico to China to buy chinese products. $\endgroup$ – Geronimo Sep 8 at 20:16
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    $\begingroup$ Why would you even ship that much gold around? Once in a while you might need to ship some gold to settle a long-term trade deficit, but most trading can be done virtually in gold-backed currencies. $\endgroup$ – MSalters Sep 9 at 9:38
  • $\begingroup$ If gold is available on both planets and neither planet has an overabundance of it then that would be a good starting point. Supply and demand will naturally drive the exchange rate though. $\endgroup$ – MonkeyZeus Sep 9 at 15:34
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You just pass laws on each world allowing the purchase and sale of the other world’s currency, with some sensible regulation to make sure people can’t get ripped off. Then the markets will establish the exchange rate and arrange the physical transport of any currency that actually needs to be moved, just like between two countries on Earth at present.

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    $\begingroup$ This is historically exactly how it was done -- well, no one passed laws, but foreign currencies were just another form of trade goods typically valued at their metal value. The idea of fixed exchange rates for fiat currencies was a 20th century thing, that's largely been abandoned. $\endgroup$ – Mark Olson Sep 7 at 18:14
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    $\begingroup$ @MarkOlson : fiat currencies largely been abandoned? I think I must have misunderstood that could you clarify it for me :) $\endgroup$ – Pelinore Sep 7 at 21:33
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    $\begingroup$ "The idea of fixed exchange rates for fiat currencies" is a noun phrase which is the subject of "has largely been abandoned." $\endgroup$ – Mark Olson Sep 7 at 23:19
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    $\begingroup$ You don't even need laws. Merchants and businessmen will quickly adapt and start trading with money and commodities. Laws would need to be passed to FORBID this kind of trade. $\endgroup$ – Euphoric Sep 9 at 13:35
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    $\begingroup$ @Euphoric They are technologically advanced worlds, and financial regulation is a technology. I’m assuming pre-existing laws banning the sale of complex financial instruments to members of the public, and these planets don’t have established currency exchanges and regulations, because the question specifies a single currency per planet. $\endgroup$ – Mike Scott Sep 9 at 14:12
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Why have an exchange rate?

Just deal in the local currency on whichever end of the trip I am at, and carry my wealth in the form of goods that will sell well at my next stop. Freight carriers don't like to run with empty holds, it is a waste of resources to sit still longer than necessary to unload and reload, and an even bigger waste to move while empty.

I leave A with a hold full of cargo bound for B. When I get there I sell my cargo for B coin. I then turn around and buy new cargo using said B coin for my trip back to A. On the A side I do the same thing but with A dollars. If I am doing this regularly, I keep accounts on both ends of the trip in that planets currency. When I am ready to retire, or otherwise have a need to consolidate my wealth, I deliberately skew the relative value of my cargos so that A>B just covers the costs, while B>A lets me extract my savings and bring my profits home.

Money is just a convenient means of representing the time and energy that goes into producing something. It only has value as long as all parties agree on what a unit represents. People on A will never see value in B coins, and B will never value A dollars, because they have a different reference base. The only ones who will see value in both are the people who move between places, and they will naturally define their own formula for relative worth base on what they can do with each currency in it's own place.

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    $\begingroup$ Or even more simply, sell your holdings on B to another trader at A for A currency. The worth of the holdings would be the expected value of the cargo (when sold at A) that they can buy on B (depreciated by risk and overheads). Effectively, this would be how the market would set an exchange rate for transferring wealth from B→A or A→B. $\endgroup$ – tylisirn Sep 8 at 6:28
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    $\begingroup$ Assuming you are citizen of planet A, you probably have a company based on A for which you pay taxes in A coins, employees with A contracts whose salary you pay in A coins and probably other expenses that you mainly pay in A coins. Your strategy accumulates a lot of B coins that you basically cannot use. A B citizen doing the same thing as you would probably be interested in exchanging his A coins with your B coins. And a bank or exchange office would also probably be interested in making business with both of you. $\endgroup$ – Didier L Sep 9 at 8:28
  • $\begingroup$ "Just [...] carry my wealth in the form of goods that will sell well at my next stop" - Imagine a facility that produces antimatter. It may be interested in the company buying the antimatter to also bring important supplies on their way (which is already unrealistic, because you don't want to clean your expensive containers for antimatter), but even then you expect the facility to make profit, which is exchanging the antimatter for more than just the supplies for the facility, and storing commodities on the facility to sell it for profit is not the most efficient solution. Money is. $\endgroup$ – Markus von Broady Sep 9 at 9:20
  • $\begingroup$ "t is a waste of resources to sit still longer than necessary to unload and reload". This wasn't the case when we still had sailing ships, and it won't be the case for interplanetary transport. It's only true when the price of travel is mostly constant over time, but e.g. for Earth-Mars you want to wait for the shortest trip distance. $\endgroup$ – MSalters Sep 9 at 9:44
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Comparing commodities. Money, after all, is just an abstract representation of goods and services. The only reason any form of fiat currency has power is its ability to be swapped for either a good or a service. A way to get an idea at what the exchange rate would be is to just compare a common and frequently used commodity between the two and use it to set a benchmark.

The trick is finding the commodity. Any metal that's used in equal measure would be useful, but suppose one planet is iron-rich and the other is iron-poor? Or perhaps one culture values gold whereas the other values silver? If both planets have the same amount of metals and use similar ways to process it, that would be the best, but that's not always the case.

Services would actually be another good place to start. Figure out the 'living wage', as in how much money would be the bare minimum for living expenses i.e. food, clothing, shelter at a minimal level. Or plot a graph with the respective salaries for necessary jobs - like doctor, farmer, lawyer, etc. (Cue lawyer joke.) Take all that information together and you should get a pretty good idea of what the exchange rate should look like.

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    $\begingroup$ This is really how all exchange rates begin... "How much do you want for that tamale? Is 25 Q*skk'ltzbit! a lot? How many tamales would I get for this crisp Benjamin? Huh? One?" $\endgroup$ – JBH Sep 8 at 5:53
  • $\begingroup$ "If both planets have the same amount of metals and use similar ways to process it, that would be the best". Not the best for trade, really. Trade is beneficial because it exchanges goods that have different valuations at different ends of the trade. $\endgroup$ – MSalters Sep 9 at 9:41
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    $\begingroup$ @MSalters Best for figuring out the exchange rate, not for trade. $\endgroup$ – Halfthawed Sep 9 at 17:36
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As bitcoin history shows, currency exchanges will emerge very quickly as soon as the currency is considered to have some nonzero value, despite exchange rate fluctuations. The rates on all these exchanges tend to quickly converge, and are used as a basis even for other people who trade directly. Even after failures of large exchanges like MtGox, the trade went on.

Unlike Bitcoin, you have equivalent goods on both planets (gold, drinking water, rocket fuel, ...), so trader can use them to calculate the estimated value of foreign currency.

When the interplanetary trade gets non-negligible and it gets regulated, these exchanges gradually enter the regulated regime and precautions to stabilize the exchange rate are made. I assume here both governemnts view the interplanetary trade as something good or neutral, not try to stop it.

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  • $\begingroup$ upvoting this because the question and many of the answers assume a formal exchange has to be set first, whereas history shows the opposite - an exchange rate occurs naturally through trade happening. $\endgroup$ – xorsyst Sep 9 at 16:18
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I worked in a electronic trading of currencies and commodities. Typically, there is not a single exchange market but the price would be more or less the same. The liquidity of the market and the spread (difference between BUY and SELL aka BID-ASK) determine how likely customer would use your market.

Travel between the planets takes a few days

Does it have Faster than light (FTL) communication? In the real world, the news publish in US would takes a couple of milliseconds to reach our London office

The market price is set by Market Depth. The buyer and seller would line up a the price with the volume.Those in the middle would match and the trade is done. Market depth

Market Maker those who regularly publish price and trade often would get a discount to use the market. The price is set by multiple Market Makers that provide their vision to the market.

Market Makers can be:

  • Hedge fund that tries to bet on the market
  • Company needs to offset their risk by hedging, say they have to pay in USD while holding GBP in the future.

As long as there are enough regulars states their demands, a market is formed. So the price is determine by those who is willing to trade at this moment at this price.

Statistic data moves the market. When the Nonfarm data released by the government, the price moves dramatically at that particular millisecond. There are more indicators

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OK, let's think about it:

  • we have roughly market economies on both sides
  • we have not united planets with already non uniform jurisdiction => they must already have some rules governing conflict of laws or law of the sea
  • we have modern states, which detest any power vacuum and just in case would impose (or even usurp) their authority on everything closing by. (not mentioning that modern states would quite quickly at least start to establish some kind of relationship and working on treaties)

So for practical purposes a space alien is a foreigner like any other, who while in your space is subject to local laws, but for many purposes concerning example technical certification of his ship is considered to be subject to his local laws, unless they are considered as outrageous. (In this case he is politely asked to comply with local laws or refused docking rights).

I don't think that any high tech tech civilisation would barter much. It would be too cumbersome. Rather an alien would check what he can buy, whether there are any nasty restrictions, and if everything is fine would accept local currency with tendency to err on side of caution. Moreover, someone presumably would even demand from him some cash payment for tariffs or docking fees. If he didn't trust it, then he would just try to spend it all before leaving those barbarians.

Exchange rate would be determined by the market and it would happen very fast. However, at first it would jump a lot, before stabilising. In a while all major currencies of the other world would be honoured.

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I think the short answer is: you're missing a step.

The next step in that picture isn't a currency exchange. If you've got a trader who's currently taking barter in exchange for their goods, the next step is to take the local currency instead. Instead of taking on 500 kilos of sodium chloride in payment, you get 500 cilrish - which you know you can use to purchase X, Y, and Z at the local alien freemarket. There isn't an exchange rate - you're not directly exchanging dollars for cilrish. In fact, the trader in that situation doesn't even really care about an exchange rate. Instead, they care about the goods X, Y, and Z versus the amount of dollars they spent on the venture. The trader may even keep spare cilrish - but mostly from the standpoint that it'll let them buy goods on the alien planet.

So for small-time trading, there isn't an exchange rate. But what happens when trading gets more prevalent - or, more directly, entities start springing up that do one directional trading - they focus on importing A and B from the alien planet and selling them on earth. In that case, the business needs to find a way to convert dollars into cilrish.

But there are likely business entities on the alien planet with the same problem. They're importing Miniature Corgis (a delicacy on their planet) and receiving payment in cilrish... which those businesses have to convert to dollars in order to purchase more inventory.

At that point, there's still not really an 'exchange rate', so much as a "Here's a rate we happen to agree to a transaction to at this point in time." It's just two companies agreeing to swap X dollars for Y cilrish.

Now, once there's a market demand for exchanges, that's when an actual exchange rate pops up. Because there's enough trading of cilrish to/from dollars that an actual proper rate can be established.

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I was thinking, if they are different life beings and have different life standards and materials use, what they have in common? Because one of the civilizations could valerate gold, whereas the others simply don't care. But what they have in common? Both have difficulties and cost to travel between their two planets. The exchange rate could be a trip from one planet to the other. They can calculate the equivalent in 1kg per trip.

I assume that the cost of travel is more or less the same in each civilization while being a little cheaper for the most advanced one. But they are more advanced, is logical they have a more valuable exchange.

For example:

A car cost 50,000€, and the European Union can put 1 kg in orbit for 9047€ (according to Wikipedia, Ariane 6 cargo capacity and approx launch cost are 10500 kg and € 95 million). The car cost (50000/9047 = 5.52) 5.52kg per trip.

Meanwhile, in Russia, they are selling a laptop, about 40000 Russian Rubles. The Soyuz have a charge capacity of 7200kg and a cost of 3200 million Rubles. 1 kg per trip cost 444444 Rubles. The laptop cost 0.09 kg per trip.

Those calculations are approximate and the capacity and the cost of the launches and capacity of the rockets are also approximate, the source is Wikipedia.

If we convert the currency (the laptop cost approximately 600€, 40000 Rubles), the car is 83 times more valuable than the laptop. So, 0.09 kg per trip 83 times more, are 7,5 kg per trip. The Europeans have they car for 5,2 kg per trip. The exchange rate is 1.44 Russian kg per trip for 1 European kg per trip. I think it's a good ratio.

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  • $\begingroup$ The cost of getting something "into orbit" isn't fixed. Not only is it a function of utilization (all else equal, using the same rocket, it would cost more per kg to put 1 kg into orbit than to put 1000 kg into orbit, because the fixed costs are, well, fixed), it's also highly dependent on exactly which orbit you want your cargo in, and where you launch from. $\endgroup$ – a CVn Sep 9 at 10:19
  • $\begingroup$ Getting 1000 kg into a polar orbit from the Kennedy Space Center in Florida is not at all the same thing as getting 1000 kg into an equatorial orbit, let alone what either involves when launched from Baikonur Cosmodrome in Kazahkstan, or Plesetsk Cosmodrome in Russia, or Guiana Space Centre in French Guiana, South America. Getting 1000 kg into a 400 km orbit (roughly the same altitude as the ISS) is not the same thing as getting it into a 1500 km orbit at the same inclination and from the same launch site, even though both are considered low Earth orbits. And so on. $\endgroup$ – a CVn Sep 9 at 10:19
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    $\begingroup$ I think you are missing the point. I'm not talking about how much put a car on orbit will cost or at what orbit. I just take some average cost and make a comparison between two "civilizations". The trip is interstellar, put in orbit won't be enough, of course. We can assume the civilizations will have constant trade and the cost will be regular in each cargo send. It was just an example. Those civilizations could make their trades using the average cost of transport between their two worlds as a valor in common which the will use to know "how much will cost this thing in that planet". $\endgroup$ – Miguel NoTeimporta Sep 9 at 12:50
  • $\begingroup$ You might want to reword the first paragraph. When I read "one civ could value gold, but the other doesn't care about it," my first thought was, "Well, they'll start to care pretty quickly, because they'll realize they can use that formerly-valueless gold to get valuable things from their new trade partner." $\endgroup$ – Kevin Sep 11 at 13:25
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During the barter phase, when you were trading a ship full of grain for some crates of microprocessors, you established the relative values of the commodities. Now that you have this information you can start trading with tokens, like the federal reserve notes. The parties will have to establish a clearing house for transactions, the parities between the tokens will have to be agreed upon, either by state decrees or by letting the tokens' value float in the markets or by having a common currency.

Until you a have an agreed-upon clearing house you will still need to resort to barter.

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