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The real world is based on economics; from the rise and fall of the value of currency, to the relative value of currency across nations. Trying to claim that a gold coin is worth the same across kingdoms is just as ridiculous as claiming the dollar is just as valuable across countries.

How can I make the economic evolution in my world believable? How can I make the relative economic values in my world realistic?

See the other questions in this series here : Creating a realistic world Series

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    $\begingroup$ A gold coin is worth a gold coin all the way across every kingdom. What differs are the values of the goods you might buy with said gold coin. $\endgroup$ – Separatrix Sep 22 '16 at 16:52
  • $\begingroup$ @Separatrix wording error, my meaning remains $\endgroup$ – TrEs-2b Sep 22 '16 at 16:55
  • $\begingroup$ It almost does, but if you're using gold coins then you're by definition on the gold standard, the dollar is a fiat currency so you can't compare the two. $\endgroup$ – Separatrix Sep 22 '16 at 16:57
  • $\begingroup$ @Separatrix I not using gold coins, I'm asking about economic evolution and relative value. $\endgroup$ – TrEs-2b Sep 22 '16 at 17:02
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    $\begingroup$ So look at the real world: treaties and trade agreements, tariffs, etc. That’s really an entire field of economics. $\endgroup$ – JDługosz Sep 22 '16 at 19:24
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Well the first thing we have to do is discuss what currency is...

Currency is pretty much just a standard of exchange that is backed by the authority of a region to honor those debts or it's value. The reason I can trade paper for turkey, is based on 1 of three things; how much that currency is worth on its own merit (A brick of salt has an absolute value while a love poem has a subjective value), how much trust you have in me as the other person in the exchange (The oldest form of currency... Basically "favor". I do or give something to you in exchange I expect the society or you will provide something to me in the future that I need), and/or how much trust you have in the authority(Taxes, fiat currency, etc). If you have no trust in me and the currency is worthless to you as an object then you are relying on that currency to be backed in some way by the authority or government, either to provide you with a fair rate that has been stated for goods (for example a voucher for food) or to hold that authority from attacking you.

Early economies were based on simple token bags or certain amounts of salt. The token bag gave you the right to a portion of food in Sumeria (if I rememeber right) while Salt is necessary to humans and as such has value as an object that can be traded on it's own (this is where the word "salary" comes from).

The obvious faults with these systems we see today are with the ability to counterfeit and inflation. It's not hard to make an extra rock or satchel of rocks that looks like a currency token. And Salt, as we progressed simply became more and more readily available which made it worth less and less for most people.

And so, we switched to precious metals which held their value as salt generally did and wasn't easily replicatable. Some regions had more of one kind than another so coins were differentiated by that.

So now we got ugly lumps of metals as currency. This is good, but people also knew of "fake" metals at the time and knew that you could mix some gold with some lead and people would be none the wiser till too late. What did we do? Well we wanted to make sure our currency was worth something so governments started making laws against owning precious metals and eventually minting coins. Along with they also gave some groups the ability to mint coins, but they largely held that power to themselves (Lots of problem with this but not going to discuss it). This then allowed the mints to produce coins that had specific look and weight with specific amounts of this metal or that.

This made it extremely easy to check if the coins were "real". Just weigh them and check against what they were supposed to be.

And this is where you get the answer to your question...

Things like precious metals have a generalized standardized value across the world so 1 unit of gold equals 1 unit of currency. And how do we determine that unit of gold? By kings decree and weight. The king needs money to finance their wars. Theives want to con people. This results in them both taking coins and altering their content in some way so more gold comes from the same amount...

The king doing it would produce a new type of coin. They'd simply do things like cut the amount of gold in a coin in half and add more of another metal allowing them to push out more coins which technically have less value but the populace generally wouldn't pay attention, know this, and wouldn't really care as long as the king would take it as taxes. This results in inflation and money being more or less valuable in that kingdom.

Thieves on the other hand would do a thing called "shaving" (now you know where that term comes from) where they would take tons of coins and just shave a bit of edge off and make new coins with the shavings. This results in the devalue of the coin overall and if too many thieves do it to a particular coin it gets a reputation.

How is the easiest way to replicate this?

Start at the point of how long ago did coining start.
The next part is easy, but time consuming... Just make up a world history.
Have periods of thievery and counterfeiting which should last a decade or so. Have wars with neighbors. As the war goes bad or the king needs more money the value goes down, but as it goes good and doesn't need the money the money will be valued higher.
Likewise, as a kingdom/nation becomes more powerful their currency also raises in value so that even though the gold content might be the same, the coin will be of higher value because it is associated with a particular kingdom that allows foreigners to do business with them which allows them to prosper. Of course that also means more theives are going to be shaving.

How do you do the above? You can make a program, or just use a dice rolling system that takes these things into account. Ideally you'd want several stats interacting to give you the gold value, but you could just use a single value to represent good/bad fortune as value goes up and down. If you're going to do that that I'd use a 2d10 for percentages. If you don't have a history already, you can use this to generate the history of a region by doing it multiple times and relating them each to other... Though this system would require you figure out how to account for trends. Economies generally do go in a wave pattern with an overall upward trend that results in times of booms and times of bust that larger over time, but overall end positive or destruction for the kingdom/country... They also have the same thing with minor fluctuations. I have no idea how you can account for that with dice, but if you can, good on you.

P.S. I am not an economist and I largely disagree with what economists think/say, but an economist should largely agree with what I said here.

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  • $\begingroup$ "Currency is a standard of exchange that is backed by the authority of a region to honor those debts or it's value" You are talking about the subset of currency known as "fiat currency". The gold standard or any other non-fiat currency doesn't need backing by any authority since the value is in the item and not in the promises by authority that it has value. $\endgroup$ – Mark Ripley Sep 23 '16 at 5:45
  • $\begingroup$ @MarkRipley Ironically, we call the gold standard a non-fiat currency when the fact is until very recently it had no practical usage. In other words, it's still "fiat" currency. What makes something currency is the standardized thing that can be used rather than favors, or the exact thing you want. What allows the standardization to occur is some authority which imposes the standard, whatever it may be. $\endgroup$ – Durakken Sep 23 '16 at 7:03
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Look at the costs a trader has when trading on a price difference.

Traders will look for opportunities where the profit they make from a price difference outweighs their costs. So it's pretty simple: price differences tend to disappear if someone can make a good profit from them. It doesn't matter what currency you take as a reference point; a trader who can make a clean profit in any available object with currency properties will probably do so.

The major costs to arbitrage, the movement of goods to sell them at higher prices, are:

  • Cost of transportation
  • Cost of distribution
  • Blockades or tariffs by local rulers/government/...

The major costs of speculation, the storing of goods with the expectation of selling them when demand is high, are:

  • Storage costs
  • Risk of theft/loss
  • Taxation/confiscation

Between free-market countries with good infrastructure and equal taxation, prices of easily transported goods approach equal levels quickly. Lots of analysts earn their living from dampening price fluctuations over space and time.

When analyzing any specific good, look for the most important cost factors. The gold-to-silver exchange rate will probably be fairly stable under various circumstances, since both have no big cost for traders. But consumable goods that decay over time can make wild swings when there's a supply shortage, say, because there's a conflict on the trade route. If the risk sends the cost of transportation through the roof, traders will demand a huge premium.

This analysis gets harder the less free/peaceful/capitalistic a country is, because the local black markets and police/corruption situation makes it harder to estimate costs. But ultimately, it's still about cost factors for those doing business: can enough people live off trading a pair of goods/currencies at competitive prices? If so, prices balance out; if not, prices drift apart.

On Currency

A good currency is something that minimizes the above costs and isn't expected to become highly volatile, i.e. probably won't have sudden swings in its value.

It's pretty much a local consensus what is used as currency. Exchange rate differences between currencies emerge from the same factors as for any other tradable object. In the real world, it's usually the government that causes chaos in currencies, directly by controlling it and spending more than it should, or indirectly by making changes that have a massive impact on many users of one specific currency. Other than that, supply and demand for the specific currency cause it to change over time, but this isn't usually as disruptive.

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    $\begingroup$ The other major cost for arbitrage is the information cost. If you don't know what you can sell an object for elsewhere, buying that item suddenly has a very large risk. This is less of an issue with the internet, but it was a big deal in historical trading. $\endgroup$ – Mark Ripley Sep 23 '16 at 6:26

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