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Extra! Extra!
Muggle Exchange Rate Less Than Adequate
by Lavender Brown
by Lavender Brown
A startling trend has been seen occurring for those entering the Wizarding World from Muggle households. Once they've been acquainted to our world, mostly following an acceptance letter to Hogwarts or any of the other educational institutions, they are left without help to infiltrate our society. Not only are they thrust into a world they may not understand, they are forced to come to terms to a very harsh fact:
"I'm poor here," said Tajaria Reynolds, a recent graduate from Hogwarts that is busing tables at Fabians Fine Food to make ends meet. "My money from home is worth next to nothing here. The exchange rate for the pound is abysmal."
But why is the wizarding exchange rate for muggle money so low? Aside from factors such as political climate and inflation, the wizarding exchange rate is one of the most important determinants of the wizarding world's relative level of economic health. Exchange rates play a vital role in the wizarding world's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic measures. But exchange rates matter on a smaller scale as well: they impact the incoming muggleborn's livelihood in the wizarding world. As almost every wizarding business, whether Flourish and Blotts or the Leaky Cauldron, deals specifically with Wizarding Money, the rate at which their muggle money can be exchanged directly effects their ability to function.
Numerous factors determine exchange rates, and all are related to the relationship between our two worlds. Remember, exchange rates are relative, and are expressed as a comparison of the currencies of the Wizarding and Muggle worlds. The following are some of the principal determinants of the exchange rate; note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate.
As a rule of thumb, if the Wizarding World has a consistently lower inflation rate (the price relative to product and service and whether this price is an exorbitant amount), this exhibits a rising currency value, as its purchasing power increases relative to other currencies. During the First and Second Wars, the Wizarding World witnessed a low inflation rate, while the Muggle World exhibited a rather steady rate of currency. A higher inflation rate typically sees depreciation in the currency in relation to the currencies of their closest exchanged partners. This is also usually accompanied by higher interest rates. For the wizarding world, this was seen in the lowering of the interest rates enacted on the vaults at Gringotts by the Goblins (which have since raised for certain members. See previous article re: Goblin Vault Rates Hike For Some)
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, the Goblins at Gringotts exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other currencies (such as the muggle pound, their current currency). Therefore, higher interest rates attract Muggle capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the specific currency is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates.
During the First and Second Wars with He-Who-Must-Not-Be-Named, and to some extent the years between the two, the wizarding world engaged in large-scale deficit financing to pay for governmental funding and protection (the hiring of more Aurors, the protection of public places, warding, etc). While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors (Such as the Ministries from the States or France). The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government, such as that of the Ministry of Magic, may create money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means (selling domestic products which increase the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations (for instance, if the economy was unable to pay back its debts). Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country's debt rating is a crucial determinant of its exchange rate.
Perhaps the biggest deciding factor in exchange rates between that of the Wizarding World and the Muggle world is the political climate of the times. During the last year of the Second War, when it was well known that those who were in power did not view the muggleborns in our World as assets, the exchange rate for muggle currencies dropped to an all time low. For over a year, it was hard for some, if not all, muggleborns to secure enough wizarding money to function in our world. Obviously, this was a direct tactic on the part of the followers of He-Who-Must-Not-Be-Named to circumvent the power of the muggleborn's ability to function in our world.
Though it's been over five years since the end of the Second War, the muggle currency exchange rate is still low, and seems to be moving towards an even lower rate. "The Goblins at Gringotts are not the only ones who influence the current exchange rates. The Ministry decrees to us lower beings how and what we can tax," said Tackletooth, a Goblin in charge of vault rates and taxes. Sarcasm was clear on the parts of the Goblins, perhaps pointing to a power struggle between those in charge at Gringott's and those in the Ministry of Magic.
"Of course the Ministry has eyes and ears at Gringott's. We watch every facet of the Wizarding World. It's necessary to make sure our society does not delve into chaos," one source at the Ministry, who asks to be remain anonymous, had to say. "As the economy of the Wizarding World booms, it makes sense that the currency of other countries would take on less value. If it stayed the same, it'd be unfair to the owners of wizarding businesses."
This is true. As capital costs for Wizarding businesses rise due to an inflated production overhead, it would be unreasonable to assume they'd charge less for their products. In all fairness, they should charge more. This does not take into effect, however, the currency exchange rates for muggleborns. When they are thrust into a society that does not accept their current currency, they are forced to accept a lower rate for the money which they currently have, putting them deeper and deeper into debt. It has become a large problem, especially for those who are not well off in the muggle world to begin with.
"When I entered school three years ago, I couldn't afford more than one set of robes. I had to save up every pound I could during summer vacation and a dead end job at a grocer's just to afford my school books. There's no way I'd be able to live in the wizarding world, even if I wanted to," said Abigail Turret, a third year muggleborn who's attending Hogwarts School of Witchcraft and Wizardry.
"The Ministry is very adamant in advertising scholarships and grants to those muggleborns in need of help financing their schooling. It can not become the Ministry's responsibility what they do outside of school, however, or we'd be responsible for too many people," the same source previously mentioned stated.
The Ministry is right. It cannot become their responsibility to deal with the many muggleborns who are helpless in a world where their hard-earned coins are useless. But, if it's not the responsibility of the Ministry of Magic, who help influence the exchange rate and to whose laws they are subject to... whose is it?
"I'm poor here," said Tajaria Reynolds, a recent graduate from Hogwarts that is busing tables at Fabians Fine Food to make ends meet. "My money from home is worth next to nothing here. The exchange rate for the pound is abysmal."
But why is the wizarding exchange rate for muggle money so low? Aside from factors such as political climate and inflation, the wizarding exchange rate is one of the most important determinants of the wizarding world's relative level of economic health. Exchange rates play a vital role in the wizarding world's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic measures. But exchange rates matter on a smaller scale as well: they impact the incoming muggleborn's livelihood in the wizarding world. As almost every wizarding business, whether Flourish and Blotts or the Leaky Cauldron, deals specifically with Wizarding Money, the rate at which their muggle money can be exchanged directly effects their ability to function.
Numerous factors determine exchange rates, and all are related to the relationship between our two worlds. Remember, exchange rates are relative, and are expressed as a comparison of the currencies of the Wizarding and Muggle worlds. The following are some of the principal determinants of the exchange rate; note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate.
As a rule of thumb, if the Wizarding World has a consistently lower inflation rate (the price relative to product and service and whether this price is an exorbitant amount), this exhibits a rising currency value, as its purchasing power increases relative to other currencies. During the First and Second Wars, the Wizarding World witnessed a low inflation rate, while the Muggle World exhibited a rather steady rate of currency. A higher inflation rate typically sees depreciation in the currency in relation to the currencies of their closest exchanged partners. This is also usually accompanied by higher interest rates. For the wizarding world, this was seen in the lowering of the interest rates enacted on the vaults at Gringotts by the Goblins (which have since raised for certain members. See previous article re: Goblin Vault Rates Hike For Some)
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, the Goblins at Gringotts exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other currencies (such as the muggle pound, their current currency). Therefore, higher interest rates attract Muggle capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the specific currency is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates.
During the First and Second Wars with He-Who-Must-Not-Be-Named, and to some extent the years between the two, the wizarding world engaged in large-scale deficit financing to pay for governmental funding and protection (the hiring of more Aurors, the protection of public places, warding, etc). While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors (Such as the Ministries from the States or France). The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government, such as that of the Ministry of Magic, may create money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means (selling domestic products which increase the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations (for instance, if the economy was unable to pay back its debts). Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country's debt rating is a crucial determinant of its exchange rate.
Perhaps the biggest deciding factor in exchange rates between that of the Wizarding World and the Muggle world is the political climate of the times. During the last year of the Second War, when it was well known that those who were in power did not view the muggleborns in our World as assets, the exchange rate for muggle currencies dropped to an all time low. For over a year, it was hard for some, if not all, muggleborns to secure enough wizarding money to function in our world. Obviously, this was a direct tactic on the part of the followers of He-Who-Must-Not-Be-Named to circumvent the power of the muggleborn's ability to function in our world.
Though it's been over five years since the end of the Second War, the muggle currency exchange rate is still low, and seems to be moving towards an even lower rate. "The Goblins at Gringotts are not the only ones who influence the current exchange rates. The Ministry decrees to us lower beings how and what we can tax," said Tackletooth, a Goblin in charge of vault rates and taxes. Sarcasm was clear on the parts of the Goblins, perhaps pointing to a power struggle between those in charge at Gringott's and those in the Ministry of Magic.
"Of course the Ministry has eyes and ears at Gringott's. We watch every facet of the Wizarding World. It's necessary to make sure our society does not delve into chaos," one source at the Ministry, who asks to be remain anonymous, had to say. "As the economy of the Wizarding World booms, it makes sense that the currency of other countries would take on less value. If it stayed the same, it'd be unfair to the owners of wizarding businesses."
This is true. As capital costs for Wizarding businesses rise due to an inflated production overhead, it would be unreasonable to assume they'd charge less for their products. In all fairness, they should charge more. This does not take into effect, however, the currency exchange rates for muggleborns. When they are thrust into a society that does not accept their current currency, they are forced to accept a lower rate for the money which they currently have, putting them deeper and deeper into debt. It has become a large problem, especially for those who are not well off in the muggle world to begin with.
"When I entered school three years ago, I couldn't afford more than one set of robes. I had to save up every pound I could during summer vacation and a dead end job at a grocer's just to afford my school books. There's no way I'd be able to live in the wizarding world, even if I wanted to," said Abigail Turret, a third year muggleborn who's attending Hogwarts School of Witchcraft and Wizardry.
"The Ministry is very adamant in advertising scholarships and grants to those muggleborns in need of help financing their schooling. It can not become the Ministry's responsibility what they do outside of school, however, or we'd be responsible for too many people," the same source previously mentioned stated.
The Ministry is right. It cannot become their responsibility to deal with the many muggleborns who are helpless in a world where their hard-earned coins are useless. But, if it's not the responsibility of the Ministry of Magic, who help influence the exchange rate and to whose laws they are subject to... whose is it?
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