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Gnomes are from Zurich, Goblins are from Vienna: Gringotts and the Wizarding economy - Wemyss's Appalling Hobby:
From the Party Guilty of Committing 'Gate of Ivory, Gate of Horn'
Gnomes are from Zurich, Goblins are from Vienna: Gringotts and the Wizarding economy


Recently, lusiology asked, ‘Could the WW have something like a credit crunch?’  She went to ask,


How do you think the wizarding world economy works?

UK wizards trade with other communities around the world and what do you think the UK
wizards could offer?

Do galleons rise and fall in price like other monetary systems? Would Voldemort’s actions have had a negative impact on the WW economy?

How does Gringott’s operate?

Do the goblins charge their human customers and would they have something like the Muggle money markets to make a profit on all that gold etc sitting in their vaults?

Could families like the Malfoys, Blacks and Potters have amassed their fortunes by taking advantage of generations of Muggle labour or Muggle ambition, such as trading in tea, porcelain, opium etc?

I’m thinking this gathering of wealth on the back of Muggle labour is very likely because there must’ve been Muggle borns throughout the centuries. Would the heir to a grand estate been made to renounce his title because he was a wizard?


Now, not all of these questions are related; and not all of them by any means are related to the initial question, ‘Could the Wizarding world have something like a credit crunch?’  I said in response at the time,


The short answer as regards a similar credit crunch is, No. An almost equally short answer is, No, because the Wizarding world uses commodity money rather than fiat money.  The long answer, including all your points, will require its own post.


This is that post.


The limits of our knowledge: canon


There is no evidence in canon for banknotes.  We appear not to be dealing with fiat money here: Wizard-dom’s Γ.ſ.ĸ., like the £.s.d. of old (back when Isaac Newton ran the Mint), are commodity money, coinage from precious metals with intrinsic value.  We do not know whether Galleons, Sickles, and Knuts are subject to a legal tender statute, but there is clearly something special about them, as evidenced by the Goblin serial numbers on them, which seem to be more than merely an equivalent to the Mint’s milled edges as a defence against coin-clipping.  They are legal currency; not being fiat money, there is no need to declare them legal tender.


It is also an inescapable conclusion that money, like food, cannot be conjured or transfigured, at least not permanently: perhaps this is one of Gamp’s Laws of Transfiguration.  We must conclude this, firstly, because of what we know of Transfiguration: the Animagus transfiguration does not change the Witch or Wizard into the animal, but merely allows him or her to take its form and attributes; the dog Cedric conjured from a stone was not an actual dog, nor did Krum’s partial transfiguration make his head truly that of a shark; the apparent snuffbox remains a mouse, the orchid an owl, and can be reverted to that form.  Secondly, it is not the art of Transfiguration, but that of Alchemy, that can alone transmute base metals into gold, and for this, the unique Philosopher’s Stone is required, as Dumbledore attested.  Finally, we must conclude this to be the case because, even in a legal tender regime, were gold subject to being created by Transfiguration and to remaining in that state thereafter, nothing would or could stop private contracting parties from agreeing to use Transfigured gold as a means of exchange.


In fact, gold, silver, and copper are capable of being monetised precisely because they are relatively rare; are luxury resources; are divisible; and are impervious to decay: all factors that would be made nonsensical were it possible to Transfigure these commodities from the weeds in one’s herbaceous border.


We may also conclude that Gringotts is not your common or garden High Street bank.  There is no evidence that it makes loans, and indeed, absent banknotes (and a concomitant fractional-reserve ratio), it is hard to see how a credit system in the modern sense could exist.  So far as canon is our guide, Gringotts operates to a full-reserve banking system: it has one hundred per cent. of the money on hand that it pays out, lends, or receives.  In other words, Gringotts has on hand the full amount of the depositor’s deposits at all times, available to be paid out upon demand and in full.  (A full-reserve banking system can still make loans and carry on similar intermediation functions, but only of course as between lenders and borrowers with similar – indeed, essentially exact – time horizons.  Short term deposits and long term credit extensions could not readily be matched in such a system.)  It is immune from liquidity risk: it will always be able to pay out the full measure of deposits upon demand.  So far as it does not engage in lending, it also avoids credit risk (defaulting borrowers) and interest rate risk (negative differentials between what it pays for deposits and pays on loans). 


How, then, does it make money?  We shall return to this; suffice it to say, for now, that it is known in canon to exchange money between the Wizarding and Muggle currency systems; it leases vaults; it appears to make international transfers between its branches (this is but one evidence of the fact that, yes, British Wizardry does indeed trade with the rest of the world, as also reflected in the existence of the Ministry’s International Trading Standards Body and the list of magical substance export controls and schedule of non-tradable goods); it operates what amounts to a grave-robbing business in Egypt; and it enjoys at least one privilege we associate with central banks, that of creating the currency.  It is in fact the Mint.  As discrimination always imposes a cost (Alchian and Kessel are perhaps the best analysts of this factor), it is quite likely that the Goblins maximise their profits to a punitive level at every turn of the activities just noted, and as the body corporate charged not only with holding the monetary assets of the Wizarding world, but with actually coining the currency, their position is so commanding that one wonders just who it was who actually won the last few Goblin rebellions (certainly one cannot get the story properly from Binns).


Insofar as they act as the Mint, Gringotts control the money supply: in US terms, the money supply is M0, the monetary base, currency in circulation, with some elements of M2 and M3 (deposits). With commodity currency and no fractional reserve basis, and no apparent or institutional and merchant bank lending, the Wizarding money supply simply is the amount of money that has been coined, full stop.  As Gringotts are the only bank in the Wizarding world – or so Hagrid has suggested – there is no distinction between currency created and held in vaults by a central reserve bank and the amount that the central bank has released to commercial banks.  (One consequence of this would be, I note, that the Galleon must therefore be rather like guineas and sterling in the heyday of empire, a universally acceptable currency.  If it seems odd that so reliably fashionable a Grauniad-ista as Ms Rowling should indulge that particular nostalgia, even unconsciously, I can only point out that the only public man in the past twenty years to have waxed publicly nostalgic for the palmy days of the Raj is, py Chesu, that ‘hairy Lefty’ the Archdruid of Canterpury, look you, Rowan Williamce….)  (No actual Welshmen were harmed in the writing of the preceding sentence.)


Finally, we can deduce from canon – and this is an important factor throughout this analysis – that the Goblins mine the gold, silver, and copper for the specie they coin, and that, thanks to magic, the resource extraction costs in the Wizarding (and Goblin) world are therefore negligible: whereas of course in our own, as Friedman has noted, they would be so nearly prohibitive as to make a return to the gold standard impossible. 


What we can conclude from canon


Could the WW have something like a credit crunch?


It is not my intention or indeed within my remit in this essay to bore you all (‘too late!’) with a detailed – and contentious, in some quarters – analysis of the reasons and roots of the real world credit crisis.  I will simply say here that insofar as it is a credit crisis, and one involving to some extent at least the volatility of fiat currency, No, a similar crisis is not possible in the Wizarding world, based upon what we have determined above.  Moreover, as we shall see, Gringotts is so positioned that no market is left without adequate information – and it is lack of determinable information to guide the market that has been the greatest failure of Browndarlingballs and the Obamateurs in our world.  All economic expectations in the Wizarding world are rational.  This is not to say that other crises cannot occur, and we shall return to that point.


How do you think the wizarding world economy works?

Like any other.  Or, rather, like any other that works.  It appears to be almost fully dedicated to Free Trade; the career of jobbery and peculation that was enjoyed by Lucius Malfoy suggests that there is no direct taxation; and it certainly enjoys the advantages of sound money.  A primitive, if not wholly lacking, credit system, and a hostility to innovations, seem to be the major drags upon its economy – in addition to the already mentioned cost of discrimination.  It has been argued that the economy is quasi-feudal and that, so far as it is so, is not merely stagnant, but on very shaky foundations indeed; however, I wish here to mention again the concept of resource cost.  Both the existence of magic itself, and the presence of house elves, would reduce these costs very nearly to zero, and the knock-on effect of that reduction in cost would be equivalent to an ongoing and perpetual Industrial Revolution.  Otherwise and more generally, we can only assume that the economy consists of trade in a very pure and free form.

UK wizards trade with other communities around the world and what do you think the UK wizards could offer?

Canon is clear, as I have noted above, that there is international trade.  What Wizarding Britain’s economy speciality is, we cannot surmise, although banking itself may be a major component, as we have seen.

Do galleons rise and fall in price like other monetary systems? Would Voldemort’s actions have had a negative impact on the WW economy?

As we have seen, in a commodity money system such as that in the Wizarding world, the currency will not ‘rise and fall in price’, if only because there is nothing against which they could rise or fall.  The commodity money system in Wizard-dom is not even a gold standard system, in which notes are backed by gold; it is a gold system, tout court.  There would be no inflation in real or nominal terms, and no Fisher relationship (the relation of the nominal interest rate to the expected inflation rate: (1 + i) = (1 + r) × (1 + gPe), where i is the nominal rate, r is the real rate, and gPe is the expected inflation rate) to measure it.  Prices of goods may rise or fall as measured by cost in Galleons, but that is a different matter; and with Gringotts control of M0, effectively no resource cost in mining the gold, and what is said to be essentially a world currency and a single bank, even price volatility is severely reduced: there is no inflationary temptation (yes, Darling, you may call it ‘quantitative easing’ if you like, you’re fooling no one), as governments literally cannot print currency; the Goblin control of both mining and minting renders the possibility of monetary event shock from a sudden gold discovery negligible at best; and there seems unlikely to be any great balance of payments problem.  Nonmonetary shock, however, is still potential; and to take up the second and unrelated question, it is there that Riddle’s rebellion would have had its effect.  Primarily, Voldemort’s actions would have depressed productivity, hugely effected and affected the cost of discrimination, promoted hoarding, vastly depressed spending, and severely hampered monetary velocity (the rate at which currency changes hands in transactions for final or end-use goods and services).  It should be noted that GDP, gross domestic product, is definitionally the quantity of money multiplied by its velocity; the equation of exchange for purposes of analysing the impact of money supply and the price level is MV = Py: M being the money supply, V being velocity, P being the price level, and y being real income.  Velocity being Py/M, it is evident that an increase in the money supply simply dilutes the currency to no advantage: an increase in M causes only an increase in P, and does not over time increase V (velocity) or y (real income).  The effect of the nonmonetary shock of the war in a system in which M is tightly and independently controlled, consists of commodity money, and cannot be inflated by simply printing notes, would therefore be depressive of price and quasi-deflationary in effect.

How does Gringott’s operate?

As we have seen, not like a High Street bank.

Do the goblins charge their human customers and would they have something like the Muggle money markets to make a profit on all that gold etc sitting in their vaults?

It is quite likely that they charge for the security vaults.  Why, you might ask, absent interest on deposits or other countervailing advantages, would depositors be willing to pay to store their money?  If its value is not increasing, why would one pay to store it?  The answer is simple.  Gringotts are famously secure.  The initial cost of having a tenth the physical security that it offers its depositors would be prohibitive for any one depositor; fractionalised between many depositors, it is a cost worth paying to assure physical security of commodity money that, if stolen, would pass anywhere and that is itself intrinsically valuable as raw metal.  Moreover, since the Muggle invention of banknotes, and particularly since the Muggle abandonment of the gold standard, Gringotts are necessarily making a fortune simply by converting currency or metal.  In addition, they rob graves and doubtless sell the goods thus acquired.  And as a Mint, they almost certainly profit from seignorage, even without considering their mining advantages and the charge they doubtless extract from government for minting the coinage.

Could families like the Malfoys, Blacks and Potters have amassed their fortunes by taking advantage of generations of Muggle labour or Muggle ambition, such as trading in tea, porcelain, opium etc?

Certainly.  For all we know, the Potters own the Potteries, or their magical equivalent, and the Midlands may be the Black Country in a sense unknown to Muggles.  However, with magic and the nugatory cost of house elf labour, it is likely that resource costs are so much lower in the Wizarding world that dabbling in Muggle manufacturing is a far less attractive proposition.

I’m thinking this gathering of wealth on the back of Muggle labour is very likely because there must’ve been Muggle borns throughout the centuries. Would the heir to a grand estate been made to renounce his title because he was a wizard?


Canonically, this is doubtful; certainly second sons, such as Lord Stoddard Withers, seem to have retained their courtesy titles.  And of course, there was the reprehensible Sir Herbert Varney, who may have been a knight or may have been a baronet, and Nearly Headless Nick, who was clearly a knight, as the baronetage had not then been established.




And this, I think, is as far as canon and logical deduction from canon may take us.  What I find most remarkable about it all is that Ms Rowling, of all unlikely people, and certainly without intending to do, has all but accidentally created an economic world that approximates more than any other the ideal of the Vienna-Chicago-Virginia School.  It is a world, for all its economic faults, in which Hayek, von Mises, Coase, Friedman, and Buchanan would find a remarkably congenial and Keynes-free home.  Three cheers and a Nundu, then, for the Goblins.



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(Deleted comment)
wemyss From: wemyss Date: March 24th, 2009 01:51 pm (UTC) (Link)

Ta, love.

I do truly believe that they do take their insults out in fees. Quite right.

Thank you for yr kind words; and I am glad we are in agreement on all points.
marionros From: marionros Date: March 23rd, 2009 03:56 pm (UTC) (Link)
Hmm... The serial numbers on the coins would suggest that they, the coins, *are* the 'paper money' of the WW. It might be possible that there is only a fixed amount of Galleons in cerculation, and that the Goblins control the exact amount to battle inflation.

I've read a fanfic where an adult Hermione Granger investigates Wizard economy and finds that the gold in Gringotts vaults are but an illusion. There simply isn't enough real gold in the world to account for all those Galleons. The Goblins keep track of the accurate amount of Galleons that are supposed to be in each and every one of those vaults, and provide any wizard that wants to substract a certain amount with real coin, even though there aren't as much coin in the world as the wizards believe. The Wizard economy in that story works, however, because the wizards believe that the coins are real.

Wish I could remember where I've read that story...
marionros From: marionros Date: March 23rd, 2009 04:05 pm (UTC) (Link)
Hah! Found the fic. It's 'Good as Gold' by Camillo, and can be found here:


The finance stuff can be found in chapters four and five (the rest is Snape/Granger fluffy - but very humerous - stuff)
wemyss From: wemyss Date: March 24th, 2009 01:53 pm (UTC) (Link)

Thank you - not least for looking out that story, wh I shall read.

I'm sorry, I was unclear on one point: I agree that the Goblins fix and control the money supply, of course. But the currency cannot, I shd argue, be equivalent to paper money precisely because it is commodity money, having an inherent value based upon its precious metals content. What the serial numbers mean wd in that case be that the coins are legal currency, and not counterfeit.
luci0logy From: luci0logy Date: April 9th, 2009 03:19 pm (UTC) (Link)
That's a very interesting premise indeed. And your icon is terrific. *giggles*
tree_and_leaf From: tree_and_leaf Date: March 23rd, 2009 09:30 pm (UTC) (Link)
Fascinating look at the apparently not-so-dismal science. Thank you. (Though Gringotts strike me as an example of a private monopoly rather than an aid to unfettered free trade...)
wemyss From: wemyss Date: March 24th, 2009 01:55 pm (UTC) (Link)


I agree Gringotts is in effect a monopoly, in part because it is the Mint and must therefore be a natural monopoly. I think the economy to be a Free Trade system because we do not see barriers or tariffs.
hanfastolfe From: hanfastolfe Date: September 24th, 2009 06:59 pm (UTC) (Link)

Re: Thankee.

Arrived at this quite late. I was bored and was poking through hp_essays.

I suspect the wizarding currency may be quasi-fiat because of the fact that Hermione says that Goblins conjure coins.

Also: trade flows.

The fact that the British Ministry of Magic does set standards on imported products suggests that trade may not be as "free" as might seem on first glance.

Import controls have long been a quasi-barrier to trade used when tariffs can't or won't be used. Japan has used this trick to good effect to keep insulating its internal markst from outside products.
leni_jess From: leni_jess Date: March 24th, 2009 01:03 am (UTC) (Link)
Thank you for this careful analysis, which will undoubtedly be most useful to anyone wanting to include some rationality in devising interactions between goblins and wizards/Gringotts and Ministry.

I'm glad to know I didn't commit any logical howlers in writing the latter last year in a sort-of mystery, which was based on the goblin currency and its origins.

A most interesting read! Boring-not.
wemyss From: wemyss Date: March 24th, 2009 01:56 pm (UTC) (Link)

Kind of you to humour me, m'dear.

And of course it is impossibly that you shd ever have perpetuated any error in yr admirable writings.
leni_jess From: leni_jess Date: March 24th, 2009 02:39 pm (UTC) (Link)
Kind of you, in turn, to say that, but would I could be assured of it! Just trying to get htings right. Full stop.

Not humouring; this is an excellent essay (from a very ignorant pOV, needless to say).
tudorpot From: tudorpot Date: March 24th, 2009 02:41 am (UTC) (Link)
I presume families like the Weasley's need a vault in order to receive Arthur's salary from the Ministry. Otherwise, there would be little reason to pay to keep such small amounts in Gringotts.
Also, Fanon has created 'wand transfers' from customers to merchants, any thoughts?
wemyss From: wemyss Date: March 24th, 2009 01:58 pm (UTC) (Link)


I expect Gringotts are the transfer agents for Ministry accounts and pensions, and charge the Ministry a fee.

I shd expect that credit accounts with merchants are simply private contracts, but it's an interesting question.
woman_ironing From: woman_ironing Date: March 24th, 2009 01:05 pm (UTC) (Link)
Very enjoyable, thanks! I like Obamateur, but isn't he also Obarmature for the world economy at the moment? The Angel of the North, South, East and West!

I wonder if there may not be a temptation for wizards to dabble in muggle investments - especially at times like the recent boom - and, if so, whether that might not affect the wizard economy? Many wizards have a foot in both the muggle and the wizard world, so to speak, and muggle wealth could be beneficial to them. But at the least, it could be a way of acquiring gold more cheaply, depending on the price of gold in the muggle world. I'm sure someone like, oh, I don't know, Lucius Malfoy could persuade quite a few fellow wizards to put some of their gold into his wizard muggle investment scheme. But perhaps Gringott's and the Ministry have a way of preventing this sort of thing.
wemyss From: wemyss Date: March 24th, 2009 01:59 pm (UTC) (Link)

Some angel. Wholly out of his depth, I fear.

I can quite see Lucius running a South Sea Bubble or doing a Madoff.

And I do anticipate that many a Wizard has taken a flyer on Muggle investments.
drusillas_rain From: drusillas_rain Date: March 24th, 2009 03:40 pm (UTC) (Link)

here via daily snitch

fascinating read!
wemyss From: wemyss Date: March 25th, 2009 02:18 pm (UTC) (Link)

Thank you.

You're vy kind.
luci0logy From: luci0logy Date: April 9th, 2009 03:16 pm (UTC) (Link)
First of all I must apologise for taking so long to respond to your post. Thank you for writing this article; it's exceptionally interesting, even though I don't grasp all the finer points completely, e.g. the Fisher relationship, but I do now know what a reserve bank is.

their position is so commanding that one wonders just who it was who actually won the last few Goblin rebellions

(Deleted comment)
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