What Harry Potter Can Teach the Federal Reserve
As Harry Potter fans are well aware, the wizarding world runs on a trimetallic standard of gold galleons, silver sickles and bronze knuts. There is no mention of any form of paper money in the magical world, with everyone handling their purchases with metal coins.
In a feature that would delight Murray Rothbard, there also seems to be no fractional reserve banking in the wizarding world. Instead, the goblin-controlled Gringotts bank holds their clients savings in guarded private vaults with increasingly elaborate security measures.
From an economic perspective, these features have very important significance for the wizarding economy.
First, all this means that wizarding money is completely independent from the wizarding government, which – given the body’s consistent incompetence – is a very good thing. In fact, it’s notable that in spite of all the chaos and disorder that arises throughout Harry Potter’s world during the book series, there is never an issue with widespread hunger or any signs of severe economic depression. Even during the seventh book, with Lord Voldemort having succeeded in taking over the Ministry of Magic, the market hub of Diagon Alley was still active. While many had fled the Alley out of fear of Death Eaters, economic activity was still present — with new stores even opening up selling items for the dark arts.
Since the money itself is a full metal standard, Rowling’s world also enjoys one of Ron Paul’s favorite pillars of prosperity: sound money.
In spite of all of this, Mate Hajba argues at FEE that J.K. Rowling’s magical world in the Harry Potter series fails on both an economic and political level:
[D]espite all the witchcraft and wizardry, J.K. Rowling’s fictional world is simply not as good as ours. ... Why would anyone prefer the magical world of stymied progress and arbitrary authority?
While many libertarians would probably laugh at the notion that the unforgivable curse of “arbitrary authority” is limited to the pages of Harry Potter, Hajba goes on to make fine points on how free trade with the Muggle world would improve the lives of poor wizarding families like the Weasley’s. It’s also easy to get behind the call to abolish any government, including the Ministry of Magic (I do not know if Rowling has ever read Ludwig von Mises’s Bureaucracy, but given her depiction of incompetent and occasionally evil government officials, it wouldn’t surprise me.)
But I think Hajba's article tragically overlooks one important area where the wizarding world has it much better than ours: monetary policy.
In fact, while the magic in Rowling’s world can accomplish an unmeasurable amount of incredible feats, the one area in which it finds itself ineffective is in currency manipulation. As Hermione Granger would be glad to remind you, Gamp's Law of Elemental Transfiguration, which describes the limitations that come with magic’s ability to transform and conjure, includes both money and food.
This also explains why scarcity continues to exist in the magical world (and why the works of Ludwig von Mises would remain a worthy addition to Hogwart’s library.) It also explains why the Goblins would be able to issue money at all.
As Ludwig von Mises notes in A Theory of Money and Credit, “The function of money is to facilitate the business of the market by acting as a common medium of exchange.”
Basically, money is what allows people to convert their labor, among other things, into a medium that can be used for goods and services with people who may not need the specific skills an individual has. For example, Garrick Ollivander, the legendary wand maker, is able to sell wands to Padma and Pavarti Patil for a total of twelve galleons. This allows him to buy a butterbeer at the Three Broomsticks, even though Madam Rosmerta already has a wand of her own and would otherwise have no need of Mr. Ollivander’s services. Money allows Ollivander to trade a portion of his work creating wands in exchange for a portion of the butterbeer Madam Rosmerta brews.
But imagine if Mr. Ollivander is able to create coins out of thin air. He is now getting a portion of Madam Rosmerta’s butterbeer stock without producing anything of value himself. He can stop doing anything worthwhile in his wandshop and rely on his spell to get everything he needed. Civilized societies view this counterfeiting as a very serious offense (though most governments grant themselves this privilege.) Meanwhile, as Mr. Olivander continues to create gold coins out of them air, the number of total gold coins in the economy increases. With every new coin that enters the economy, the less value each individual coin has. In economics, this is called inflation and presents itself in the form of the prices of goods and services going up.
Constant inflation renders the currency itself unstable and leads to people finding a more stable means of exchange. For example, during the American Revolution, the Continental Congress kept printing worthless paper money, forcing even patriotic American farmers and shops to prefer British silver pounds. When inflation in Zimbabwe became so bad that they had to start printing $100 trillion bills, people naturally moved to the (relatively) stable US dollar and others for their transactions. It’s not a coincidence that the cryptocurrency Bitcoin was introduced in 2008, when the actions of America’s Federal Reserve made many people concerned about the stability of the US dollar.
Since the goblins of Gringotts are not the government, and therefore could not force wizards to use their money with threat of imprisonment or taxes, the only way they could make sure their coins were used throughout Britain was to ensure that they could not be magically manipulated. Their currency necessarily had to be stable and reliable.
It’s worth pointing out that while magic cannot create real money from thin air, it doesn’t prevent people from trying to enjoy unearned prosperity using monetary hijinks. For example, in Harry Potter and the Goblet of Fire we are introduced to Irish leprechauns that have the ability to summon gold coins. Upon seeing this while attending the Quidditch World Cup, Harry’s perennially broke friend Ron Weasley grabs a hand full of this leprechaun gold and offers it to Harry to repay him for a purchase Harry made on his behalf earlier in the book:
"There you go," Ron yelled happily, stuffing a fistful of gold coins into Harry's hand, "for the Omnioculars! Now you've got to buy me a Christmas present, ha!"
While Ron and Harry don’t realize until later that the leprechaun gold eventually disappears, the episode serves as an effective illustration of how debtors benefit from money creation. In an incident that happens later in the story, we learn that an infamous bum named Ludo Bagman also managed to renege on a bet with Ron’s twin brothers by paying them in the disappearing gold coins, rather than legitimate galleons.
Of course there is nothing fictional about the trick of nefarious schemers using inferior money to get out of paying financial obligations. During the Great Depression, President Franklin Delano Roosevelt criminalized the possession of gold coins, forcing Americans to turn them in for a specific amount of dollar bills. While these dollar bills wouldn’t disappear overnight like leprechaun gold, their value dissolved over time. For example, a purse that contained an ounce would have been confiscated in exchange for $35 of FDR’s leprechaun money. Today, it would take over $1,200.
Ludo Bagman would have to be impressed.
So contrary to Mr. Hajba’s criticisms of Ms. Rowling’s “shortcomings vis-á-vis economics,” I think it is a testament to her brilliance and skill as a writer that she is able to create a world that gets richer and more interesting with age. It is a joy to be able to apply an economic lens to a childhood favorite and come away even more impressed than when I first read them.
Given the monetary dark arts being practiced around the world, I would much prefer my money in the hands of a Gringotts goblin, than at the mercy of our Federal Reserve Chairman Who-Must-Not-Be-Named.