Harry Potter and the Methods of Rationality

Harry stood there, and stared with his mouth open at the family vault. He had so many questions he didn't know where to start.

From just outside the door of the vault, Professor McGonagall watched him, seeming to lean casually against the wall, but her eyes intent. Well, that made sense. Being plopped in front of a giant heap of gold coins was a test of character so pure it was archetypal.

"Are these coins the pure metal?" Harry said finally.

"What?" hissed the goblin Griphook, who was waiting near the door. "Are you questioning the integrity of Gringotts, Mr. Potter-Evans-Verres?"

"No," said Harry absently, "not at all, sorry if that came out wrong, sir. I just have no idea at all how your financial system works. I'm asking if Galleons in general are made of pure gold."

"Of course," said Griphook.

"And can anyone coin them, or are they issued by a monopoly that thereby collects seigniorage?"

"What?" said Professor McGonagall.

Griphook grinned, showing sharp teeth. "Only a fool would trust any but goblin coin!"

"In other words," Harry said, "the coins aren't supposed to be worth any more than the metal making them up?"

Griphook stared at Harry. Professor McGonagall looked bemused.

"I mean, suppose I came in here with a ton of silver. Could I get a ton of Sickles made from it?"

"For a fee, Mr. Potter-Evans-Verres." The goblin watched him with glittering eyes. "For a certain fee. Where would you find a ton of silver, I wonder?"

"I was speaking hypothetically," Harry said. For now, at any rate. "So... how much would you charge in fees, as a fraction of the whole weight?"

Griphook's eyes were intent. "I would have to consult my superiors..."

"Give me a wild guess. I won't hold Gringotts to it."

"A twentieth part of the metal would well pay for the coining."

Harry nodded. "Thank you very much, Mr. Griphook."

So not only is the wizarding economy almost completely decoupled from the Muggle economy, no one here has ever heard of arbitrage. The larger Muggle economy had a fluctuating trading range of gold to silver, so every time the Muggle gold-to-silver ratio got more than 5% away from the weight of seventeen Sickles to one Galleon, either gold or silver should have drained from the wizarding economy until it became impossible to maintain the exchange rate. Bring in a ton of silver, change to Sickles (and pay 5%), change the Sickles for Galleons, take the gold to the Muggle world, exchange it for more silver than you started with, and repeat.

Wasn't the Muggle gold to silver ratio somewhere around fifty to one? Harry didn't think it was seventeen, anyway. And it looked like the silver coins were actually smaller than the gold coins.

Then again, Harry was standing in a bank that literally stored your money in vaults full of gold coins guarded by dragons, where you had to go in and take coins out of your vault whenever you wanted to spend money. The finer points of arbitraging away market inefficiencies might well be lost on them. He'd been tempted to make snide remarks about the crudity of their financial system...

But the sad thing is, their way is probably better.

On the other hand, one competent hedge fundie could probably own the whole wizarding world within a week. Harry filed away this notion in case he ever ran out of money, or had a week free.

Meanwhile, the giant heaps of gold coins within the Potter vault ought to suit his near-term requirements.

Harry stumped forward, and began picking up gold coins with one hand and dumping them into the other.

When he had reached twenty, Professor McGonagall coughed. "I think that will be more than enough to pay for your school supplies, Mr. Potter."

"Hm?" Harry said, his mind elsewhere. "Hold on, I'm doing a Fermi calculation."

"A what?" said Professor McGonagall, sounding somewhat alarmed.

"It's a mathematical thing. Named after Enrico Fermi. A way of getting rough numbers quickly in your head..."

Twenty gold Galleons weighed a tenth of a kilogram, maybe? And gold was, what, ten thousand British pounds a kilogram? So a Galleon would be worth about fifty pounds... The mounds of gold coins looked to be about sixty coins high and twenty coins wide in either dimension of the base, and a mound was pyramidal, so it would be around one-third of the cube. Eight thousand Galleons per mound, roughly, and there were around five mounds of that size, so forty thousand Galleons or 2 million pounds sterling.

Not bad. Harry smiled with a certain grim satisfaction. It was too bad that he was right in the middle of discovering the amazing new world of magic, and couldn't take time out to explore the amazing new world of being rich, which a quick Fermi estimate said was roughly a billion times less interesting.

Still, that's the last time I ever mow a lawn for one lousy pound.

Harry wheeled from the giant heap of money. "Pardon me for asking, Professor McGonagall, but I understand that my parents were in their twenties when they died. Is this a usual amount of money for a young couple to have in their vault, in the wizarding world?" If it was, a cup of tea probably cost five thousand pounds. Rule one of economics: you can't eat money.

Professor McGonagall shook her head. "Your father was the last heir of an old family, Mr. Potter. It's also possible..." The witch hesitated. "Some of this money may be from bounties placed on You-Know-Who, payable to his ki- ah, to whoever might defeat him. Or those bounties might not have been collected yet. I am not sure."