Determination of Exchange Rate under Mint Parity Theor

The mint parity theory states that under gold standard, the exchange rate tends to stay close to the ratio of gold values or the mint parity or par.

In other words, the rate of exchange between the gold standard countries is determined by the gold equivalents of the concerned currencies.

According to S.E. Thomas, “The mint par is an expression of the ratio between the statutory bullion equivalents of the standard monetary units of two countries on the same metallic standard”.

Thus, when the currencies of different countries are defined in gold, the exchange rate between such countries is automatically determined on a weight-to-weight basis of the gold content of their currencies, after making allowance for the purity of such gold content of these currencies.

For example, before World War I, both England and America were on gold standard. The British pound contained 113.0016 grains of gold and the American dollar contained 23.2200 grains of gold.

The exchange rate between the British pound and the American dollar was determined on the basis of the mint parity and was equal to the ratio of the gold content of the two currencies.