MINT PARITY THEORY

When the currencies of two countries are on metallic standard (gold or silver standard), rate of exchange
between them is determined on the basis of parity of minorities between currencies of the two countries.
Thus, the theory explaining the determination of exchange between countries which are on the same
metallic standard (say gold coin standard), is known the Mint Parity Theory of foreign exchange rate.
By mint parity is meant that the exchange rate is determined on a weight-to-weight basis of two currencies,
allowances being made for the parity of the metallic content of the two currencies.' Thus, the value of each
coin (gold or silver) will depend upon the amount of metal (geld or silver) contained in the coin; and it will
freely circulate between the countries. For instance, before World War I, England and America were
simultaneously on a full-fledged gold standard.
While gold sovereign (Pound) contained 113.0016 grains of gold, the gold dollar contained 23.2200 grains
of gold standard purity. Since the mint parity is the reciprocity of the gold content ratio between the two
currencies, the exchange rate between the American dollar and the British Sovereign (Pound) based on
mint parity, was 113.0016/23.2200, i.e., 4.8665. That means, the exchange rate: 1 = 4.8665, can be defined
as the mint parity exchange between the pound and the dollar.
Today, however, the method of determining currency values in terms of gold content or m parity is obsolete
for the obvious reasons that:
(i) none of the modern countries in the world is gold or metallic standard,
(ii) free buying and selling of gold internationally is not permitted various governments. As such it is not
possible to fix par values in terms of gold content or mint parity, and
(iii) most of the countries today are on paper standard or Fiat currency system.