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In the modern economy, the central bank decides the cost of borrowing money using interest rates along with other several tools and technic. But I was wondering, in a gold-based economy (not the gold standard) by which tools and technics the "cost of borrowing money" or in simple terms the interest rate was determined?

[NOTE: Answer based on a real historical Gold standard is fully appreciated. By the gold-based economy, I meant where there is no ratio between the gold reserve and the banknotes. where notes are fully backed by 100% of gold.]

My guess is because the bond has still existed at that time so the yield of the bond determined the cost of borrowing money or the interest rate for the government and companies. On the other hand for personal borrowing, local banks and open markets did determine the cost of borrowing money or the interest rate.

Actually I just want to know that, back then by which tools and technics the money supply was controlled. how the cost of borrowing money was controlled for the government, companies, and for the retailer also?

[NOTE: By tools and technics, I meant something like interest rate, fed fund rate, QE, bond yield, and all the other things that can control the money supply. But back then they didn't exist. so back then besides the actual supply and demand of the gold, what other factors possibly could exist that affected or determined the supply of money or the cost of borrowing money?]

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In the modern economy, the central bank decides the cost of borrowing money using interest rates

No, it does not. It provides a lender of last resort facility which TENDS to limit interest rates, but there are cases where this did not work or does not work and the credit limit is not touched, i.e., which clearly invalidates your statement. The participants are free to ignore the market rate, and at times they have.

But I was wondering, in a gold-based economy (not the gold standard)

Then you need to define gold based. Anyhow, in that you can not lend gold you do not have - so, you must have enough to cover wahtever loans you want to make (unless you also accept deposits, but then the spread must be attractive enough to "refinance" (regold) your reserves.

But you really mus define what you mean by gold based economy.

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  • By gold-based economy, I meant where there is no ratio between the gold reserve and the banknotes. where notes are fully backed by 100% of gold. Jun 7, 2020 at 9:32
  • But this means banknotes have no specific value - a banknote is basically "1 ounce of gold, whatever you get for that at this time"?
    – TomTom
    Jun 7, 2020 at 9:34
  • Yes, I am talking about this economy then. where a banknote was basically 1 ounce of gold. Jun 7, 2020 at 9:38
  • Actually I just want to know that, back then by which tools and technics the money supply was controlled. how the cost of borrowing money was controlled for the government, companies, and for the retailer also? Jun 7, 2020 at 12:16
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In an economy that uses gold as a currency, the amount of gold that is circulating determines inflation or deflation and that obviously determines the interest rate. Of course a lender wants more than the inflation rate.

If a larger amount of gold is circulating then the gold buys fewer goods. If a smaller amount of gold is circulating then the gold buys more goods.

But here's a link that shows interest rates simply limited in early human history:

https://www.armstrongeconomics.com/research/a-brief-history-of-world-credit-interest-rates/3000-b-c-500-a-d-the-ancient-economy/#:~:text=Although%20interest%20rates%20of%2020,to%20the%20Laws%20of%20Manu.

Here's a link on money supply:

https://www.economicshelp.org/blog/111/inflation/money-supply-inflation/#:~:text=Increasing%20the%20money%20supply%20faster,firms%20to%20put%20up%20prices.

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