Mises Wire

National Currencies’ Tragic Race to the Bottom

Money—the magical power it has over people is almost universal. But whether we earn it, spend it, or save it, we hardly ever think about the following questions: What is money, why does it exist, and what will money look like in the future? Why should we? Our money works. Day in, day out we use it without much effort. So what’s the problem?

Well, let me explain. As August Friedrich von Hayek pointed out, we humans constantly use things we don’t know anything about. It’s this very fact that makes us such a successful species. It’s no different with money. That we don’t have to think about money but can still use it successfully is a big win and a witness to how well our market and knowledge society functions.

In the course of the Great Recession of 2008 and the corona crisis this year, questions about the role of money seem to become asked more frequently again. Is money undergoing great change? As the history of money shows, money has never been a dormant, unchangeable thing. Money and its nature have always been in a state of flux. Therefore, even with money, what we take for granted today may no longer be valid tomorrow. It is simply not a problem until it is a problem.

Money at a Crossroads

The assumption that the essence of money has never been more in a state of flux than ever before could be due to the following facts: technological change, the Faustian hyperextension of our financial order, old insights from monetary theory, or how entrepreneurial discovery processes are shaking up the current dogmas of money. Precisely because uncertainty about the future of money seems to be felt by an increasing number within the general public, it is worth taking an objective and sober look at the current processes, trends, and dynamics.

Today we associate money primarily with national currencies: dollar, euro or Swiss franc. These national currencies are issued by the respective state, or more precisely by its constitutionally authorized national or central bank. These monies are also commonly referred to as fiat currencies. The term “fiat” is of Latin origin, meaning “it will be,” and is intended to refer to the fact that national currencies were created from nothing (“ex nihilo,” also Latin) and would have no commodity backing.

The extent to which this description is correct is the subject of heated debate. According to Chartalists, money would get its value from the state’s monopoly on money and taxes. In their view, the state is the origin of money and determines what exists as money. Other economists point to the necessity of a functioning economy, whose diverse production structure makes a medium of exchange necessary. This group sees money’s intrinsic value coming from the productivity of an economic area. Still, others consider a money’s backing to be the determining factor. Historically, paper currencies were backed by gold. In August 1971, gold backing of the dollar was abolished with the closing of the so-called gold window. Currencies no longer referenced commodity money. Ultimately, where money’s value really comes from is still being debated, even after hundreds of years.

A Battle of Devaluation

With the abolition of the gold backing, the latter justification has lost its argumentative radiance. State currencies continue to exist without a pecuniary link; nevertheless, the modern monetary order has not crashed, but has moved to a system of free exchange rates.

The closing of the gold window in 1971 is often regarded in libertarian circles as the sin of modern monetary history par excellence. In fact, however, this certainly drastic event also has great psychological significance. For even the gold standard under Bretton Woods had hardly anything to do with an actual, pure gold standard. What had started as a gold bullion standard in England after World War I continued with the beginning of the Bretton Woods system as a completely watered-down version of a gold standard. Gold coins had long since ceased to circulate and could no longer be redeemed for banknotes by a country’s inhabitants. Only central banks were allowed to insist on the delivery of gold in exchange for US dollars.

Over several decades during the late nineteenth century and then throughout the twentieth century, what once went down in the history books as the classical gold standard was gradually eroded. During the brief period of arguably the purest gold standard of all time, the yellow precious metal served as a value and price anchor. With its decades-long dilution, the stabilizing function which circulating gold was able to provide was increasingly weakened.

State paper currencies, which were increasingly circulating as a substitute for gold, became more and more prominent. Among them, a battle of national currencies gradually broke out. The longer this battle went on, the more costly it became. The different exchange rates of individual currency pairs led to an increase in foreign currency risks. The latter added transaction costs to international trade as a whole, which continue to burden it to this day. One could speak of our world as being ailed by an international currency barter system.

Merchants, companies, and politicians reacted to this situation. Within the political sphere, the US dollar developed into the global unit of account for oil and other commodities due to the US hegemony as the strongest economic power around the globe. To this day, the US dollar continues to function as an international reserve currency. In this way, the greenback facilitates global trade, but due to its importance it also lets the US exploit what is called the privilège exorbitant. The sheer dominance of the dollar and the advantages for US markets are impressive.


The entrepreneurial response has been to create derivatives and more and more hedge funds. The former are financial products whose primary objective is the contractual hedging of risks over time and space. The latter, hedge funds, are entities that trade in these financial products. They are actively managed investment funds. It is therefore hardly surprising today that hedging transactions to minimize exchange rate risks account for a considerable proportion of total financial transactions.

The importance of these instruments and entities is particularly evident in the case of internationally active companies. Their income and costs often arise in geographically diverse currency areas. Derivatives help reduce currency risks here. For example, the organizer of the Wimbledon tennis tournament receives payments in dollars for broadcasting rights in the United States. However, almost all costs for the tournament are incurred in pounds. This makes the organizer dependent on the pound-dollar exchange rate. For a given price, this risk can be reduced with derivatives if the tournament organizer commits to selling the dollars at a predetermined exchange rate for pounds at a certain point in the future.

The ever-increasing number of derivatives used today is ultimately a consequence of the costly effects of this diversity of national currencies. Anyone wishing to send money across national borders today pays hefty fees. The reason: the reality of different currency areas requires the involvement of banking and financial institutions. Countless banks, partner banks and financial service providers from different countries are involved and want their “fair” share. So, ultimately, our current international monetary order resembles a global barter trade based on numerous fiat monies. Legacy systems and regulatory requirements make the efficient and rapid transfer of these monies difficult.


The various fintech companies of today can therefore also be seen as an entrepreneurial reaction to this state of affairs. The most popular and successful among them are those that want to remove artificial barriers in international payment transactions resulting from this global barter. What banks have barely managed to do is now made possible by upstart companies such as TransferWise or Revolut.

While sending and receiving national currencies is not only becoming faster but also cheaper, one still wonders: Are these fintechs not fighting an uphill battle that they won’t be able to win? Although they are trying to make our financial system work better for the masses, the devaluation of national currencies is to the detriment of all us. IF the foundation is rotten after all, any effort by entrepreneurs is ultimately like putting lipstick on a pig.

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