Eli5: is there a reason that there are different currencies?


Explain the concept of different currencies and why there is no singular world wide currency/ what are benefits and downsides of having a world wide currency?

In: 0

Because not all countries are equal, and each country is responsible for its own currency. Maybe you want to use gold instead of currency?

Countries like being in control of their own currency.

Lets say we have a worldwide currency. Who makes and issues it? Who determines whether it is real or counterfeit? If every country can issue and make it, how do you prevent one country from printing a bunch of this currency and using it to pay other countries?

If you only allow one country to issue and validate this currency, you get them massive control over the entire world economy. What’s the incentive for all the other countries to give up this control?

For a while it was thought that having a fixed exchange rate between currencies (equivalent to just having one currency) was necessary for international trade. This haves us the gold standard where many currencies were tied to the price of gold. Unfortunately this system is difficult to maintain, because currencies would naturally drift, and so governments had to work to keep them at the right exchange rate, with varying success.

The important feature of currencies that governments don’t want to give up is the ability to drive the value up or down, and so influence their own economy. You may have heard about central banks printing money, or devaluing a currency; things that would not be possible if that bank was only part of a larger currency union.

Currency used to be the physical resource. A cow is a cow wherever you are. Gold is gold. As trade advanced, people started switching to coins as they’re more portable than a cow, and then countries started standardizing their coins to make exchanging money for goods easier. They used to actually weigh coins to determine their worth because the coins themselves were silver, gold, or copper. Then they eventually shifted to having something non-valuable (like paper or nickel) stand in for a specific amount of gold, but the amount it represented varies by whoever was producing the coin. Now it doesn’t even directly represent a specific amount of gold, it’s tied to the country’s economy and its value depends a lot on inflation. That’s why there’s an exchange rate, each country’s currency reflects a different value depending on the country’s economy and how expensive goods sell for in that country.

There have been very few times in history where one country wasn’t at war with another. We’d need world peace to settle on a global currency. Even crypto has multiple different kinds and it’s not linked to any specific country. The EU obviously switched to one currency but it wasn’t easy and it almost didn’t happen because of how much poorer Greece was relevant to the other European countries and the concern that their poverty would tank the Euro’s value. It is not currently possible to do that on a larger scale.

The problem with single world currencies is the problem Greece had when it joined the Euro.

Before that, it had the Drachma. Drachmas could only be spent in Greece. That meant that any drachma that left Greece would eventually come back. If someone bought dollars for drachmas, the seller would only agree to that deal if they knew or believed that in the future they would either need to buy something in Greece, or someone else would want to and would therefore want to offer dollars for those drachmas. If Greece isn’t producing things people want, they might need to accept less dollars for those drachmas.

But if there’s a single currency and Euros leave Greece, and Greece isn’t producing things people want, then those Euros are now *gone*. If more go out than come in, then steadily the supply will drain away and never come back. Result: the mess that happened a few years back.