The Cross of Fixed Exchange Rates

This file is a short single-author polemical essay/chapter by Murray N. Rothbard on fixed exchange rates under fiat money. It is not merely a defense of floating currencies: Rothbard regards fiat floating as defective, but argues that official fixing of fiat exchange rates is worse because it converts foreign exchange prices into political price controls. The result, in his account, is crisis management, reserve losses, international inflationary pressure, and movement toward supranational monetary planning.

The fact that history is a black record of continual gross failure by this “god,” and that economic theory explains why it must be so, makes no impression on official political discourse.

Rothbard’s opening anti-interventionist premise frames the rest of the essay. Governments imagine themselves as technical correctors of markets, yet he presents intervention as a recurring pattern in which officials create the very disorder they claim to cure. The exchange-rate question is therefore not treated as a specialized banking problem, but as one instance of a general political temptation: to replace market prices with administrative prices.

His crucial historical distinction is between fixed rates as monetary definition and fixed rates as policy management. On the classical gold standard, national currencies were not independent fiat units requiring constant diplomatic coordination; they were different names for weights of the same market commodity.

Fixed exchange rates worked because these national money units—the dollar, the pound, the lira, the mark, etc.—were not independent things or entities. Rather each was defined as a certain weight of gold.

That distinction lets Rothbard deny that nineteenth-century stability justifies modern currency pegs. Once gold was abandoned, especially after 1971, each national money became a separate good, and foreign exchange became an ordinary market among those goods. He does not claim floating fiat money is ideal: it weakens international monetary integration and removes gold’s discipline on inflation. But his central reversal is that fixing fiat rates intensifies rather than cures the instability of fiat money.

What the world has failed to grasp is that there is one thing much worse than fluctuating fiat moneys: and that is fiat money where governments try to fix the exchange rates.

The mechanism is price theory. Since exchange rates are prices, an official peg must be either above or below the market-clearing rate. Rothbard therefore treats fixed fiat exchange rates as analogous to rent controls, price ceilings, or price supports. In his extension of Gresham’s Law, the politically undervalued currency disappears from circulation while the overvalued one becomes excessive, forcing further intervention through reserve sales, inflationary cooperation, rationing, or exchange controls.

The contemporary target is the Clinton administration’s dollar policy. Rothbard criticizes both the effort to cheapen the dollar to aid exports and the later coordinated support for the dollar against the mark and yen. The problem, he argues, is not that officials selected the wrong target, but that the very search for an “ideal” administrative rate is impossible.

There is no way, however, that government can ever find and set some sort of “ideal” exchange rate.

The NAFTA discussion broadens the essay from exchange-rate theory to political economy. Rothbard treats credit pools and regional financial institutions as evidence that trade agreements can become vehicles for currency regulation and regional monetary governance.

Like all other modern “free trade” agreements, Nafta serves as a back-channel to international currency regulation and fixed exchange rates.

The essay’s structure moves from anti-statist satire, to gold-standard history, to price-control theory, to contemporary polemic. Its enduring conceptual point is that fixed exchange rates under commodity money are definitions, while fixed exchange rates under fiat money are interventions. For Rothbard, managed exchange rates do not restore monetary order; they compound fiat money’s defects while expanding bureaucratic power beyond direct public accountability.