Why Currencies Don't Lock to One Price Despite Being Interchangeable
Currencies don't lock to one rate because each represents a different economy with different monetary policy. Instant exchangeability sets the mechanism (forex markets), not a fixed price. Pegs exist but can collapse.
The intuition that currencies should all lock to one fixed exchange rate (since they're instantly interchangeable online) misses a key factor: WHAT determines "one price"? Currencies float because they represent fundamentally different things: - Each currency is backed by a different economy with different productivity, inflation, interest rates, and political stability - Demand for a currency depends on demand for that economy's goods, services, investments, and debt - Central banks set different monetary policies (printing money, setting interest rates) Why instant exchangeability doesn't create a fixed rate: - You CAN exchange euros for dollars in one click, but the RATE at which you exchange is what's constantly moving - The exchange rate is a price, and prices move with supply and demand - If the ECB prints more euros (increasing supply) while the Fed doesn't, euros become relatively less valuable against dollars Analogy: Stocks are also instantly interchangeable for cash, but Apple and Google don't trade at the same price despite both being "money-exchangeable assets." Each represents a different underlying value proposition. Fixed exchange rates DO exist (currency pegs) — some countries fix their currency to the dollar. But maintaining a peg requires the central bank to actively buy/sell currency, and pegs can spectacularly collapse when reserves run out (e.g., Thai baht in 1997, triggering the Asian financial crisis).