This article is compiled and organized by BlockWeeks
The monetary standard in today's world has long been in a state of monopoly, and inflation policies continuously erode the wealth of holders. But over the past decade, innovations in crypto assets have made it possible for the first time for the question of "which currency is best" to be answered by the free market. In a competitive currency market, the monetary standard will be determined naturally by the market, and issuers will also be subject to natural discipline and be forced to maintain the soundness of their currency. This is the second article in a three-part series by Galaxy Research, focusing on the free market for currency.
The Market for Monetary Standards
Like any good, service, or labor, the monetary standard also exists within a market—and it is precisely this market process that establishes the prices of currency in terms of goods and services. The market for monetary standards allows competing forms of currency to contend with one another, while the economic agents who maintain a given monetary standard compete for scarce resources within a limited market. The effective use of a monetary standard makes exchange, distribution, and the allocation of social resources possible. This market can form spontaneously or arise through deliberate human interaction, with the goal in either case being to enable the exchange of ownership over services and goods.
The spectrum of the monetary standard market is broad: at one end is the free market, where the best forms of currency compete and accurately transmit cost and benefit signals; at the other end is monopoly, where the monetary standard is controlled by a central authority. Historical examples of "free currency markets" include barter and commodity money economies, the free metallic currency markets of early Mesopotamia and the Mongol Empire period, and even the United States in the late 19th century. Overall, the common thread among more competitive currency markets tends to be relatively liberal economic and political policies. Conversely, most monetary standard markets in history have approximated monopoly within closed economies—whether through explicit government decree or through requirements that taxes be paid in a designated medium—with monopoly or oligopoly persisting for long periods.
Two Thousand Years of Government Monopoly on Money Issuance
Monetary history has been documented in detail by numerous historians, among which the most striking is the monopoly dynamics and externalities of government-issued currency. Over the past two thousand years, government monopolies on currency issuance (whether formed naturally or by decree) have deprived society and the economy of the opportunity to discover the best form of currency through natural, free-market processes. In almost every case of a government monopoly on money issuance, a government able to fully control currency issuance has led to rapid expansion of the money stock and depreciation of holders' wealth, and in many cases has also triggered economic collapse.
Before and After Bitcoin: Pandora's Box Has Been Opened
Before Bitcoin emerged, the modern monetary standard market was monopolistic (or oligopolistic, if other G20 currencies are included), with various monetary standards highly similar to one another, following similar policies and controlled by centralized governments. The birth of Bitcoin and the innovations of the past decade have provided an experimental ground for creating new forms of value and currency. In our view, Pandora's box has already been opened: native digital currencies and forms of value (whether crypto assets or currencies issued by private enterprises) have given rise to an emerging market for monetary standards. It is too early to say that we already have a free market for currency, but the U.S. dollar's status as the global reserve currency is facing increasingly intense competition from foreign sovereigns, crypto assets, and currencies issued by private enterprises.
In competitive markets, open competition brings innovation and product iteration, so consumers gain more choices and products better suited to their needs. The same applies to currency markets: different monetary standards compete with one another, and ultimately the form of currency that is best for users will be selected. The essential elements of money thus become the key to competition and differentiation, and drive the free-market determination of society's monetary standard.
The Three Major Functions of Money Become the Focus of Competition
The three generally recognized requirements of money are: unit of account (the ability to measure value concretely), medium of exchange (usable as a tool to obtain goods and services, avoiding the limitations of barter), and store of value (the ability to preserve value and exchange value at some point in the future). As long as a medium satisfies these three elements, it can be regarded as a form of money, and need not be limited to what is called "money" in everyday contexts. From this broader perspective, the category of money can extend beyond government-issued currency to include crypto assets designed to be money (whether already existing today or future new entrants), newly issued forms of currency by enterprises, and even traditional assets given new life by digitization and transferability—they too can be used to transfer value and pay for goods, services, and labor. If asset X can serve as a unit of account, preserve value over time, and avoid the limitations of barter through market price discovery, then it should be usable as money.
The first two requirements are undoubtedly crucial: economic goods must be measurable in discrete units of that medium, and that medium must possess some economic value in the present.
The Cost of Monopoly Money Issuance: The Dollar Has Lost 96% of Its Purchasing Power Over a Century
Changes in the price level have profound effects on economic dynamics. That being the case, there should be explicit or market-driven discipline constraining policymakers' fiscal responsibility in managing a country's money supply, in order to promote price stability, lasting purchasing power, and long-term prosperity. However, quantitative evidence shows the severe long-term consequences of monopoly control and unconstrained money printing. The U.S. dollar in particular rose to become the world's primary reserve currency over the past two hundred years; but measured by core CPI inflation, the dollar has lost 96% of its purchasing power over the past century. After the 2008 global financial crisis, the U.S. dollar M2 money stock doubled to 17 trillion dollars, causing a 16% decline in the dollar's purchasing power and a 31 percentage point rise in the U.S. debt-to-GDP ratio in just ten years.
These figures may seem astonishing, but many argue that inflation in developed markets over the past decade has actually been quite moderate, averaging below the 2% inflation target set by policymakers—large-scale money printing did not translate into inflation. Some policymakers have even stated explicitly that low inflation persisting despite aggressive monetary stimulus left them puzzled. Part of the reason is that deepening globalization and automation have weakened the pricing power of domestic firms, with cost increases being passed on to wages and only ultimately to goods prices. In addition, a great deal of innovation has not been captured by inflation indicators, and these innovations have improved the overall quality of life for ordinary people; neither the composition of the CPI basket nor hedonic quality adjustment reflects these innovations, and may even imply that goods prices have actually experienced deflation.
Underestimated Inflation: The Blind Spots of Traditional Indicators
However, the historical rigid reliance on traditional inflation indicators has severely underestimated the broader pricing dynamics of the past decade. Looking at CPI alone cannot fully depict the true changes in the purchasing power of money across asset prices, service prices, and the structure of the cost of living. When the consequences of money printing first appear in asset prices rather than consumer goods prices, using "low inflation" to defend monetary expansion is itself an illusion of statistical measurement.
From Hayek to Bitcoin: The Historical Logic of the Denationalization of Money
Hayek hit the nail on the head in "The Denationalization of Money": the government's position of monopoly over currency issuance was never built on the rationale that "the government will provide better money than anyone else."
The history of civilization and the history of "dead currencies" show that although empires and hegemonic states strive to maintain lasting political and economic influence, weak currencies backed by fragile empires ultimately lose in Darwinian competition and are replaced by currencies with stronger monetary attributes (Figure 5: Historical timeline of reserve currencies, based on multiple estimates).
Competition Will Not End the Dollar, but Will Force It to Return to "Soundness"
Moving from a monopolistic market to a competitive market does not mean the dollar is doomed; on the contrary, it offers central banks an opportunity: to return the dollar to a "sound" state and make it more competitive among open competitors. Competition in the monetary standard market will not only open the door to new entrants and innovation, but will also force existing issuers to maintain discipline in managing the money supply, to remain vigilant in safeguarding the soundness of their currency, and to provide users with the best form of currency.
The monetary standard no longer needs to be ordained by royal decree or government statute; it can exist in an open, competitive market, be determined by the free market, and provide global citizens with more choices of monetary standards.
