Why Do Different Countries Use Different Currencies?

Why do different countries have different currencies? Traditional answers to this question assume that governments can use their ability to create money to affect exchange rates, output, prices or revenue. However, such explanations are difficult to reconcile with several empirical facts. For example, there have been long periods in history in which countries followed fixed exchange rate regimes or pegged their currencies to the price of gold or other precious metals. These episodes include, among others, the gold standard of the 19th and early 20th century as well as the post-war era of fixed exchange rates under the Bretton-Woods regime. In all of these cases, the ability of national authorities to create money, and in particular to create money at nationally differentiated growth rates, was extremely limited. Nonetheless, throughout these periods, countries generally found it in their interest to maintain different currencies.