Currency Peg

A currency peg is a policy of fixing one currency's exchange rate to another currency or asset. Hong Kong has held its dollar between 7.75 and 7.85 per United States dollar since 1983. Maintaining a peg requires reserves to defend it, and pegs that fail tend to fail violently, as sterling did when forced out of Europe's exchange rate mechanism in 1992.

Why it matters

Pegs import the credibility of a stronger currency, taming inflation and stabilizing trade, but at the price of surrendering independent monetary policy. A pegged central bank must follow the anchor currency's interest rates whether or not they suit the domestic economy, and the moment markets doubt the commitment, speculators can attack with more capital than any defender holds, as George Soros demonstrated against the pound in 1992. Most pegs also lean on capital controls to survive, restricting citizens to keep the fixed rate defensible.

In the gold vs bitcoin debate

The gold standard was history's grandest peg, every major currency fixed to metal, and it ended the way pegs end: governments abandoned it when defending the rate grew too painful, finally and completely in 1971. Stablecoins are pegs rebuilt in software, holding a dollar value only as long as their reserves and redemption promises hold. Bitcoin takes the opposite position, floating freely by design with no rate to defend, no reserves to exhaust, and no promise anyone can break, at the cost of the volatility a peg exists to remove.