The foreign exchange market under fiat money becomes a vehicle for speculation and instability, whereas under the gold standard, exchange rates were automatically stable. The Bretton Woods system—an attempt to fix exchange rates while retaining fiat money and central banking—was inherently unstable and predictably collapsed. The current system of floating rates is chaotic, with currencies fluctuating based on central bank policies, political developments, and market sentiment. This uncertainty impedes international trade and investment. The solution is to return to gold, which would automatically create fixed, stable exchange rates worldwide. The argument that floating rates are more 'flexible' confuses instability with adaptability—genuine adaptation requires stable monetary foundations.

While the gold standard provided stable exchange rates, we shouldn't romanticize the pre-1914 system. It worked partly because central banks cooperated and partly because governments didn't yet use monetary policy to pursue full employment and social goals. In today's political environment, a gold standard administered by existing central banks would likely be as manipulated and unstable as the interwar gold standard was. Better to allow currency competition: let different currencies circulate internationally, with exchange rates determined by market choice among competing monies. This would create stability through competition rather than through government commitment to a metallic standard that might be abandoned whenever politically convenient.

Free banking would eliminate the need for foreign exchange intervention entirely. Banks would issue notes redeemable in gold or another commodity, and these notes would circulate across borders at their commodity value. There would be exchange rates between different issuers' notes, but these would be kept stable through arbitrage—if one bank's notes traded at a discount, gold would flow out until the bank contracted its circulation and the discount disappeared. No central bank foreign exchange reserves or intervention would be needed. The problems of modern foreign exchange markets stem from government fiat monies and central bank manipulation, not from international trade or financial integration themselves.