Optimal Area Currency With Milton

Friedman and Mario are about the same height.

Friedman and Mario are about the same height.

In hindsight, one of Friedman’s great predictions is the Eurozone crisis. Despite being a massive champion for flexible exchange rates, Friedman never advocated for a common European currency.

Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.

— Milton Friedman, The Times, November 19, 1997

The Greek financial crisis exemplifies many of the problems Friedman points out.

In an economic recession, central banks devalue the domestic currency to return the country to full employment. When economies are similar, recessions move together; if there’s a crisis in Texas, it’s probable there’s one in Washington. This makes central bank policy more effective because capital won’t escape from ‘recessed’ areas to ones with higher returns – there are none. It can be much harder to accomplish this in Europe, where every country’s economy is dramatically different, and institutional policy fluctuates widely.

What the hell does this have to do with game design?

Why do multiple currencies exist in games? Why not just have one type of currency rather than four or five?

The answer is segmentation and capital flight.

Once again, Supercell has provided us with a beautiful example, Clash of Clans (CoC). In CoC, some items cost gold, others and others elixir. After a quick scan, you’ll notice only the defensive items (cannons, archer towers, walls) cost gold, and only the offensive items (troops, barracks, spells). Why might this be the case? Segmenting these items gives designers greater control over the economy and minimizes the potential for ‘contagion’ effects. Consider a world in which Clash of Clans only contained gold. Players might prefer attacking rather than defending, encapsulating the idea of capital going to its highest return. If this were the case,e the game could become unbalanced as all players attack and none spend gold to upgrade their base defense. By segmenting base defense into the elixir, you remove any opportunity cost from expenditures for base defense. This is similar to giving your relatives a gift card; instead of spending it on whatever they fancy, they must now spend it on whatever is from the gift card store. A domestic currency is much like a gift card to that country’s ‘store’ just as an elixir is a gift card to only CoC’s offense ‘store.’

If Supercell finds players are not creating challenging defenses, increasing the rate of gold production is straightforward without worrying that money will be spent on offense. They can also do this by lowering the cost of items priced in gold. Supercell has toyed more with this strategy in their other title, Boom Beach.

The rules for when segmentation is worthwhile emerge from reading Mundell’s famous paper 1 backward.

Segmentation in games, like in real-world economies, gives game designers and central bankers more control.

  1.  Mundell, R. A.. (1961). A Theory of Optimum Currency Areas. The American Economic Review, 51(4), 657–665. Retrieved from
subscribe to the blog subscribe to the blog subscribe to the blog subscribe to the blog subscribe to the blog subscribe to the blog subscribe to the blog subscribe to the blog
Subscribe to Our Newsletter
Tweets from @econosopher