How Does Bitcoin Fit into Traditional Monetary Policy?

One of the main reasons why Bitcoin was created
was a frustration with central banking and a frustration with the discretionary monetary
policy that followed the financial crisis of 2008 and 2009. The Legal Tender Act was passed in 1862, and
essentially said U.S dollars were legal tender, had to be accepted for all debts, public and
private. After the Legal Tender Act was passed, someone
could say “I don’t want to pay you in gold coins, I want to pay you in these depreciated
and these depreciating dollar bills.” The Legal Tender Act says that that’s completely
fine. Because the central bank wants to ensure that
its money is accepted and ensure that its monetary policy is effective is going to have
to ensure that the money that they print is accepted, and so the Legal Tender Act and
Legal Tender Laws, generally, around the world act as a kind of monopoly advantage to central
bank currency. Digital currency challenges Legal Tender Laws
in the same way Uber challenges Taxi monopolies. Previously, there had been a system where,
in New York City, the yellow taxi cab was the gold standard and it was the only one
that was sanctioned by the government. Then, Uber comes around and provides people
an alternative and they really like this alternative. So, what the government has essentially done
is turn a blind eye and say “we’re not going to privilege the yellow taxicabs anymore.” And so, they can have a similar response to
their money. They can say, “Listen, we think that dollars
are good, but we think that they should be competing on the free market.” Those are the benefits of competition. It’s essentially allowing the market to
satisfy consumer demands, and we don’t know what consumer demand is, but we know that
one provider of a good is probably not able to satisfy consumer demand in a way that multiple
actors are. The downside of competition, from the government’s
perspective, they’re no longer possibly able to effect monetary policy in the way
that they would like to. If individuals decide that they don’t want
to transact in dollars or euros, especially across border transactions, central banks
are going to have to behave in a different manner. They’re not going to be able to, for instance,
inflate or engage in the kind of quantitative easing and the kind of monetary policy that
has come to typify responses to financial crises. Many say that the Legal Tender Laws are necessary
and needed and allow the government to conduct monetary policy, but some, like F.A Hayek
for instance, would have the idea that instead of having the date dictate which money wins
out, what you should essentially have is market forces determining which currency is going
to become the predominant one. And just like you have suppliers and demanders
of shoes and you have supply and demand of food, you should have supply and demand of
money. And so, in this vast market where there’s
millions of actors and they’re all giving their information, you’re able to get a
more robust solution to the question of what money should we have, and it might not be
one answer. So, as it stands right now, central banks
don’t really face competitive threat from digital currency, but in the long term, the
idea of having a currency that’s not susceptible to the vagaries of countercyclical monetary
policy is posing some kind of a threat, or provides an honest check to central banks
because they no longer have as secure of a monopoly advantage.

Leave a Reply

Your email address will not be published. Required fields are marked *