How Does Bitcoin Fit into Traditional Monetary Policy?

How Does Bitcoin Fit into Traditional Monetary Policy?

One of the main reasons why Bitcoin was createdwas a frustration with central banking and a frustration with the discretionary monetarypolicy that followed the financial crisis of 2008 and 2009.

The Legal Tender Act was passed in 1862, andessentially said U.

S dollars were legal tender, had to be accepted for all debts, public andprivate.

After the Legal Tender Act was passed, someonecould say “I don’t want to pay you in gold coins, I want to pay you in these depreciatedand these depreciating dollar bills.

” The Legal Tender Act says that that’s completelyfine.

Because the central bank wants to ensure thatits money is accepted and ensure that its monetary policy is effective is going to haveto ensure that the money that they print is accepted, and so the Legal Tender Act andLegal Tender Laws, generally, around the world act as a kind of monopoly advantage to centralbank currency.

Digital currency challenges Legal Tender Lawsin 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 onethat was sanctioned by the government.

Then, Uber comes around and provides peoplean alternative and they really like this alternative.

So, what the government has essentially doneis turn a blind eye and say “we’re not going to privilege the yellow taxicabs anymore.

” And so, they can have a similar response totheir money.

They can say, “Listen, we think that dollarsare 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 tosatisfy consumer demands, and we don’t know what consumer demand is, but we know thatone provider of a good is probably not able to satisfy consumer demand in a way that multipleactors are.

The downside of competition, from the government’sperspective, they’re no longer possibly able to effect monetary policy in the waythat they would like to.

If individuals decide that they don’t wantto transact in dollars or euros, especially across border transactions, central banksare 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 thathas come to typify responses to financial crises.

Many say that the Legal Tender Laws are necessaryand needed and allow the government to conduct monetary policy, but some, like F.

A Hayekfor instance, would have the idea that instead of having the date dictate which money winsout, what you should essentially have is market forces determining which currency is goingto become the predominant one.

And just like you have suppliers and demandersof shoes and you have supply and demand of food, you should have supply and demand ofmoney.

And so, in this vast market where there’smillions of actors and they’re all giving their information, you’re able to get amore robust solution to the question of what money should we have, and it might not beone answer.

So, as it stands right now, central banksdon’t really face competitive threat from digital currency, but in the long term, theidea of having a currency that’s not susceptible to the vagaries of countercyclical monetarypolicy is posing some kind of a threat, or provides an honest check to central banksbecause they no longer have as secure of a monopoly advantage.

Source: Youtube