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How Does Bitcoin Fit into Traditional Monetary Policy

How Does Bitcoin Fit into Traditional Monetary Policy

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 dont 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 thats 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 were 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.

Its essentially allowing the market to satisfy consumer demands, and we dont 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 governments perspective, theyre no longer possibly able to effect monetary policy in the way that they would like to. If individuals decide that they dont want to transact in dollars or euros, especially across border transactions, central banks are going to have to behave in a different manner.

Theyre 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 theres millions of actors and theyre all giving their information, youre 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 dont really face competitive threat from digital currency, but in the long term, the idea of having a currency thats 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.

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