The Evolution of US Monetary Policy and the Rise of Bitcoin as a Superior Currency

Ruisiang
3 min readApr 12, 2024

The journey of United States monetary policy is a complex narrative filled with shifts that reflect the changing priorities of the nation. From the gold standard era to today’s fiat currency system, each phase has shaped the economic landscape. Recently, cryptocurrencies, especially Bitcoin, have emerged as contenders challenging traditional monetary systems.

Historical Overview of US Monetary Policy

The Gold Standard Era

The US monetary policy was originally tied to precious metals. The Gold Standard Act of 1900 established gold as the sole basis for redeeming paper money, stabilizing the currency by pegging its value to a fixed quantity of gold. This period was marked by relative financial stability.

The Great Depression and Bretton Woods

The Great Depression catalyzed a shift. In 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold domestically, which allowed more flexibility in increasing the money supply during economic crises. Post-World War II, the Bretton Woods Agreement in 1944 established the dollar as the world’s primary reserve currency linked to gold, leading to a pseudo-gold standard where other currencies were pegged to the US dollar.

Fiat Currency and the Federal Reserve

The pivotal shift came in 1971 when President Nixon completely abandoned the gold standard, transitioning to a fiat currency system where the dollar’s value is not based on physical reserves but rather the government’s declaration that it has value. The Federal Reserve (Fed) gained an expanded role, managing the economy through control of the money supply and interest rates, aiming to address unemployment and control inflation through monetary policy tools like open market operations, the discount rate, and reserve requirements.

Status Quo of US Monetary Policy

Today, the Fed operates under a dual mandate to promote maximum employment and stabilize prices. Through quantitative easing and other expansive monetary policies, especially evident during economic crises like the 2008 financial meltdown and the COVID-19 pandemic, the Fed has aimed to bolster the economy. Critics argue that such policies, while stabilizing, dilute the currency’s value over time through inflation.

Why Bitcoin Could Be Considered Superior

Decentralization

Unlike fiat currencies managed by central authorities, Bitcoin operates on a decentralized network using blockchain technology. This makes it immune to government or institutional manipulation. The decentralization aspect ensures that transactions are transparent, secure, and immutable.

Fixed Supply

Bitcoin has a capped supply of 21 million coins, which advocates argue makes it a hedge against inflation. Unlike fiat currencies, which can be printed on a legislative whim, Bitcoin’s supply limit is algorithmically enforced, potentially increasing its value over time as scarcity intensifies.

Market Driven Value

Critics of Bitcoin often claim it is valueless. However, the value of any currency, whether fiat or digital, is determined by the market based on trust and utility. Bitcoin has gained significant traction and acceptance, not just among individuals but also in business transactions and by some government entities. The market-driven nature of its value is evident from the adoption rate and the infrastructure built around it.

Market Determination of Price

The argument that Bitcoin or any currency is “valueless” ignores fundamental economic principles of supply and demand. The value of a currency is essentially what individuals and the market at large are willing to trade for it. In Bitcoin’s case, while it experiences high volatility, its growing acceptance and limited supply suggest a market perception of value which translates into real-world purchasing power.

Conclusion

The history of US monetary policy highlights a trend of increasing flexibility in money supply management, which has its benefits and drawbacks. Bitcoin’s proposition offers a fixed supply and a decentralized control mechanism, presenting a stark contrast and an appealing alternative for those skeptical of traditional fiat currencies. As the world becomes more digitized, the allure of cryptocurrencies like Bitcoin, supported by market-driven valuations, will likely continue to grow. This represents not just a technological evolution but also a philosophical shift in how we understand money’s value.

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Ruisiang

Blockchain and Backend Developer, Privacy Advocate, Crypto Enthusiast. Twitter: ruisiang_tw