This document discusses different types of money and inflation. It compares fiat money, gold, and bitcoins. For fiat money, the pros are that it is easy to achieve stable growth by increasing the money supply, but the con is it is easy to grow the money supply too quickly and lose trust. For gold, the pros include easier maintenance of trust, but the cons are that it is difficult to increase the supply at a fast enough rate and costly to use as money. For bitcoins, the pros are that it is decentralized with no central authority and a limited supply set by an algorithm, but the cons include not growing supply enough and not being well established. The document raises questions about defining full employment, the appropriate

1. THE FED, BITCOINS, AND
INFLATION
3. GOLD, BITCOINS, AND
INFLATION
Dale R. DeBoer, PhD
Department of Economics, UCCS

2. Core functions of money
 Medium of exchange
 Unit of account
 Store of value
 Standard of deferred payment

3. Ideal functions?
 Full Employment and Balanced
Growth Act (1978)
 Humphrey-Hawkins Act
 Monetary requirements
 Full employment
 Growth
 Price stability

4. What is full employment?

5. How much growth?

6. How much growth?

7. How stable should prices be?
 Measurement bias
 Substitution
 Quality
 New product
 Outlet
 Houseman, 2003, “Sources of Bias
and Solutions to Bias in the
Consumer Price Index”

8. How stable should prices be?

9. What works best?
 Stable value
 Stable growth

10. Fiat money
 Pro
 Easy to get stable growth
 Costless to make more

11. Fiat money
 Pro
 Con
 Easy to grow too fast
 Trust can be lost
 Someone (or something) must control
it

12. How well has it done?

13. How well has it done?

14. How well has it done?

15. Gold as money
 Pro
 Easier to maintain trust
 Could be run without external control

16. Gold as money
 Pro
 Con
 Hard to grow at the “required” rate
(5%)
 Costly to use as money
 Still have fractional reserves
 Trust still an issue

17. Did it grow enough?

18. Is it stable?

19. Is it stable?

20. Is it stable?

21. Bitcoins: a modern alternative
 Decentralized virtual currency
 No physical existence (sort of)
 http://www.coindesk.com/10-physical-
bitcoins-good-bad-ugly/

22. Bitcoins: a modern alternative
 Decentralized virtual currency
 No physical existence (sort of)
 No central authority (sort of)
 Algorithm limits supply to 21 million

23. Bitcoins: a modern alternative
 Decentralized virtual currency
 No physical existence (sort of)
 No central authority (sort of)
 Algorithm limits supply to 21 million
Source: Nakamoto
Institute

24. Bitcoins: a modern alternative
 Decentralized virtual currency
 No physical existence (sort of)
 No central authority (sort of)
 Algorithm limits supply to 21 million
 Mt. Gox intermediated 69% of
transactions in 2013
 Bitcoin China intermediated 74% of
transactions in 2014

25. Bitcoins: a modern alternative
 Decentralized virtual currency
 Disintermediates formal banking
sector

26. Bitcoins: a modern alternative
 Decentralized virtual currency
 Disintermediates formal banking
sector
 Offers anonymous transactions

27. Bitcoins: a modern alternative
 Decentralized virtual currency
 Disintermediates formal banking
sector
 Offers anonymous transactions
 Eliminates fractional reserve
banking

28. Bitcoins: a modern alternative
 Pros
 100% reserve requirement
 Eliminates central control
 Anonymous
 Eliminates “middle-man” costs

29. Bitcoins: a modern alternative
 Pros
 Cons
 Will not grow as needed
 Eliminates lending mechanisms
 Eliminates monetary response to
crisis
 Open to illegal use
 Not well established or accepted

30. Is it stable?

31. Is it stable?

32. Is it really new?