A central bank manages a country's money. Norway has Norges Bank, the euro area the ECB, the U.S. the Federal Reserve.
Their main tools
- Policy rate: the rate banks get on deposits at the central bank. Raising it makes loans more expensive and cools the economy; cutting it does the opposite.
- Base money: banknotes and banks' reserves. Most money people use, though, is bank deposits created when banks lend (Bank of England, 2014).
- Asset purchases: many central banks have bought large amounts of government bonds to push long-term rates down.
- Lender of last resort: lending to banks in a crisis.
Their goals
Norges Bank's mandate is "low and stable inflation" (close to 2%) while helping keep employment high. The Fed has a similar dual mandate.
The problem Bitcoin addresses
- Discretion: a committee decides, and decisions can change with crises and politics.
- Who carries the cost: lower rates and bailouts support borrowers and banks; savers carry the inflation.
- Trust: users must trust that the issuer will not debase the currency.
How Bitcoin works without one
Bitcoin has no interest rate to set and no lender of last resort. Its supply is fixed by consensus rules every full node enforces. Nobody can bail out a mistake by creating coins – which also means nobody can dilute your holdings.
Takeaway
Central banks manage money with judgment. Bitcoin manages it with rules.