7. Satoshi on the Initial Inflation Rate of 35%

7

Satoshi on the Initial Inflation Rate of 35%

INITIALLY, with 50 bitcoins created every 10 minutes for the first few years, 2.6 million bitcoins were being created yearly. After Bitcoin started with a balance of 0 bitcoins in January, 2009, the rate of inflation of the bitcoin currency was initially staggering. However, the growth of demand for the currency given its very limited initial supply accounted for its high rate of inflation. In contrast, established national currencies such as Venezuela’s Bolivar, Argentina’s peso, or Zimbabwe’s dollar began with sufficient and relatively stable supplies. However, the rate of printing of these currencies was then increased as a method for the country’s government to fund its deficit spending.

There are three ways in which a government can fund deficit spending: currency inflation (printing new currency), borrowing from the public, and taxation. Governments tend to favor currency by fiat (i.e., creating new currency), which allows it to blame the inevitable price increases on speculators rather than on its true culprit, currency inflation. This was the excuse used by Venezuela’s government in 2013 and again in 2014. Were governments forced to use gold, silver, or bitcoins to fund their deficit spending, they would have to fund it with tax increases, a recourse not popular with the public, or with borrowing in the credit markets. This latter action leads to higher interest rates as demand for money to borrow increases, and, should governments not address their deficit spending with cuts in spending, they are forced to raise rates of taxation.

Re: Bitcoin P2P e-cash paper

Satoshi Nakamoto Sat, 08 Nov 2008 13:38:260800

Ray Dillinger:

the “currency” is inflationary at about 35% as that’s how much faster computers get annually . . . the inflation rate of35% is almost guaranteed by the technology

Increasing hardware speed is handled: “To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.

As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.

The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.

Coins have to get initially distributed somehow, and a constant rate seems like the best formula.

Satoshi Nakamoto

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