The true identity of the inventor of Bitcoin remains the subject of speculation among aficionados of the virtual currency. But one thing we know for sure is that Satoshi Nakamoto is an extremely clever person. Not only did he or she devise the unalterable algorithm that mints the currency automatically – an impressive feat of technological prowess. Nakamoto also understood something fundamental about money. Holding and using it involves a leap of faith. You must trust that it will not be manipulated by the government.

Nonetheless, Nakamoto missed a crucial point. A good currency must hold its value over long periods. It must also be readily exchangeable for the goods and services that people actually want. Combining those two functions in a single instrument requires a delicate balance. If issuance is too tight, there is not enough money moving around to meet the payment needs of the economy. This can lead to deflation and recession. Yet if too much money is issued the result will be inflation, which erodes the currency’s value. This is the dilemma that “private money”, the creation of banks rather than government authorities, has never been able to solve. Nor have money regimes based on commodities, such as the gold standard.

To solve this problem, many countries have created independent central banks. The quantity of money that society needs changes constantly because of fluctuations in economic and financial activity. Human judgment is required to make sure that, when the economy grows, an adequate supply of money is maintained. But, crucially, central bankers have to be made independent. This guards against excessive expansions in the money supply – a permanent temptation in all political systems because it spreads economic cheer, but one that over time erodes the value of money.