From Tony Yates Professor of Economics at the University of Birmingham via FTAlphaville:
The agreed protocols that govern Bitcoin are effectively its monetary policy. In exchange for expending computing power to verify the legitimacy of transactions and record them, Bitcoin “miners” get paid in Bitcoin. (This is roughly analogous to seigniorage income.) These rewards increase the supply of Bitcoin, but the growth of the Bitcoin money supply is constrained by the increasing difficulty of verifying transactions. More and more computing power is needed to verify each transaction and create new Bitcoin, which means that the total supply gradually approaches its limit of about 21 million. (There are currently just under 16.5 million in circulation.)
Our fiat money has its own protocols that give rise to a different monetary policy: appoint a bunch of clever people and tell them to stabilise inflation using interest rates and bond-buying. The money supply that results from all this is generally ignored.
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