Bitcoin Forum

An economist made the following claim: if bitcoin where to become successful and liquid and big enough of a market cap, than financial firms will start to develop derivatives, options, securities and so forth (even the ability to short was condemned negative). These derivatives will reduce the value of bitcoin in a similar fashion that fractional reserve inflates the money supply. Do you think this is true? Does it matter if bitcoins value stems from transactions or as a store of value?

This is what has happened to gold and silver over the course of history; if people allow institutions to give them Bitcoin I.O.U.s, they should have every expectation of those I.O.U.s to inevitably no longer represent Bitcoin.

There is a very good reason why we want a chronicle of mankind.  The simplest solution to this problem is, of course, to not accept anything that isn't really Bitcoin.  If we choose to ignore past mistakes, so we will experience them again, and would we deserve the following pain.

I'm all about revolution and redefining the monetary system. But from an investment POV do you think that this implies that even if bitcoin goes mainstream we won't see 5-7 digit bitcoins?

If we follow the timeline long enough, Bitcoin hits a singularity with the dollar (as does anything valued in the dollar) in which no amount of dollars will buy a Bitcoin.  No fiat currency has ever survived throughout history; the dollar is not the exception.

So it's hard to answer your question; yes and no.  Yes, Bitcoin will inevitably be worth a trillion dollars; no, because a hundred dollars, at that point, possibly might not buy a loaf of bread.  From an investment standpoint, keeping a majority of your wealth in gold or Bitcoin can never be a bad thing; gold is trusted globally as the de facto money, while Bitcoin, so long as it doesn't hit a major snag, will likely exhibit the same properties.

There's nothing wrong with derivatives options or securities on top of bitcoin.  What is good is that with bitcoin bad operators get exposed and punished faster since you can't paper over the bad decisions.

Sure, the market would be giving a bit on price, but the upside is pretty enormous.

In my opinion, the key would be to insure the deposits in a nominal amount of fiat. For example, the insuring entity (whether a company or the government) will insure deposits of BTC up to 70 USD/BTC. This number would have to be revisable periodically to keep it below the actual value of Bitcoin, but it would serve to give people a safer place to put their bitcoins to keep up with inflation via interest. It would also solve a lot of issues with capitalizing projects via bitcoin (buh-bye BTCJam).

Alas, this is only my wet dream. It's unlikely to happen in an acceptably regulated fashion.

I think I'll write a blog on this tonight. Share your ideas to help me.

I'll never accept fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins.

I might pause from time to time to observe a moment of silence to honour the losses of those who do.

one of the reasons fractional reserve became accepted as an idea was because of the impracticality of lugging all this gold, coins etc. around with you - when there was somebody supposedly trustworthy giving you a piece of paper you could use instead.

As bitcoins don't have this practical disadvantage, you would be unwise to trust anyone giving you a piece of paper, rather than you just looking after your own private key. That way you can be sure your bitcoins definitely exist as you can see them on the blockchain.

Ewww, I certainly hope fractional reserve never makes it to bitcoin :/

You hit the nail on the head: it is as if bitcoin were its own monetary "proxy," by being the representation of its private-key self in its own public-key self. Bitcoin is what I call a monetary metarepresentation, or metamoney: no Bitcoin proxy could offer any advantage that Bitcoin does not already offer all by itself.

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

You mistake trading with a financial asset and viewing that financial asset as equivalent to money (or in this case, Bitcoin). These are two separate issues. People buy stocks, for example, but they don't view them as money, even though they are liquid. So stocks are not a part of the money supply (either of fiat money or of Bitcoin). As I explain in my master's thesis, Bitcoin-denominated debt probably wouldn't be viewed as equivalent to Bitcoin, because it does not decrease transaction costs. Even full reserve deposits, such as those on the exchanges, are not viewed as equivalent.

The problem is not having "bitcoin-denominated securities," nor having "bitcoin-denominated debt (loans)": the problem is using securities or debt as money, instead of bitcoins.

The problem with our monetary system is not that it allows for the existence of debt, but rather that it mistakes debt for money by creating money from loans.

Could you please provide a link to your work? You can find mine here: http://omniequivalence.com/representational-monetary-identity/ (http://omniequivalence.com/representational-monetary-identity/).

In general I am highly sceptical of the inherent value of most financial products. We've only ever seen what a financial industry looks like when it it is subsidized and protected from competition by state power.

I suspect that in a Bitcoin world loans would tend to be short duration, relatively expensive, and rare.

I also suspect that securities would also be far less prevalent, as well as hierarchical business structures.

We're living in a world where business and financial markets are organized basically the same way they have been since the mid 19th century. We have better ways of achieving beneficial divisions of labour and deferred consumption now, or at least we'll have an opportunity to experiment with better models once the State monopoly in this area is effectively broken.

I'm not sure what the difference is if you invest in bonds (that pay out dividends).  What would constitute accepting a "...fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins" according to your definition?

I buy a bond issued by a company which lends money for profit.  The company promises to redeem my bond at any time for the full face value, and pays me dividends while i hold the bonds.  I keep all of my coin there & collect "interest," because the bond issuer is 100% trustworthy.
Do i have money or debt & what's the difference?

The nice thing about Bitcoin is we know exactly how many are out there and we have the blockchain which is an excellent way to prevent fraud and attempts at counterfeiting, if financial companies tried to forge receipts like they do now then they would have to keep it below 21 million, I'd be very surprised if paper money continues to exist in the future, I'm sure they'll attempt it but they'll definitely be found out. The only reason that they got away with doing it to gold/silver was because their methods were kept secret and nobody cared, now everyone's extremely careful about dealing with them.

You mean if there are 300000 financial institutions, no single one of them may claim more than 21mil. assets.  I doubt that helps much.

As far as ease of auditing, A & B share a wallet with 1k BTC.  A claims to own 1k BTC, and so does B.  Unless they're audited simultaneously, how do they get caught?  Oh, A & B are banks, BTW, and there's a whole alphabet of other banks doing the same.  They call that shared wallet "line of credit."

They could use signatures to prove that they own the coins at certain address(es). Only one bank can prove ownership of the same coins. We can require that the coins have remained there, at that address, for some amount of time (like 1 year). This can be proven just by looking at the blockchain. And when the coins are spent, we'll know that too.

Lol, that's not how money works.  Even IRS doesn't ask you to "not use your money for a year so we can make sure it's really yours."  If that wallet is actually the sum total of coin "deposited" in the bank, how will the bank honor withdrawals?

The only role for deposit banks in a Bitcoin world is to steal money from old people who don't know how to use computers.

So far the success rate for Bitcoin businesses that hold third party deposits in terms of not losing/stealing their customers' funds tends toward zero (https://bitcointalk.org/index.php?topic=83794.0) the longer such businesses operate.

So it becomes the game of power brokers again. Where the rich have their feet over the people.

You can just google for it. Sorry I'm lazy :-)

Nah.  Free market doesn't discriminate -- plenty of opportunities for enterprising young "investors" to be had.  
*Mentioning that success rate is close to zero is frowned upon.  Defeatism & FUD. >:(

I don't really have a definition, I have been trying to figure it out for over two years and I'm not fully sure. The best approximation I was able to come up with is that people must subjectively perceive said financial asset as equivalent to money in order for it to affect the money supply. I also argue that this probably requires that said financial asset has lower transaction costs than the base money. For example, people use their bank accounts as a medium of exchange (e.g. wire transfers, debit cards, cheques, ...), because this is more comfortable than using (and carrying) cash. With Bitcoin, functionality which historically required deposit banking can be done without banks, with base money. Even I keep some money in the bank and use it for payments, even though I don't trust banks, because I simply can't settle most of my expenses using cash or only with great hassle.

So the "fractionally-reserved promises to deliver bitcoins in leiu of actual bitcoins" probably would not be accepted as equivalent to Bitcoin. But we'll only really know once they become common. Then we'll see if people view them as equivalent to Bitcoin, or just as a liquid (and probably risky) financial asset.

Banks won't be interested in bitcoin, since they can't loan them out and charge interest (No one will be fool enough to borrow bitcoin to do business, he will sure broke). By the way people will continuously borrow the inflative fiat money to do business, they are born to be borrowed since they lose value every year

The only service banks can do is provide some secure storage service for example twin's usb drive  ;)

Why would you ever accept any form of "promise to pay" bitcoin instead of the real thing (i.e. a no nonsense blockchain-recorded tansfer)?
With gold, it made perfect sense (lack of divisibility of gold, risk of theft, poor portability), but with bitcoin I see *no reason whatsoever* why anyone would risk being defrauded by a "bank" and its IOUs. The upside is vanishingly small, while the downside is total loss...

A lot of you seem to be worried about the bank losing/stealing deposited funds. This is why regulation of such institutions is essential. I know this is an unpopular idea, but I believe it would do the bitcoin economy a world of good.

There's already regulation in bitcoin.  It's called the protocol that regulates the rules that govern bitcoin.  No amount of outside legal regulation will be able to alter that. 

Keep in mind that what allows fractional reserve is lack of competition (a company could profitably differentiate itself from competitors by maintaining transparency), and what causes lack of competition is government regulation. In a completely unregulated market, fractional reserve is a non-issue because there is no possibility of monopolistic privilege for any one company or cartel.

Why would anyone ever "invest" his coin with strangers over the internet instead of keeping it in his wallet?  Profit.
If someone is paying daily for holding your money, it's a tempting proposition.  How tempting?  Ask Pirateat40 "investors."
Thus far, bitcoin has proven much easier to scam with than fiat.  Not due to failings of bitcoin itself, but those of the people who use it.

*Finally, claiming that we do not need banks because: easy electronic transactions ignores the reason that banks exist (The other reason, not the obvious "helping themselves to mah monyz"): Capitalizing large-scale economic ventures.  You can argue that this is no longer necessary, but treating banks as simply places that let you pay bills misses the big picture.

You're wrong.  What allows fractional reserve banking is the same thing that allows almost everything else in this world -- wealth.  Regulation only tries to make sure that the stealing is kept to a reasonable & sustainable level.  Without regulation, scammers and parasites multiply 'til there's nothing left to steal -- see bitcoin "investment" for edifying examples.
On a sidenote:  Getting rid of corrupt cops doesn't get rid of crime, it only changes the ones who get to commit it.

Fractional reserve banking exists in a competitive environment and has always done so.  So that premise is faulty.

If there is a market for fractional reserve banking and derivatives in Bitcoin, all is well.  If not, its still a useful way of doing business privately.  I suspect that FRB would push up the price of Bitcoin as it would create demand for proven reserves and banks can't fudge a Bitcoin reserve.

Sorry, but I don't search for the work of lazy people.

Financial products are just like money, which can only have an inherent value as either:

1. The confusion between its exchange value independently of being money and its monetary value (example: gold money).

2. A merely possible representation of money (example: Bitcoin price).

As long as we denominate all credit in bitcoins and repay it plus interest with our Bitcoin savings, we preserve the distinction between money and credit.

I have a definition, which took me much more than two years to find. It all begins with the confusion between money and its representation, which I call "representational monetary identity." With commodity money, that confusion is already there from the beginning (it is not merely subjective), and usually evolves into the confusion between money and credit with a monetary proxy (gold-deposit receipts). With Bitcoin, the confusion between money and its representation requires a monetary proxy, which fortunately Bitcoin does not need. However, the difference between Bitcoin and commodity money goes far beyond Bitcoin having no need for a proxy representation: Bitcoin inherently distinguishes money (a private key) from its representation (a public key), a distinction its proxy representation would reduce to a mere possibility.

There's no confusion for the average guy between commodity money (gold) & its representation (IOU for gold).  It's the difference between shiny yellow metal & a slip of paper that represents it (gold certificate, representative money).
Not confusing.
That's why commodity money was such a win for so long.  No new terminology needed.

The confusion between money and its representation is not the one between gold and its proxies. Monetary proxies are not the monetary representation itself: they are, precisely, proxies of it. The confusion between gold money and its representation is the confusion between the yellow shiny metal (monetary representation) and its monetary value (monetary identity). As I said before, it "is already there from the beginning" (even before monetary proxies).

Although the concept of representational monetary identity shares many aspects with Marxian commodity "Fetishism," it is also fundamentally different. As far as I know, it is a new concept - hence the need for new terminology.

Let's tighten up our definitions so we won't keep going 'round in circles:

1.  Commodity money = tangible object with intrinsic value, e.g. gold.
2.  Monetary value = buying power of a unit of money, inversely "worth denominated in units of money."
3.  Yellow shiny metal = yellow shiny metal once used as commodity money, "gold."
4.  Monetary identity = pointless jargon.  Just googled it & hit your book.

Allow me to quote you:

"1. Nothingness is the absence of something, possibly of everything. 2. If anything is absent, then a) its presence is nothing (and) b) The nothingness of its presence is present."

Having spent a good chunk of my life studying philosophy, i still fully expected an early Woody Allen punchline at the end, something about not being able to buy good knishes there, whatever it is.

Well, if you studied philosophy and not comedy, then I would expect you to point out where my reasoning went wrong, instead of making fun of it (it is not a treatise, just three sentences).

Regarding representational monetary identity, the easiest way of understanding it is observing how Bitcoin distinguishes between monetary representation (a public key) and monetary identity (a private key). Bitcoin represents monetary value as a private key then metarepresents it as the corresponding public key. Now go back to gold. The yellow shiny metal is a mess: it makes no distinction whatsoever between its monetary value and its representation, which results in what Marx called commodity "Fetishism" (it also results in "intrinsic" monetary value, but let us save that one for later).

If something is really liquid, I can't understand how it won't affect the money supply in a way or another.
The only reason to hold money is because we expect to be able to exchange it for something else. If there's something almost as liquid as money and which also happens to be a stable form of investment (think reputable bonds), then people might hold some of this asset instead of "raw money".

You don't even need fractional reserves as is to have monetary aggregates higher than the monetary base.

Imagine some bitcoin bank one day becomes famous, and many people start using its services. Among such services, there's the possibility of converting part of your bitcoin balance to bitcoin quoted bonds offered by the bank. You configure to have 50% of your account on bonds, and the bank automatically sells/buys them every time some money leaves or enters your account. Aren't you using bonds as money after all? And if eventually you make a transfer to somebody else in the same bank who also has his account configured to have a percentage of its balance in bonds, the bank doesn't even need to actually sell and buy back again, it can just transfer the bonds at current market price.
There you have it: a very liquid asset being used as money. A monetary aggregate. And that's not fractional reserves.

So, answering OP, yeah, I do think some level of monetary aggregates will eventually appear someday, if bitcoin succeeds. Fractional reserves or not. And of course, that should push the price of bitcoin down (or prevent it from going upper) to some extent. You might want to change your investment strategy from that moment on. But let's not forget though: monetary aggregates can't expand infinitely like the monetary base of fiat currencies can. And since the monetary base of bitcoins is capped, I think we can expect monetary aggregates on top of it to be limited too.

A similar argument is being made by some Austrian economists (that the cause is confusion about property rights). I don't however agree with either. As I said, I understand that my deposit account balances are fractionally reserved and the cash is not really in the bank, yet I still treat the deposits as money them because the alternatives are impractical. I'm pretty sure that the said Austrian economists do use bank accounts as well and you probably do too. So the confusion alone is not a sufficient condition.

But I agree that the confusion is less likely to happen with Bitcoin.

Water is "really liquid" and it doesn't "affect the money supply in a way or another."

Unfortunately I do not have a full answer to that. I have been trying to understand this issue as well and all I found were conflicting and inadequate economic texts. The best I can do is yet again point to the subjective perception, which is difficult to assess. Another factor is the final means of payment. Unless these highly liquid non-money financial instruments are treated as a final means of payment by the recipient, that probably means they are not viewed by him as equivalent and should not be a part of the money supply. Instead, they would be either redeemed right away (which will take them out of circulation) or sold on secondary markets (at a discount, which decreases the subjectively perceived wealth of the recipient).

I'm not saying that none of these obstacles can't be overcome by Bitcoin-denominated financial instruments. I just don't think it's likely.

The confusion between money and its representation is at the heart of fractional-reserve banking, by making it possible. Imagine I deposit $1,000.00 into a bank, which loans $900.00 into your bank account without withdrawing them from mine. Now ask yourself: are the $900.00 in your bank account and the $900.00 not subtracted from mine the same money? In other words: do the $900.00 in your bank account and the $900.00 not subtracted from mine have the same identity? On the one hand, the answer is yes: the $900.00 in your account are a loan of part of my original deposit of $1,000.00. On the other hand, the answer is no: the same deposit money cannot be at the same time in both accounts. The reason for this ambiguity is that the identity of that money (its value) has been mistaken by its representation (the bank account in which it sits). Money in different bank accounts is different money, even when the money in one account is just a loan of money in the other. This confusion between monetary identity and its representation is what I call "representational monetary identity." It is inherent in both gold and bank-account money.

If Alice loans to Bob then Alice no longer has the thing she lent, period (this is simple stuff; it don't take fancy terms to describe it).  She has instead Bob's promise to repay.  If Alice wants to eat then the promise might not satisfy.  Perhaps Alice has enough other resources to make it by until Bob repays but if Bob fails to repay then Alice is screwed unless she can find and beat the repayment out of him.

If Alice and her many friends join together to make Bob a loan then each of the lenders lends less and can still eat with their remaining resources.  If need be then together they can more easily find the deadbeat and extract their due.

Alice and her many friends outsource the job of finding, qualifying, collecting from, etc., borrowers.  Let us call the outsourcing company a Savings and Loan (S&L).

Depositors at the S&L can make withdrawals only to the extent that resources have not been lent.  Perhaps the depositors would make deposits but stipulate only a portion for lending to remain more liquid.  Only the portion available for lending would earn interest.  The non-lendable portion might be charged a small fee for administration overhead.  Making a non-lendable deposit could make lots of sense; saves Alice from having to care for her own keys.

Lent lendable deposits are locked in until loans are repaid, period (see paragraph 1) -- well, I suppose Alice might sell Bob's promise to someone else -- one wonders what Bob thinks about this (he might have been happy enough to borrow from Alice but might not be too happy when Guido buys his loan).  If a depositor isn't careful and deposits too much as lendable then when they are hungry enough they will regret depositing too much.  Perhaps Alice will borrow to eat -- ugh -- but at least she "knows" she can repay since she has Bob's promise to repay.  So now Alice and Bob owe each other; what a tangled web we weave.

This is just full-reserve banking (sorry for the fancy word), which is precisely how fractional-reserve banking began hundreds of years ago (as also how most people think it still works today). To understand why it ended up being how it is today, you will have to go deeper than you seem willing to go. Unfortunately, if we don't go there, we will end up watching the same movie again from the beginning (with us in it).

I am not sure. It is not unusual that a good acts as a substitute for another good, even though they are not legally related. Copies are a very good example. If you copy a file, the original file is still there, but there's now two of them. The question is, what is the essence of the good in question? And that is a subjective issue. I am not fully convinced that the essence of money is cash (or precious metals back during the old times), if not for any other reason then because I subjectively don't view it that way.

While I tend to agree that the confusion probably is a contributing factor, I don't think it is either sufficient or necessary. I think transaction costs are more relevant.

Do you often underestimate folks?

There's nothing stopping folks from participating in fractional-reserve banking; they have to invent a device that is different than the underlying full-reserve commodity --- hmm, Alice sold Bob's promise (apparently Bob's promise is potentially just such a device).  Obviously Bitcoin could end up underneath a fractional-reserve bank system despite resistance.  What's new is Bitcoin let's folks avoid fractional-reserve banking if they prefer.  Without Bitcoin where can Alice and Bob make full-reserve deposits and take loans today?  Well, they can do so personally; e.g. we lent my daughter and son-in-law money to purchase a vehicle (rather than co-signing on a loan from an institution) -- I no longer have those funds at my disposal until they repay.  Where is there an institution operating thusly?

Proxy, monetary identity, or whatever jargon you like reveals no especially deep insight per se.

If a full-reserve bank can't compete effectively with a fractional-reserve bank then so be it.  I for one would rather try to preserve my wealth in non-interest bearing Bitcoin rather than $US denominated CDs that barely earn any interest at all and are at huge risk to devaluation due to quantitative easing (idiots).  If I happen to gain wealth relative to others that choose differently then great.  If Bitcoin goes to zero in the next 5 minutes then I am glad I remained diversified.

I don't believe Fractional Reserve Banking will (or can) exist with Bitcoin.

Bitcoin is solving a very huge problem. One of trust. This trust in the past has required a 3rd party that has managed it in a proprietory, closed (and some would say deceptive) manner.

One of Bitcoin's biggest contributions has been to give us an understanding of how this "trust" can be created and managed in an open and public way.

Once you understand that paradigm, you start realizing just how big of a game changer this is. DIS-RUP-TIVE would be an understatement of the decade.

The future is all about point-to-point, peer-to-peer.

Trust -- from ME to YOU. No middle men/agents with their own agendas. :)

Chase Bank limited withdraws to $50,000.00 a month and blocked international wire transfers beginning November 17. Do you think they "underestimate folks"?


People (except for bankers) never wanted fractional-reserve banking: they wanted to store their gold and started using gold-deposit receipts for commodity, that's all. When they found out bankers were loaning gold-deposit receipts for gold never deposited with them they got angry. There is no need to "stopping" people from doing something they do not want or even know about: we need to give them what they really want: ease of monetary storage, transport and transmission without the need to leave their money with someone else.


Resistance to what? What urge do people have to do fractional-reserve banking?


People do not care about fractional-reserve banking, they are not even aware of it.


Now you have a point: there is not yet an infrastructure in place for Bitcoin loans. However, Bitcoin is evolving rapidly, and the protocol has all resources to build something unprecedented in both ease of use and security.


Neither does "jargon."


It is not a matter of competition. Without overcoming representational monetary identity, full-reserve banks will end up becoming fractional-reserve banks, as they always did in the past.


+1

It was more than just a joke. It was meant to show how ill-defined a concept "something liquid" really is: "All it takes is a little push."

You still don't understand what I mean by the confusion between money and its representation: monetary proxies are proxies of monetary representations, rather than being those representations themselves.

The identity of money is its value: this is its abstract, subjective aspect. The representation of money is its concrete, objective aspect. These two aspects do not exist separately, and yet remain distinct. The form of money we have today lacks an inherent distinction between them. It is to this indistinction that I give the name "representational monetary identity." Bitcoin, on the other hand, inherently distinguishes money from its representation by representing monetary value as a private key then metarepresenting it as the corresponding public key.

I think I do understand your argument. I'm just trying to point out that whether something is a proxy or a representation is a subjective issue. I admit that some people might think that what you think is a proxy is in their opinion a representation because the system is confusing, I just don't think that this is either a necessary or a sufficient requirement for the proxy being perceived as a representation.

I subjectively view both cash and bank deposits as representations of money. From economic point of view, to me, they act as close substitutes. But I do not think that the bank has enough cash to refund everyone. I am not confused about the nature of the banking system, their history, legal status or risks. I understand that if the pyramid collapses, the deposit is gone (unless the central bank inflates the money supply to refund everyone). I still use bank deposits and treat them as a final means of payment.

On the other hand, I agree with you that Bitcoin does separate the essence from a particular physical manifestation and that this makes it more difficult for financial instruments denominated in bitcoins to be confused with Bitcoin. And that this in turn makes it less likely that financial institutions can affect the money supply of Bitcoin. I just don't think this is an all exhaustive approach.

It is irrelevant whether people consider something as a proxy of money or as a direct representation of it: representational monetary identity affects both direct representations and their proxies. I cannot mistake the representation of money for its value without also mistaking its proxy representations for that same value. Fractional-reserve banking could originate only because as long as people used gold-deposit receipts as monetary proxies, it was irrelevant whether there was actual gold in deposit or not: the confusion between the value of money and its representation makes the difference between proxies of money and its direct representations irrelevant.


Bank notes and bank deposits are both representations of money, and they both suffer from the same problem of providing no distinction between themselves and the monetary value they represent.


Only the Bitcoin protocol can affect the supply of bitcoins. Instead, financial institutions could try to offer Bitcoin proxies. However, Bitcoin requires an actual public key while its proxies could only offer a possible one: whenever you try to create a proxy of Bitcoin, you end up with a proxy of something else.

Notice I said government regulation. Free-market forms of regulation can and will happen, such as agencies whose job it is to monitor firms on their transarency, etc. The difference is that free-market "regulation" doesn't create monopolies, because it cannot create barriers to entry. That means no outrageous levels of fractional reserve - a non-issue.

Where is your data? Banking is almost always one of the most regulated industries, so I'm not sure where you'll find such a competitive environment in history (medieval Iceland??), and Bitcoin makes transparency even easier so there is even less friction there.

Note that insofar as "fractional reserve" implies fraudulent banking, I'm saying it won't happen enough to be an issue, provided the market is unhampered by government. But simply having a loan clearinghouse where peopleunderstand they're loaning their money and risking not getting it back, is fine. I wouldn't call that fractional reserve because there's no claim being made that it is a "reserve" (bank). If you want to call that fractional reserve as well, then yes there will be some fractional reserve and it will create some inflation, but that's an odd name for it.

Please understand that the government is a form of regulation created by the free market.
The government was not thrust upon mankind by aliens, it didn't instantly materialize from a Bureaucratic Big Bang -- it is the net result of people, and the free market, trying to regulate themselves.  It happened to be so fabulously adaptive & successful from the evolutionary & socio-Darwinian perspectives, that it is now pandemic.
Way to go, Invisible Hand.

The free market created fractional reserve banking -- it was created when the first goldsmith/money changer realized that he could write more IOUs than he had gold in his vault.  A no-brainer, really.

Fractional reserve banking predates any form of regulation, especially government.
For the wikipedos & men who love them: "Fractional-reserve banking predates the existence of governmental monetary authorities and originated many centuries ago in bankers' realization that generally not all depositors demand payment at the same time.[4]" --wikip.

Understand what it is you're against before speaking out against it, pl0x.
 

This post is very well written and thought, thank you : )

but btcjam can be really profitable if you have some funds to begin with and don't throw your money at runners/scammers?

The problem is when this regulation is out of the hands of the individual, for it assumes the higher power is always going to have the individual's best interests in mind.  The free market will be regulated, because it is involved with people who are capable of such feats; the difference between the libertarian market and the authoritarian market is who regulates it: you, or the people who attempt to represent you.

Understand the argument you're against before making people repeat themselves, please.

You forgot what you're replying to.
A post about fractional reserve in a thread about fractional reserve.  The word "regulation" was only used to point out that it is not the cause, nor is it necessary for fractional reserve banking.  I even included a wikip quote :(

This phrase is a self-contraction. If you don't see it that way, that's because you don't truly understand what free market means.
Hint: free market != market. The former is just a subset of the latter.
Ex: an assassination market doesn't belong in free markets.
Same thing for governments. Their coercive nature is incompatible with the premises of free markets.

No contradictions that i can see, read the quoted text again.
The free market created the suffocating government just like brewer's yeast created the alcohol which suffocated & killed it.
Always has.  Always will. 

That's going by your definition of the free market, where assassinations "don't belong."  They do if there's any demand and any supply.
But that's another topic :)

Finally, it's a bit odd that everyone is so eager to change topics away from fractional reserve banking -- the subject of both the post you are replying to & the title of this thread. 

No, they don't. It's only a free market if property rights are respected. Assassination - and governments - by definition does not respect them, so it's an antithesis to free markets. Regardless of supply and demand. Do no confuse "free markets" with just "markets" or even "economic laws" (like the fact that supply and demand determine prices). Economic laws are inexorable and thus, of course, apply to all sort human actions, including those which do not respect property rights, like assassination, slavery. theft and everything else government/mafias do.


It's just that....
http://imgs.xkcd.com/comics/duty_calls.png

:D

Sorry for the off-topic.

Lol, so i can't sell my wares at your free market (i deal in assassinations 8))?  That's pretty dictatorial of you.  Seems like you're an aspiring tyrant yourself, telling me what i can and can't sell >:(

*Also look at the red text.  Your definition, not everyone's.  Free market economy is simply the opposite of planned economy.  Ignore the wikipedos here -- that page is a pillow fight & a pissing contest (see talk).

Edit:  anothersomeoneswrongontheinternet.gif :P :D

Murder came about a long time ago so I shouldn't be against it?  Governmental fractional reserve is the desire to get something for nothing and should be resisted just like the desire to steal something that is also in all of us to some degree and should be resisted as well.

Does no one in this thread pay attention?
I know you hate the government.  I get it.  This thread is not about your government hatred or any other daddy issues.

It is about the effects of fractional reserve on the bitcoin value.

I've explained previously that fractional reserve banking doesn't need regulations or governments.  You took that as a cue to start raging about government.  WHICH HAS NOTHING TO DO WITH FRACTIONAL RESERVE BANKING.

There >:(

I agree.  Private fractional reserve is just fine.

Reserves are just fine, as long as they are not merely fractional.

As for being private, when the bank loans your money to someone else, that money still belongs to you yet also starts belonging to someone else. This dilutes the value of your money so part of it - part of its monetary value - no longer belongs to you: fractional-reserve banking does not respect private property.

Thus, by legalizing fractional-reserve banking, the government becomes an accomplice of the banks. Finally, with the legalization of central banking, that complicity becomes a partnership.

All the bankers of the world are criminals.
The governments, they're in on it -- all the governments of the world are criminals.
The people who use money and thus banks -- all are criminals, as much as the fence who buys stolen goods is a criminal.

I know i have to call someone to put an end to the crimez, but who to call???

Call ghostbusters.

You win the Internet today.

This whole system is based on the fundamental mistake between money itself (its value) and its representation (gold, silver, bank accounts, bank notes, etc). The bankers merely took advantage of it: they didn't create it. The solution is to start using money that distinguishes itself as a monetary value from its own representation, which is precisely what Bitcoin does, by representing its monetary value as a private key then metarepresenting it as a public key.

I do this now, but with silver instead of dollars.  You can get no less than 4 oz silver bitcoin specie for each bitcoin (and currently a good bit more than that).  The QR code on the pieces creates a flexible market based bimetallic standard (gold standard / silver standard - but only silver is released so far), with a floor value of the nominal value (1 ozt silver / quarter bitcoin).

I would never be so bold as to guarantee a level of fiat currency against bitcoin (I'm not the central bank), but I certainly would with a commodity monetary form.  It is looking like the 2014 one ounce silver will be a bit-dime if things move forward as they appear to be which would put the floor value of bitcoin at 10 ounces silver .999 fine for the bitcoin specie.