Bitcoin Forum

If you have 100 bitcoins in your computer wallet and 100 in your MtGox account, how many bitcoins do you have?

This is not a trick question!

I have been having the longest of arguments (https://en.bitcoin.it/wiki/Talk:Myths#Fractional_reserve_banking_with_Bitcoin_is_fundamentally_different) with a user about what the Wiki should say about Fractional Reserve Banking. Ultimately, our disagreement centers around the definition of money supply. I would say that you own 200 Bitcoins. The money supply is therefore definitely at least 200 bitcoins. He disagrees. He's been editing the Wiki page (https://en.bitcoin.it/wiki/Myths#Fractional_reserve_banking_is_not_possible) to say that "Practicing fractional reserve banking without issuing money substitutes is not logically possible. "

Originally the wiki said this. (https://en.bitcoin.it/w/index.php?title=Myths&oldid=18508#Fractional_reserve_banking_is_not_possible)
PeterSurda changed it to this (https://en.bitcoin.it/w/index.php?title=Myths&oldid=18912#Fractional_reserve_banking_is_not_possible) and this. (https://en.bitcoin.it/w/index.php?title=Myths&oldid=19004#Fractional_reserve_banking_is_not_possible)

I very much want the wiki to be as accurate as possible. Please help!

This is probably totally naive but I see no difference beteen having my dollars at a bank and having my BTC at Mt. Gox.  I go to my account page at Mt. Gox and they promise they have 100 BTC reserved for me somewhere in their accounts.  If I ask for it they give it to me.  However since not everyone will ask for all the BTC at the same time they could find it "safe" to loan out some of the BTC on account.  As long as they keep enough in their accounts to cover any requests for BTC from their depositors they are good to go.  Isn't that the definition of fractional reserve?

The other way I look at it is that the second that Mt. Gox loans money to someone and puts the loan into an account for them they have increased the number of people claiming ownership of the same BTC.  This is an increase in the "money".

I have 100 BTC on deposit - I can ask for it to be sent to me at any time so I can spend it
Keeping 10% in reserve the borrower would have 90 BTC on deposit - and they can ask that it be sent to THEM at any time so they can spend it

But in fact there are only 100 BTC to cover both claims.

As far as I know this is the definition of fractional reserve and it would operate the same as the dollar.

EDIT:  I would add that there is one big difference between dollars and BTC in the event of a bank run.  With dollars each bank that runs low on dollars during a run can simply go back to the central bank and borrow more.  The central bank can just loan them newly created dollars - hence the term fiat. With BTC if everyone want their BTC from the fractional reserve bank or banking system at once they are totally screwed - there may not even be enough BTC in existence to cover all the deposits.

It is 200 BTC BUT the money supply didn't grow because no fractional lending occured.

Simplistic universe.  The entire bitcoin economy consists of you w/ 200 BTC and MtGox with nothing.  Money supply is 200 BTC.

You deposit 100 BTC @ Mt. Gox.

You now have 100 BTC deposited, 100 BTC in your wallet.  Money supply is still 200 BTC.  

Someone robs Mt. Gox.
You have 100 BTC, Mt Gox is bankrupt and thief has 100 BTC.  Money supply is still 200 BTC.

So the wiki isn't wrong.  It isn't saying deposited funds somehow vanish from money supply it is saying without fractional lending there is no multiplier, the money supply doesn't INCREASE.

Ok, So suppose MtGox lends out 10% of their Bitcoins. They have then increased the money supply, right? Assuming people agree, what do I do about someone who is editing the wiki and talking about 'substitutes' and other nonsense instead of leaving it the way it was (https://en.bitcoin.it/w/index.php?title=Myths&oldid=18508#Fractional_reserve_banking_is_not_possible)?

 ???

D and T are you saying you agree with the original version of the wiki or the modified version.  I am not sure.

More the first one however the first one doesn't clearly indicate the power central banks have in fractional reserves and that Bitcoin lacks a central bank thus the monetary base (not to be confused with money supply) can never grow beyond the 21M BTC.


However the 2nd & 3rd texts are just pure nonsense.

Say I owed the D&T savings bank.

You deposit 100 BTC.  I lend out 50 BTC. 

What is the money supply ... 150 BTC.  You have 100 BTC deposited and the borrower has 50 BTC.  I just created 50 BTC out of thin air.  The money supply expanded.  If that 50 BTC was then deposited into another bank and he lent out 50% another 25 BTC would be created.  Money supply is now 175 BTC. 

The 3rd linked text seems to be confused into thinking some alternate currency, or note, or script would need to be issued.  That is simply false.  As my example above shows there is no need for a D&T Savings bank note.  You have 100 BTC on deposit and the bank has one borrower which has been lent 50 BTC.  All transactions are done solely in BTC. 

The only difference between BTC banking and USD banking (other than regulation, FDIC, etc) is the lack of a central bank.  Central bank has the ability to mint money out of nothing.   So BTC banks can acts as multipliers on the monetary based on 21M BTC but can't expand that.  If a central bank of BTC existed it could also expand the monetary base by minting >21M BTC.

You own 100 bitcoins and you own a demand deposit of 100 bitcoins at mtgox.  Mtgox has a liability to make those 100 bitcoins available to you on demand.  Mtgox may or may not hold 100% reserves (it just depends on the nature of your contract with them and whether they honor that contract).  One thing is certain…you do not have 200 bitcoins (just like you don't have dollars when they are deposited in a bank…the bank has custody of the dollars and you own a demand deposit for those dollars).

With bitcoin, this possession question is even clearer than with fiat currency because unless you have the private keys that enable you to send bitcoins to someone else, you do not have bitcoins.  Anything else is some form of contract for bitcoins that you've entered into with another party.  You can think of it like gold…if you don't have possession of the physical metal, you don't own gold.

On the question of fractional reserve banking, money supply and money substitutes, it is indeed possible for fractional reserve banking to exist with bitcoin.  While actual bitcoin money supply is limited to 21 million coins, if bitcoin substitutes become popular and widely accepted (ie. mtgox deposits), then you can effectively expand the money supply.  This could be through fractional reserve banking, or it could simply be of the form of a debt owed by one person to another that is widely recognized and which trades almost interchangeably with actual bitcoins (though actual bitcoins should always command a premium).  In the long run, the use of money substitutes based on bitcoin may serve to expand and contract the effective money supply in response to market forces rather than central planning…and this may have a stabilizing affect on the value of a bitcoin. 

What will be different about bitcoin is that it will always be clear whether you're dealing with actual bitcoins or a bitcoin substitute.  Actual bitcoins should always have a premium over bitcoin substitutes (when given a choice would you prefer to be sent actual bitcoins or a mtgox redeemable code for bitcoins?).  You will always know whether you're dealing with real bitcoins or a bitcoin substitute and, in that respect, it should be less deceptive than current fractional reserve banking practices.

Would the substitutes be traded between parties?

You have 100BTC and are owed 100BTC. MtGox has 100BTC and owes 100BTC.

MtGox debt right now trades at face value, that's just incidental and hasn't always been the case.

But if I can demand the depot back easily at any time, how is it functionally any different? Why would I not view myself as owning 200 bitcoins seeing as I can access 200 bitcoins easily?

I have never believed those fractional reserve banking related money supply creation, you can not just add the same money multiple times (typical lacking of knowledge of accounting) and said money were created by loaning out savings

Banks can lend out the same money multiple times in a year, that will change the money flow speed, but the money supply will not change without someone creating new money

Simple but still useful formula:
MV=PY
M is money supply
V is money flow speed
P is price level
Y is real GDP

It's up to you what you believe of course; but fractional reserve banking is perfectly possible and real.

Let's say that on average Mt.Gox are holding 1,000,000 BTC. All 1,000,000 are claimed by Mt.Gox's creditors; Mt.Gox (let's say) therefore has net assets of 0. Now let's say that at worst, 100,000 BTC flow out and 100,000 BTC flow in to Mt.Gox every day.   In that case Mt.Gox are holding 900,000 BTC that are doing nothing.  Nothing would change whether those BTC were literally in Mt.Gox's wallet or not.

If Mt.Gox decide to invest 900,000 BTC in Chocolate Teapots inc.; then at the moment they take that 900,000 real BTC and invest it, then the money supply has effectively increased.  900,000 BTC owed to the Mt.Gox depositors which is simultaneously invested in Chocolate Teapots.  Add up the total economy and it's 900,000 BTC more than it was.

Of course, bank runs become possible; which is why fiat currencies with FRB in place need a central bank to act as a lender of last resort -- the lender of last resort's role is to make bank runs blow themselves out.  Once everyone has their savings withdrawn during a run, what do they do with them?  They observe that the bank is still standing and deposit it again.  The bank can then return the money to the lender of last resort and everything is back to where it started.

Unless everyone decides to buy gold (or other tangible assets) with that money, in which case the money quickly becomes worthless.  ;)

In the case of bitcoin, it's clear that the supply can never exceed 21 million, no matter how much lending or fractional reserve banking takes place.  However the *effective* money supply could expand with lending activity or fractional reserve banking so long as such obligations are nearly interchangeable with actual bitcoins (i.e. people view 100 BTC on deposit at some bank as nearly equivalent to actually possessing 100 BTC).  It's not necessary to debate whether the money supply is expanded or not…if you're talking about actual bitcoins, it clearly is not.  If you're talking about bitcoin substitutes (like bank deposits or other type of loans or contracts), you could call that credit expansion/contraction.  To the extent those credit instruments can be used like money, you are *effectively* expanding the money supply.

Modifictions by me.



No the money supply IS expanding.  There isn't anything different between you depositing 100 BTC into a BTC bank and you depositing 100 USD into your local fiat bank.  In both cases the monetary supply is expanded via fractional reserves.  Does your local bank say $100 USD deposited or do they give you a statement saying 100 LocalBankScripts (not expanding money supply)?


It isn't "effectively" expanding the money supply.  IT IS EXPANDING THE MONEY SUPPLY.

The 21M is the MONETARY BASE. The difference between BTC and USD isn't monetary supply expansion via fractional reserves (which works exactly the same) it is the monetary base can never expand.  In USD the central bank directly expands the monetary base and then individual banks using fractional reserves acts as a multiplier on that base to create the money supply

I think what confuses people is that modern fiat currencies work on two principals.
1) Central bank issues currency (at the whims of central bank)
2) Deposit banks acts as a multiplier effect on that monetary base

BTC:
Fixed monetary base (21M)
Multiplier is possible via fractional reserves.
Money supply  = (21M) * (Money Multiplier)

USD:
Infinite monetary base (can be expanded or contracted at will be federal reserve)
Multipler is possible via fraction reserves.
Money Supply = (variable base) * (Money Multiplier)

http://upload.wikimedia.org/wikipedia/commons/0/01/Fractional-reserve_banking_with_varying_reserve_requirements.gif

An important thing to note is the asymptotically relationship in the curves.  Fractional reserves can only expands the money supply so much.  With 10% reserve requirement at most you can expand the money supply 10 fold.  With 50% reserve requirement you can only expand the money supply 5 fold.

Since BTC monetary base is fixed at 21M then the money supply is also capped at
BTC Money supply = (21M - losses) * (Sustainable Multiplier)

There is no requirement for a particular reserve.  A fractional Bitcoin bank could maintain 1% (or less) reserves but those banks likely would go bankrupt.  The "community" will set the max reserve requirements by free market (only banking w/ trusted banks who set conservative reserve requirements).

So for example if the BTC economy achieved a 2x money multiplier then BTC money supply would be 42M BTC.  The actual money multiplier will demand not only on average bank reserve requirement but also in the % of monetary base held in banks.  Given the ability to secure BTC outside of banks many users may adopt to never put their money in banks.

As a noob to this discussion it appears to me that everyone here is pretty much in violent agreement.  It appears that everyone agrees that:

A BTC bank could be formed, right?  There are no regulations preventing anyone from doing that.

However you do not need a bank, an "evil" central bank, or even a banking system at all in order to "increase the money supply" without "increasing the money base" all you need is for people to lend BTC to each other.

The number of BTC that exists is finite and known - something everyone must agree on or we will get nowhere :)

Take the case of three people:  A, B and C

Person A has 100 BTC, person B has zero, person C has zero.
Person A lends their 100 BTC to person B
Person B buys a product from or the labor of person C for the 100 BTC he borrowed from person A

At this point:

Person A rightfully claims a 100 BTC asset/contract in that person B owes him 100 BTC.
Person C rightfully claims the ownership (and possession) of the same 100 BTC since he sold a product or his labor for them.
Now person C can loan his BTC to person D, etc.  Loan, rinse, repeat!

Therefore the number of BTC that exists is finite but the number of legitimate claims of ownership to this finite pool of BTC is unlimited as long as you allow lending - and how can you stop the act of lending and the practice of loan contract creation?  The answer is that you cannot.  If I posses BTC I have every right to create a contract and lend them out.

Now we all agree that the original 100 BTC currently possessed by person C are in fact BTC and to the degree we agree BTC is money they are money.  Person C possesses them, they own them, and they can spend them or lend them out.
 
But what about the contract held by person A? What is it worth?  Well assuming he can find someone willing to give him 100 BTC worth of goods and/or services for the contract then it is also worth 100 BTC!  Since all these contracts created by the lending process can be used to purchase goods and services then everyone must agree that to some extent and under at least some definition of money the contracts themselves are money.  There is also no way you can stop people from selling debt contracts once they are created.

So there you have it, once people start lending BTC the BTC denominated money supply will inevitably be larger than the number of BTC that exist even without the creation of a BTC banking system.

OK, so Steve and others do not like everyone else's definition of the phrase "money supply" so they make up their own.  There are already several definitions of money and money supply so I guess a few more will not hurt anything.  However, I have done my best and I personally am done arguing over the definition of a phrase that was ambiguous to begin with.

No, MtGox can lend these coins to himself, for free, the supply goes up.

I'm holding my BTCs, but MtGox can still sell it, so i'm not holding it at all.

Not sure what you are saying.  They CAN lend it doesn't make money supply go up.  If they DO lend then the money supply increases.

Hello,

I'm the author of the "pure nonsense" edits. While I admit that my original posts were not very intelligible, I maintain that my position is correct.

Kindly review the bottom of the wiki talk page (https://en.bitcoin.it/wiki/Talk:Myths) that quotes examples by mainstream as well as Austrian authors, that claim:

• Money supply is the sum nominal value of instruments that are used as media of exchange, not the sum of the nominal value of zero-maturity instruments.
• The reason why demand deposits usually appear in the money supply is that they are used in exchange instead of the reserves. If they are not used in exchange, they are not a part of the money supply.

Merely by depositing Bitcoins into Mt. Gox, and Mt. Gox lending out a proportion of them to someone else, the money supply is not affected. It only would be affected it someone accepted the Bitcoin deposit as a method of payment. At the moment, this is only even possible though the redeemable "Mt.Gox code" and the acceptance thereof is limited.

The difference between FRB with gold/fiat and Bitcoin is that the derivative media of exchange (hypothetical Bitcoin-substitutes) do not provide general advantages over Bitcoin itself, and therefore there is little demand for them. People might use bank notes because gold coins are too heavy, or EFT because they are not at the same location. This creates a demand for exchanging these claims instead of the original gold (for example). With Bitcoin, these problems do not exist, because the Bitcoin value of a storage medium does not affect the weight of it, and you can transfer Bitcoin electronically without an intermediary. So there is little demand for the features which normally require banks.

And even if the claims evolve into substitutes at some stage, as Steve pointed out, it is trivial to distinguish between a Bitcoin and a Bitcoin substitute - they are incompatible. This makes it much easier to accept these substitutes below par, thus at least partially compensating for the case where there is an overissuance of substitutes due to FRB.

A brief summary of my argument:

• money supply measures the nominal value of media of exchange available
• Bitcoin demand deposits are, in general, not a media of exchange (unlike fiat/gold)
• Bitcoin demand deposits (or any other claims) would only become a generally accepted media of exchange if the issuers thereof find some generally demanded service which Bitcoin itself does not have
• This would only affect the money supply if the people accepting these substitutes would do so at a rate different than the reserve ratio of the issuer

Great!  So we all agree:  debt instruments denominated in BTC are not, in fact, BTC.  To the extent these instruments are used as money, lending increases the supply of BTC denominated money.

That is not true.  How do you think fractional reserve banking works?

Lets look at USD first (because everyone is familiar with it).
You deposit $100 in Bank of America.  
They lend $50 out.  The money supply has increased $50.  
You need to pay a bill and withdraw $10.  
BofA gives you $10.

BofA doesn't issue an alternate script, a BofA token.  They give you USD which are just as accepted as the USD you deposited and the USD they lend out.

You keep going back to this belief that Mt. Gox (or any "bitcoin bank") would need to issue some alternate currency/script/note and then that note be accepted as equivelent to BTC.  Where do you get that idea from?   I believe that misconception is the basis for all of your misinformation.

Lets modify the BofA example for Bitcoin.... BitcoinInternational Bank.

You deposit 100 BTC @ BIB.
BIB loans 50 BTC to a borrower.
Money supply has expanded 50 BTC.
You need to pay a bill and withdraw 10 BTC.
BIB gives you 10 BTC (not some alternate bank script, they give you 10 BTC in a normal Bitcoin transaction).

Simplisticly this is the entire basis of fractional reserves.


That is a whole different argument.  First of all lets drop this bitcoin-substitutes.  Does BofA issue USD substitutes or do they lend out USD, accept USD deposits, and return USD deposits.  A bitcoin bank would do exactly the same thing.

The question of demand for Bitcoin banks is a genuine question.  There may not be much need for Bitcoin banks thus the amount of deposits would be low and the MONEY MULTIPLIER for Bitcoin economy would also remain low.  However that is different from saying it is impossible to have fractional reserves.  

Demand for going to the moon is low but it isn't impossible to go to the moon.  

We don't know how much end user demand will eventually be created however that doesn't make fractional reserves impossible.  Convenience is only one reason people use banks.  Security is another.  The ability to earn yield is another.  

I think the use of "monetary base" to refer to the 21million bitcoins is useful.  Note, I didn't make up any definition of money supply.  The term itself is ambiguous as evidenced by the fact that every central bank publishes many different measures of "money supply" (M0, M1, M2, etc).

It's probably more useful to think in terms of "monetary base" and lending activity rather than try and come up with different measures for a money supply.  You have 21 million BTC of monetary base, that's it.  And then you have various forms of lending, some of which might serve as near substitutes for actual bitcoins, but which are still definitely not bitcoins.  What matters is the level of lending activity and the liquidity of those loan instruments (the higher the liquidity of a particular loan agreement, the more it is able to function like money).  

In the bitcoin world, we'll never likely see anything be a perfect substitute for actual bitcoins due to inelastic supply (just like nothing is a perfect substitute for physical gold).  In the US, since you have the FDIC backing most demand deposits, people can safely treat them as perfect substitutes for physical money (safe in the sense that they'll be worth what any other dollar is worth, but not so safe in terms of the value of those dollars).  If an exchange existed that traded mtgox BTC deposits, they would trade at a small discount to actual bitcoins to account for the counter-party risk associated with those deposits (unlike FDIC backed deposits of USD which would be just as valuable as any physical dollars).

Lending Bitcoins is Bitcoins just like lending USD is dollars.

You deposit $100 at a US bank.
The bank lends $50.
The money supply has increased $50.
You need to pay a bill and withdraw $10.  It isn't the same $10 you deposited but it is just as accepted.
The bank didn't issue some alternate currency for withdraws it gave you a "genuine" USD.

You deposit 100 BTC at a Bitcoin bank.
The bank lends 50 BTC
The money supply has increased 50 BTC.
You need to pay a bill and withdraw 10 BTC.  It isn't the same 10 BTC you deposited but it is just as accepted.
The bank didn't issue some alternate currency for withdraws, it gave you a "genuine" 10 BTC.

There is no need to "trade" demand deposits.  Have you seen anyone trading Bank Of America savings accounts, or Chase checking accounts.  "I got a checking account worth $280 Chase dollars (not real USD because they are in a Chase bank),  I will accept $0.90 cash for $1.00 deposited.".

Of course not.  Nobody trades demand deposits.  Anywhere on the planet.  How MUCH money is deposited and thus available for lending determines the money multiplier.  If trust of Bitcoin banks is low then only a small amount will be deposited and thus money multiplier will be low.  However it still does increase the money supply when used.

Yes they did…it's called a BofA bank account balance.  If that balance doesn't happen to be covered by FDIC, would you treat it as a perfect substitute for physical dollars?  No, you wouldn't (or at least you shouldn't) especially considering the ill-health that BofA is in right now.  Substitute MF Global for BofA and the point becomes much clearer.  Now, if the account is FDIC backed, it's a completely different story because you know your balance is protected in the event of a bank failure (because the FDIC has access to the printing press if it needs it).  In that case the bank account balance is a near perfect substitute for base money.

Kindly review the quotes I referenced. Here they are again:

Wikipedia on demand deposits (http://en.wikipedia.org/wiki/Demand_deposit) :

Another link: http://www.economicsjunkie.com/true-money-supply/ :

Rothbard in Austrian Definitions of the Supply of Money (http://mises.org/rothbard/austrianmoneysupply.pdf):

Where are your references?

In the Fiat banking system, usually the money multiplier from m0 to m1 is 8 times.
But MtGox's BTC money multiplier is infinite, as long as nobody withdraw BTCs from it.

Slightly modified scenario.

For a short time but eventually a run of the bank could collapse it and the money multiplier would shrink to 1x.  In a free market the effective money multiplier for the economy will be set by individuals.

Overall Money Multiplier = (% of monetary base subject to fractional reserves) * (1/fractional reserve used by banks on average) + (% of monetary base outside of fractional reserves) * (1).

Thus if say hypothetically only 10% of bitcoins end up in Bitcoin banks and those banks on average have a 50% fractional reserve then the money multiplier would be a very small (0.1 * 1/0.5) +0.9*1 = 1.1 

Good to see that someone seems to understand what I'm talking about  :).

This is a very interesting point. I'll borrow it if you don't mind :)

The above bolded statement is the crux of this thread.  If you agree with it you are on one side, if you disagree with it you are on the other.  The first side, those that agree, are defining money as having only one use case - as a medium of exchange.  The other side, those that disagree with the statement are defining money as having two use cases:  1) as a medium of exchange and 2) as a way to store value.

If you believe that money is a way to store value then you believe your deposits are money.  Those that disagree are saying that deposits are not money or more specifically static deposits are not counted as part of the money supply.

Your first modifications is dubious.  If someone someone doesn't think BTC on deposit has the same value then ... they won't deposit.  If they do deposit then that is a manifestation of the belief that the deposit is a substitute for "actual BTC".   So while a Bitcoin bank may find it harder to attract deposits any deposits it does attract are part of the money supply.  Nobody is arguing that Bitcoin likely won't have a LOWER money multiplier but that is a far different thing than saying the money supply = 21M and can't change (money multiplier of 1x into perpetuity).

The second modification is merely a run on the bank scenario. The same change to the USD bank scenario would have had the same outcome.   The scenario was intentionally simplistic.  In reality the bank would have some or all of this elements:

a) have more depositors so the action of any individual depositor would be insignificant
b) have access to short term funding from other entities (bank being a creditor) albeit without a central bank to be lender of last resort
c) have ability to sell loans as reserves fall to ensure it has sufficient assets available for demand
d) sell additional stock to raise reserves.
e) issue bonds in the name of the bank to raise reserves.

Exactly like a USD bank.

So:
1) BTC can be used in fractional reserve
2) The money supply thus can be >21M
3) The monetary base can never exceed 21M so that puts an "effective limit" on the money supply at 21M * (Effective Money Multiplier).
4) Due to inherent differences between fiat money and Bitcoins the money multiplier for BTC economy will likely be lower.

Please review the references:

Definition of money supply from Merriam-Webster: (http://www.merriam-webster.com/dictionary/money%20supply)

Another definition (http://www.investorwords.com/3110/money_supply.html):

Austrian definition of true money supply: (http://wiki.mises.org/wiki/True_Money_Supply)

The money supply does not measure store of value of everything that is listed as denominated in the money unit, but what's available for exchange.

Demand deposits ARE available for exchange.
I have $100 in a USD bank.  I realize I need to pay a bill. I withdraw $10.  The $100 was available for exchange.

Demand USD deposits are considered part of the USD money supply.
Demand BTC deposits would be considered part of the BTC money supply.
There is no difference between BTC & USD with that respect.  None.

Value is subjective. Merely because a depositor thinks that the deposit has value, it does not follow that other people think that too. If they are not a customer of the same issuer, they might just as well see this derivative instrument as an additional cost.

I mostly agree (and I think most people here are in broad agreement)...I really enjoy this thread.

Sure they would…I don't consider a mtgox deposit to have the same value as BTC over any substantial length of time. But in the very short run I consider it more valuable than BTC because it can enable me to exchange those BTC for dollar deposits.  The value of a mtgox BTC deposit can fluctuate independently of the actual BTC it represents.

Not exactly…if it were an FDIC insured account, the depositor would not lose anything.  In the BTC case, the depositor would lose actual bitcoins because there is no FDIC backing up the account.  The FDIC backing increases the value of the deposits to the point were is makes those deposits a near perfect substitute.

Yes, but I quibble with the notion that there is any single definition of money supply.  We're treating lending instruments (of which demand deposits are but one example) as if they are either a substitute or not a substitute (and using that as a test of whether the are included in the "money supply") but the reality is that they can be nearly a substitute, almost a substitute, somewhat a substitute, a substitute under a broad definition of money supply, or not a substitute at all.  And all this really says is that lending instruments have a value and liquidity that can fluctuate independently of the underlying BTC they represent…some are almost as good as the underlying BTC, and some are not.  Those things there are nearly as valuable and liquid (spendable) as BTC would be counted as part of narrower definitions of money supply…things that are less valuable and/or liquid would only be counted under broader definitions of money supply or not counted at all.

I don't know if I would make that assumption (it may or may not end up that way)…I can imagine scenarios involving a ripple-like debt network where p2p, short term lending would be far more common…you would have more adhoc, informal lending on a p2p basis where trust is more important than formal risk assessment…and you would also have your more traditional lending where risk assessment is rigorous.  Under such circumstances, it's conceivable that the multiplier could actually be greater.

In your example, it's the reserves, rather than the deposits, that are available for exchange. The withdrawal was a redemption, not an exchange. The exchange occurs when you trade with a person other than the issuer, and you need to withdraw prior to that.

It doesn't matter what others think.  If/when they get paid it will be in BTC.

What are you talking about customer of the same issuer?  You would be paid in BTC and nothing but BTC.

I deposit 100 BTC in to Bitcoin International Bank.
Obviously by my actions I value that demand deposit = 100 BTC in a private key I control.

I owe you 10 BTC.
I am not going to have BIB issue a BIB-share for 10 BTC and hand that to you.

I owe you 10 BTC
I withdraw 10 BTC from BIB and transfer it to you.
You receive 10 "genuine and authentic" BTC.

Your trust in BIB is immaterial.  The amount of trust collectively in BIB determines how much deposits BIB attracts.
No trust/value/utility = no deposits.
High trust/value/utility = high deposits.

Where does everyone seem to have this false impression that fractional reserves involves derivatives, alternate scripts, demand notes, etc?

Think back the last time someone paid you with USD and had USD on demand at a local bank.  Did they
a) withdraw USD and pay you with USD (via CC, debitcard, cash from ATM, ACH, etc).
OR
b) have their local bank print of bogus-localbank script and pay you with that which you then had to evaluate on its value, deposit at your local bank and request they contact the other bank and arrange repayment in USD
?

Why does anyone think that Bitcoin banking would involve B when every fractional reserve banking system in the world involves A?

I am not sure about this interpretation. Why should decentralisation decrease the likelihood of redemption?

So, can you provide references that refute my references on the reason why demand deposits are a part of the money supply?

No, they won't, and that's the point. They will receive a financial instrument denominated in BTC. They won't receive Bitcoins.

Because it does. See wikipedia on Fractional Reserve Banking (http://en.wikipedia.org/wiki/Fractional_reserve_banking):


Exactly as I said: overissuance of deposits is an insufficient reason for FRB to increases the money supply. It is also necessary that these deposits are treated as a money substitute.

If you want to be more convincing, please quote some references.

At any instant the amount of BTC held by Mt. Gox is based on the perceived value.  You can't break apart long term and short term.  A million BTC in 1 day rolling deposits or a 1 million dollars held for 1 year is still 1 million BTC.  You consider the value of 1 BTC on deposit at Mt. Gox to be worth at least 1 physically (as in exclusive ownership of private key) BTC.  It would be illogical to do deposit otherwise.

Now Mt. Gox doesn't engage in fractional reserves so the money multiplier is 1x.  They aren't a bank more like a safety deposit box.  To attract deposits any Bitcoin bank (Mt. Gox or otherwise) would need to convince you the value of BTC on demand is equivelent to value of BTC you hold otherwise you wouldn't deposit.  That means trust in the solvency of the bank which is a harder sell.


No reason that Bitcoin banks couldn't be insured.  FDIC insurance increases the value that most depositors feel their deposits have but some people in the US still don't use banks.   They don't use banks because they don't trust them.   The value of a deposit isn't universal it is based on the depositors belief.    Things like FDIC, regulation, security of the bank, need to safeguard money, need to have easy legit access drive utility and thus demand for deposits.

Still in any bank anywhere in the world if people feel a deposit has less value than "cash" then don't deposit (and likely try to withdraw).

Thus if a Bitcoin bank had 1M BTC in deposits (right or wrong) those depositors by their actions have decided the deposit has equivelent or higher value than "BTC cash" and thus is a money-substitute.

I do agree it would be MORE DIFFICULT (but not impossible) for Bitcoin banks to attract deposits but once deposited those funds are money-substitutes.


Well economists don't even agree so I doubt we are all going to agree.  I am simply saying it is possible for the Bitcoin money supply to expand beyond 21M.  Period.  How much, how we track it, and how likely are all interesting topics that will require thought.  

It is also possible that the Bitcoin money supply will NEVER expand simply because people never trust Bitcoin banks, never consider a deposit as having the same value as a coin they control and thus never deposit.  If that happens the money multiplier will remain 1x.  I know it may be a trivial distinction but a money multiplier of 1x doesn't mean a higher multiplier is impossible.  If any multiplier greater than 1 can exist then the money supply CAN (has the potential) to expand. 


That is why I said likely.  Thing like FDIC, need for security from theft, need for security from loss, need for access to money as needed all contribute to high multiplier in USD banking.  Simply put money in a bank has higher utility than a giant pile of cash in their house for more users.  Bitcoin reduces those needs, and combined with the risk banks offer makes me think that the muliplier will be lower.  I could see private insurance helping but those insurance companies will likely demand a much larger reserve fraction to underwrite any policy and that has a lower multiplier effect.

So you have a compounding effect where less of the monetary base is even subject to ANY fractional reserve and that fractional reserve is higher (lower multiple).  It is possible that Bitcoin could have any multiplier but I think it is probable that multiplier will be low compared to other economies.

A side note I don't believe Ripple is a fractional reserve system.  Even if Ripple "notes" sold on a secondary market they wouldn't be considered money as they aren't easily divisible or fungible.

The references I provided disprove the last part of the sentence. Money substitutes require acceptance as if they were money proper. Merely having zero maturity is insufficient for a claim to be a money substitute.

Further elaborations in Mises in The Theory of Money and Credit (http://mises.org/books/Theory_Money_Credit/Part1_Ch3.aspx):

lonelyminer et al agree with themselves, authors that agree with them and definitions that agree with them.  Others agree with the definitions they like.  How about this definition from here http://www.thefreedictionary.com/money


So I have found a definition on the internet that agrees that any "readily liquefiable account" is money.

Arguing about definitions is pointless.  AGREE on definition and then discuss from that starting point.

I don't disagree with you state money substitutes require acceptance as if they were money  BUT you would be a complete idiot to deposit money into a bank that you KNOW has less than 1 BTC value on 1 BTC in deposits.  That the action of depositing would immediately reduce the value of your cash.    

I would imagine most economies function on the premise that most people aren't idiots and willingly exchange an item of value (cash) for something of less value (demand deposit).  Any rational person making a deposit into a bank is doing so because they believe the demand deposit is the equivelent of money.  It doesn't matter if they are "wrong".  

If they believe demand deposit ~= cash then they deposit.
If they don't believe demand deposit ~= cash then they don't deposit.
Their action indicates they have a belief that the demand deposit is the equivalent of currency.


I disagree w/ that definition.  By that ultra restrictive definition then no demand deposit is money.  FDIC isn't absolute.  It could go bankrupt.  It doesn't provide unlimited insurance.  Also there are forms of loss (fraud) not covered by FDIC.  No demand deposit is absolutely secure and no demand deposit can be guaranteed to be immediately payable (claims though FDIC can take months). 

If no demand deposit is money then fractional reserve has no effect on money supply and the money multiplier is always 1.  I have never seen such a restriction definition before.  I am only hoping it is quoted out of context.

Nonsense.   That isn't the basis of fractional reserve at all.

Please explain to me how this isn't BTC.
I deposit 100 BTC into Bitcoin International Bank.
Bitcoin International Bank loans 50 BTC (money supply expansion).
I owe you 10 BTC so I withdraw 10 BTC from BIB and send them to you address via transaction verified by the blockchain.

You are telling me that despite the block chain validating those coins and you having an irrevocable record back to their creation and the genesis block they are somehow not Bitcoins?  Really?

I can pay you and ever other creditor completely in Bitcoins despite having my deposits on demand at BIB.

I don't understand this.

They are doing it because they think it is a better alternative, not because it's equivalent. See Mises in Human Action. The actual reason might be indecipherable for us. But the reason for them depositing, and the reason for other people accepting it in exchange are completely unrelated. You're making the unfounded assumption that because someone wants to deposit, this creates a demand for other people accepting these deposits in exchange. This might be the case with fiat and gold due to reduction of transaction costs, but with Bitcoin this reason is most likely absent.

This reasoning is false: they deposit because they think it provides them an advantage. It also ignores the actual problem, which is not the demand for depositing, but demand for accepting deposits in exchange.

And provide no alternative. I provided about 8 quotes. Do you disagree with all of them?

You probably wanted to say that "If demand deposit is not money substitute". I agree. That's what my argument is was about since the beginning.

Again, you provide no references.

However, in order to do this, you need to redeem your BIB account balance first. That is why this balance does not affect the money supply, rather the reserves do.

Once again, money supply measures what is exchanged, and it is defined this way because this is what affects prices. If you defined it otherwise, it won't fit into economic theories.

I think he said exactly what he said:  If I were to agree with your definition of money money supply then you are correct.  The subtext in his quote is that he does not agree with your definition.

Again that is one definition, how about all these others:

The two are intrinsically linked.  Why do you put your money in a bank instead of a pile in your house.
* protection from theft
* protection from loss
* ease of use
* other advantages

however none of that is worthwhile if you KNOW you will lose value by using the bank.  If you absolutely know that deposits to bank X are worthless and you will be unable to use that to pay debts and obligations (owed in USD = aka money) then it would make no sense to use bank X. 

While there are utility reasons that cause one to value a demand deposit higher than money if the demand deposit doesn't at least have equivelent value as a money substitute nobody would use it.

Would you deposit money in a "bank" that didn't hold its value and you would be unable to pay debts in full (i.e. it would require withdrawing >1$ to pay $1 in purchases or debts)?  Of course not.  No rational person would.    Now if the bank fails then you may end up in that situations BUT at the moment of deposit you valued the deposit as a money substitute.  If you didn't you wouldn't deposit.

Lastly nobody accepts demand deposits as currency.  It is an abstraction, a method of record keeping.  You owe me $100 USD are you going to write out a fractional reserve note on the money you have in your checking account and issue it to me as payment?  Of course not.  You will withdraw $100 USD from your account (another abstraction) the bank will reduce the value of your account (money substitute) and give you cash (proving that your money-substitute demand deposit IS a money substitute).  You pay me in actual money.

BTC equivalent:
If I owe you 100 BTC I will withdraw 100 BTC and pay you. There is no need for you to trust if my demand deposit will be accepted by a third party as equivalent you aren't being paid in demand deposit notes.   You are being paid in BTC.   What determines if I deposit in a demand deposit account is IF I have a belief that this is a money substitute.  That it is fungible, divisible, transferable (via withdraws, writing checks against it, credit card transactions, etc).


And provide no alternative. I provided about 8 quotes. Do you disagree with all of them?
[/quote]

I had no problem w/ prior definitions they weren't absolutist like that one was.


So no demand deposit is a money substitute? 

IF you accept that fiat demand deposits are money-substitute then why not BTC demand deposits?

What would make BTC demand deposit not money substitute when for example Iraqi Bank demand deposit is money substitute?

Also please don't say FDIC. FDIC doesn't make something money.  They US existed for decades without FDIC and obviously have both currency and demand deposits.  Many countries today lack FDIC equivelents or when the have them they are not trusted as absolute by the populace.

I actually did not define money. I defined money supply, and money substitutes.

Regarding the inclusion of demand deposits in money supply, I provided three different quotes which explain the conditions under which demand deposits are included in money supply. These are present with fiat and gold, and absent with Bitcoin.

References would do no good because you are comprehending the references YOU provided.  


Read that again.
Now read it one more time.
Now once more.

REDEEMING A BITCOIN DEMAND DEPOSIT FOR BITCOINS MEANS IT IS A MONEY(BTC) SUBSTITUTE!

How do you think it works in USD banks?

I'll modify the quote.


So you believe that any deposits held by BankOfAmerica are not part of money supply?  This is the very defintion of money supply?

YOU NEVER PAY ANYONE WITH DEMAND DEPOSITS.  EVER.  IN ANY COUNTRY SINCE THE BEGINING OF MODERN FINANCES.  PERIOD.

When you pay someone the Bank (which doesn't have as much MONEY as they owe in MONEY-SUBSTITUTES) takes the portion of your MONEY SUBSTITUTE account and gives you MONEY.  You use that MONEY to pay someone who deposits it in their bank account and thus increases the value of their MONEY-SUBSTITUTE.

There is no difference between USD & BTC?

So at this point I am not sure what you are trying to say?  Are you saying no demand deposit is a money-substitute?  

You are aware when you have $100 USD in deposit at BankOfAmerica it isn't money.  It isn't money because BankOfAmerica has less money than it owes depositors.  This is exactly how the money supply grows.

BankOfAmerica may have $10M in actual MONEY but $80M owed depositors.  
The $70M difference is the growth in money supply through the use of money substitutes.

Of course they do. Anytime you use a debit card, credit card, paypal, cheque, eft, you're doing it. The banks, when processing those transactions, do not beam the contents of their vaults to the recipient: they send a bunch of data back and forth and adapt the balances of their accounts.

I clearly specified my argument as a conditional. Whether demand deposits are or are not money substitutes is an empirical question. With gold and fiat, they are. With Bitcoin, they are not, and I argue that they probably never will be to a significant amount.

It is not up to me to decide this. I merely present the facts: BTC demand deposits are generally not accepted as substitutes for BTC. Period. I provided my own explanation why this is the case: transaction costs, incompatibility, et cetera. If you disagree, either show where they are generally accepted, or provide a different explanation why they are not.

Also, I forgot to mention one thing: you can have a bitcoin bank without using claims, and instead using pure Bitcoin. Strongcoin does this: their "accounts" are not demand deposits, they are merely another way of storing Bitcoins, similarly as Bitbills and Casascius coins do.

No. Exchanging a Bitcoin demand deposit balance for goods or services means it is a substitute. Redeeming a demand deposit means it's a claim. Read what I actually write.

Dubious distinction. 

If a US bank existed that only allowed deposits, and withdraws in cash and used fractional reserve you are saying it isn't part of the US money supply.  You are aware for decades that is how US banks existed.  Nobody pays with a demand deposit.  They pay with money.  Money-substitute is exchanged for money and used in payment.

Just because direct bank to bank networks now exists to make it easier to facilitate the transfer of payments doesn't make that a requirement.  Fractional reserve banking has existed a lot longer than direct bank-bank transfers.

Those aren't demand deposits.
They aren't money substitutes.
They aren't fractional reserve banks.

Textbook distinction.

Exactly. You just need to think about it a bit longer.

No. Before fiat money, banks provided bank notes: a money substitute for gold, which they eventually issued as fractional reserves.

On the contrary, that's precisely what it is.

Yes, as bank notes. And because it was more acceptable for a holder of the note to accept FRB than demurrage, this is how FRB came to dominate.

No, they are not. Strongcoin has no "reserves" upon which they issue claims. They merely allow you to encrypt your private key on the client side. Strongcoin cannot initiate a transaction nor, if you make offsite backups, prevent you from doing so.

Correct.

On the contrary, it follows exactly from the meaning. Money supply is the sum of things available for exchange. If there were a "cash only" bank, it could not do anything to the money supply, regardless of the what inflated balances they would show.

I am sorry to challenge your ideas, but they find no reflection in any economic theory I know of. You provide no references and when its shown that you're plainly wrong, you just skip over it.

Banks in the US have operated on a cash basis for a very long time.  Since 1913 no bank has issued a private currency for demand deposits.  They accept and disburse federal reserve notes.

Electronic high speed settlement is a recent development and not essential for any fractional reserve system.  A cash only bank would most certainly be part of money supply.  Its deposits are available upon demand.  Just as I can charge $100 via debit card against my demand deposit account I can also withdraw $100 from my demand deposit account which contains not money but money-substitute.

A limitation of only withdrawing cash is in no definition of money supply.  None that you have provided.  You continually provide links, references, quotes and then reach beyond those inferring claims which don't exist or are not supported. 

Since 1913 no bank has issued any private reserve note and prior to high speed electronic clearing banks cleared check drafts and wire transfers by settling against credit lines established at the reciprocal banks (and reserve banks).  Cash and other assets could be transferred via slower methods to clear those credit lines.  By your definition (not the definition of any reference you "cited") those banks and their reserves were somehow outside they US money supply.

Of course a need to conduct commerce that way is made unnecessary by the Bitcoin blockchain.  There is no need for me to send you a check worth 10 BTC when I can simply send you a 10 BTC.  Payment methods like checks, ACH, and wire transfers came about because of the limitations of cash.  However their use isn't essential to banking or fractional reserves.

Most commerce at one time was conducted in currency.  Currency that was drawn on demand from demand deposit (money-substitute)  accounts.  Your belief that a cash bank weren't part of the money supply has no merit.

Citations concerning the definition of Money Supply
Here is one. (http://www-personal.umich.edu/~alandear/glossary/m.html#MoneySupply)

"There are several formal definitions, such as M1 and M2, but all include the quantity of currency in circulation plus the amount of demand deposits. The money supply, together with the amount of real economic activity in a country, is an important determinant of its price level and its exchange rate."

Or how about we look at the top of the Wikipedia article on money supply:
"standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).[2][3]"

We can even cite the Fed!
http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html

"The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. ... The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds."

The definition of money supply couldn't be more consistent.

But lonelyminer clearly isn't buying it.

I want to see if we can all agree on the following: The number of bitcoins people think they own, and the amount of value that they are willing to trade, determines how much bitcoins are worth. For example, If people collectively think they own 7.673 million bitcoins, and everyone is collectively willing to pay 17.26 million dollars for them, then bitcoins are worth $2.25 each, correct? Does anyone disagree?

However, they issued cheques, and there were cheque clearing houses. See wikipedia:
http://en.wikipedia.org/wiki/New_York_Clearing_House#History

You continue to contradict any reference that I could find, and can't provide any yourself. You also fail to address my actual points, other than you disagree with them.

Atheros, for the last time, the definition of money supply has a reason. Those that you quote merely implicitly assume that demand deposits are used as a medium of exchange, because that's how it evolved with fiat and gold. None of them say that this condition is unnecessary.

I provided three quotes that explain the conditions under which demand deposits are a part of the money supply. You provided zero.

I propose that you pick any university economist you like that understands macro and ask him if the reason why demand deposits are in the money supply is that they are treated as a medium of exchange.

No no, You are the only one assuming this.

Nor do any say it is necessary. In fact, if it were necessary, they would have said it.


You are right that I provided zero conditions. Because all demand deposits are part of the money supply.

I want to see if we can all agree on the following: The number of bitcoins people think they own, and the amount of value that they are willing to trade, determines how much bitcoins are worth. For example, If people collectively think they own 7.673 million bitcoins, and everyone who knows about Bitcoin is collectively willing to pay 17.26 million dollars for them, then bitcoins are worth $2.25 each, correct? Does anyone disagree? If no one disagrees, I'll assume we all agree so far.

So why do my three independent sources claim something else? They don't even belong to the same economic school.

I'm sorry but for this this is too far detached to the question. I also have fundamental objections, for example there is no "worth", there's only the market price.

I think what this thread tells me is that it's almost pointless to think in terms of "money supply" …in a digitally connected world where almost anything can be turned into a securitized asset and traded in deep and liquid markets, many things can serve the role of money.  Especially from my perspective where I see the very real possibility of payment in any number of currencies (bitcoin, bank deposits, stocks, MBSes, CDOs, etc) and the immediate conversion of those funds into any kind of asset allocation a merchant desires.  The merchant might want to hold 10% in bitcoins and 50% in mtgox EUR deposits, and 40% in AAPL stock…someone could pay in gold backed tokens and then we convert those gold tokens into these other assets in real time.  To understand how extended the economy is with respect to obligations (in order to project whether we're in store for an expansion or contraction), you would want to understand all of these assets and their volatility, depth and liquidity.  You would want to model what percentage of assets people hold on average that are contractual in nature relative to those that have no counter-party risk (land, gold, bitcoin, etc).

Jesus Christ, if you can't agree to such a simple premise, I give up.

Everybody Else,
I want to revert the wiki back to the way it was (perhaps with additional information pointing out that the monetary base is limited to 21 million bitcoins) but this gentlemen is going to change it to his goofiness. What do we do? Let him have half of the space to present his viewpoint?

You miss that the purpose of the money supply calculation is to measure whatever is available for payment. Merely because a debt instrument has zero maturity, it does not allow it to be used as a payment and it does not influence the amount of money available for payment. If you abandon this requirement, further economic methodologies that refer to the money supply (for example, inflation, money velocity) lose their meaning.

Atheros, I provided multiple quotes that claim:

• The purpose of the money supply is to measure the nominal value of whatever is used as a medium of exchange.
• The reason why demand deposits are included in the money supply is because they are used as a generally accepted medium of exchange

You provided zero references that counter this, you merely cling to some inadequate explanations which do not address either of these points. You practically invented your own economic theory. Again, I challenge you to pick any university economist that disagrees with the above claims.

I remember tutoring a friends' son in chemistry in preparation for his exams a few years ago. His textbook said: there are three states of matter: solid, liquid and gaseous. I know of course that there are many other states of matter, such as plasma, superfluids, Bose-Einstein condensate, just to name a few. A short look at wikpedia confirms this. The textbook dumbs it down to a level it is adequate for a high-school student. That does not mean the textbook refutes the existence of other states of matter.

Similarly, the definitions of money supply that include demand deposits dumb it down for a casual reader, and do not refute more in depth analyses that explain the reason why demand deposits are included in the supply in the fist place. I provided several quotes, by Austrian as well as mainstream sources, that explain what money supply is, and why are demand deposits usually included. My opponents have countered with dumbed-down versions targeted at casual reader that skip over the question.

Find a professional economist, and ask him for to address my points. Do not invent your own economic theories.

Atheros and DeathAndTaxes,

Here is yet another reference, by Anna J. Schwartz, who, together with Milton Friedman, pioneered the concept of money supply: http://www.econlib.org/library/Enc/MoneySupply.html
(emphasis added)

Furthermore, Atheros' own quote of Wikpedia, http://en.wikipedia.org/wiki/Money_supply:
(emphasis added)

Yet you're both adamant that this is not how it works, because it is possible to simplify this into one sentence that can be interpreted is if it contradicts this. You stick with your interpretation even though it negates almost everything build upon it and annihilates the concepts of inflation, money velocity, and, the actual reason for our debate, fractional reserve banking.

Address my points and stop making up stuff. Quote any economists that denies that the purpose of the money supply is to measure media of exchange, or that the reason why demand deposits are included in it is that they are generally accepted as a medium of exchange.

"Worth" has nothing to do with it.  The dollars used to buy the gold still exist, and are eventually deposited back in a bank.  Those dollars eventually make their way back to the central bank to wipe out the debt.

The problem is that central banks don't just print money during bank runs, they print it on a whim.  They aren't constantly pushing the banks to return the "last resort" cash that they borrowed.  So that printed money stays in circulations and, exactly as you say for gold being purchased, reduces the worth of all dollars.


Others have covered a response to this as well as I could.  I think our only difference here is that you are calling the "monetary base" the "money supply" and the "money supply" the "effective money supply".  Fine -- use whatever words you want.

You love grabbing quotes that nobody disagrees with and then apply meaning unsupported by the facts.

Money in a US bank account is a medium of exchange.
Money in a BTC bank account is a medium of exchange.

Period.

Your belief that one must use non-"cash" methods of exchange for a demand deposit to be suddenly a magical medium of exchange has never been backed up by all your hundreds of unrelated "cites".  Nobody dispute the cites.  I am disputing the inferences you are making out of thin air and then pointing to an unsupported cite.  Taking a quote and then using it support a position that has nothing to do w/ the quote isn't considered a cite.  Then claiming people disagree with the quote is intellectually dishonest and lame.  Have fun talking w/ yourself.

For large portion of this countries history most commerce was conducted by currency.  Your belief that demand deposits weren't part of the money supply because people used cash for the actual trade is not only dubious but not backed up by one of the barrage of spam cites you keep "referencing"".

You are on ignore because you are pathetic, obviously trolling, and honestly what you think or believe really has no relevance in my life.

Only when it is exchanged, such as by cheque, EFT, POS terminal. See the other quotes I provided.

Only to the extent it is used an exchange, which is very rare (Mt. Gox codes, internal flexcoin transfers, etc).

Period.

On the contrary, it was in my second post, as well as in the bitcoin wiki talk page. You are either a liar or just ignorant.

I provided three quotes which explain that being used as a medium of exchange without prior redemption is a necessary condition for a demand deposit to be included in the money supply. Here they are:

https://bitcointalk.org/index.php?topic=51899.msg619480#msg619480

Confront them.

You provide no references which support your claims, and do not confront my references, which contradict your claims.

Ask a professional economist to confirm your claims. Otherwise, you're just making up stuff which has no backing.

By the way, if anyone wants to discuss this in person, I'll be at the Prague Bitcoin conference next week.

At first I thought that lonelyminer was just being a "religious fanatic", just spouting dogma over and over but now I am starting to think (to complete the metaphor) he has the patience of a saint.  He has finally won me over with this comment:


This hit home with me as an electrical engineer who is constantly explaining things like electricity, physics, math, cryptograph (including Bitcoins) to my very inquisitive 5 year old.

It got me to thinking that hey, maybe I am not as well informed on this subject as I could be.  After all I am an electrical engineer, not an economist.

I think what he is saying is that when you measure the money supply in order to measure, calculate and predict other things like inflation etc. you want to measure the "live" money and you really do not care about the "dead" money.  The dead money is sitting there doing nothing for the economy at the moment.  Isn’t the BTC economy actually a perfect case in point?  If you look at all the BTC a lot (most?) of it is dead lifeless money sitting in accounts.

In fact here is what got me over to the "dark side":  consider all the BTC that are sitting on public addresses where the owner has lost the private key.  Should this money be counted in the money supply?  I think the answer is obviously no.  This money is truly dead and will always be.  It will never contribute again.  Now think of the money sitting in accounts that has been there since it was created and has never moved.  We all know that all this money may someday contribute to the economy but it currently is not.

Again, I admit I don’t really know what I am talking about here but it seems to me that in the BTC economy removing money sitting in deposit accounts like Mt. Gox from the accounting of the money supply may not go far enough in this attempt to measure “live” versus “dead” money.  In the BTC economy we would have to estimate and remove all the actual BTC that have been destroyed through lost public keys, or destroyed on purpose by sending them to addresses like http://firstbits.com/1bitcoin (what a shame, I wish they had sent them to me instead!)  Also when calculating the money supply it seems to me you would also have to take into account and remove all the “early adopter money” that is not dead but is more like zombie money, it just sits there and sits there as long term savings/hoarding.

So my suggestion for the wiki is that we start out with a paragraph something like the original explanation that we all know and love and then add a second section that further refines the explanation taking these further distinctions of definition into account.

Thank you for your reaction bwagner. I think I actually need even more patience. While I don't know why Atheros is objecting to my claims, I think DeathAndTaxes just for whatever reason completely missed the quotes where I provide exactly what he claims I'm missing. Since he's ignoring me now, possibly I won't be able to resolve this with him.

I'd like to think of myself as falsificationist and rather than attempting to take the position a of a 100% believer, I prefer to take the position of a 99% doubter. The reason why I hold the opinions I hold is that I have been studying money intensively since I started being interested in Bitcoin, having now read over twenty books and thirty papers about the topic. Often, the claims in them contradict each other, but in this case of definition of the money supply and why demand deposits are included in it, I found no dissent, as evidenced by my references, which are even from proponents of different schools of economic thought (even though I personally lean towards the Austrian school).

The distinction between "live" and "dead" is a nice way of putting the term money supply in simple terms. Your arguments about "zombie" and "lost" Bitcoins are, of course, very valid. Unfortunately, we do not have a good way of measuring that. The best method for measuring behaviour of Bitcoin I found is cumulative bitcoin days destroyed, which I slightly modified to represent a relation to bitcoins in existence. This tells you how often, on average, a Bitcoin was spent. I think it's a unit that makes more sense as a measure of velocity than CBDD.

I don't know if you have see this but check out http://ecdsa.org/stats.html

If you take your cursor and run it across the graph from left to right is animates BTC movemment.

If you take your cursor all the way to the right and then pick a point in time, let say one year ago, and then calculate the blue area from day one through the day one year ago I think we can safely take all those BTC from the money supply calculation since this blue area would represent all BTC that have not moved in over one year (lost, destroyed, saved/hoarded).

Notice the large number of BTC that were created in the first year that have never moved.  I believe that in that time when BTC was just a "toy" some (many?) people ran their CPU miners, got bored with it and then deleted the program (lost forever), others collected a bunch when they were basically free and are sitting on them, etc.

I didn't know the site, I perform these calculations in mysql (with the help of bitcoin-abe). Last time I calculated it, I think on November 1st,  only 28% of the Bitcoins mined in first year have been spent at least once. That does not necessarily mean they are lost, I just saw a transaction sometime during the last week which showed bitcoins mined in 2009 and unmoved being spent, I think it was like 4000 or something.

And that demonstrates a problem with lonelyminer's definition of money supply. If it is only currency in circulation, then we must take out the cash grandma hides under her bed, and bitcoins people save for a long long period of time without spending.

I think, or at least hope, that we can all agree that deleted coins are no longer part of the monetary base. That's where the word monetary base is useful. And a smaller monetary base does affect the money supply. But it is not the same thing. If lonelyminer wants to propose another word which means currency-in-circulation, that would be fine. But lonelyminer's definition of money supply is problematic and not useful.

Per the links that I cited, Money Supply is defined as "currency in circulation plus demand deposits (depositors' easily accessed assets on the books of financial institutions). This definition, Bitcoin included, is useful. I wasn't going to bother explaining the following, but seeing as I'm now losing Brucebwagner and possibly other readers, I must explain.

The number of bitcoins people think they own, and the amount of value that they are willing to trade, determines how much bitcoins are worth. For example, If people collectively think they own 7.673 million bitcoins, and everyone who knows about Bitcoin is collectively willing to pay 17.26 million dollars for them, then bitcoins are worth $2.25 each.

But suppose that Satoshi decided long ago that there were 100 bitcoins in each block instead of 50 starting out. The project would have developed the same exact way except that bitcoins would have maxed out at a value of $15 rather than $30 several months ago, would be worth $1.12 now, and everyone would have twice as many. The total value of the Bitcoin economy would be the same as it is in real life. The amount of money or other value that people collectively exchange for bitcoins is constant, but the value of each bitcoin depends on how many bitcoins each individual thinks they own.

But everyone must recognize that it isn't the monetary base that determines how valuable bitcoins are, it is the money supply. The difference is the demand deposits. And this is why I asked such an important question at the beginning of this thread: If you have 100 bitcoins in your wallet, and 100 on MtGox, how many do you have? Most people think of a bitcoin in MtGox as being just as easily accessible as one in their wallet and they consider themselves to have 200 bitcoins.

Lonely miner says that those 100 bitcoins in MtGox cease to be part of the money supply. If that was true, and everyone moved their money into MtGox and other banks, then the value of each Bitcoin would skyrocket because the money supply would drop significantly. Clearly that isn't what would happen because everyone still considers themselves to have bitcoins, and they would behave as such which means that many people would sell if the value rose an unreasonable amount. Under my definition of money supply, the money supply stays the same, as we would expect.

Let us consider a further situation. Almost all of us would agree that if Satoshi started us at 100 bitcoins per block, then each bitcoin would be worth half as much and there would be twice as many of them, right?
Lets go back to real life where there are 50 bitcoins per block, but let's imagine that MtGox lends out half of their bitcoins, which raises the money supply (under My definition) by, lets say, 5%. The people who get these bitcoins would be free to do with them whatever they want and they would do various things: they would spend them further on goods and services, they would store them in a wallet, and they would sell them. These are important points. You and I still have our same number of bitcoins in MtGox, but suddenly there are Bitcoins that weren't there before suddenly on the market. This would lower the value of each bitcoin. It would lower it by about 5% because that is how much the money supply increased. Even the people who only have these bitcoins stored in their wallet contribute to this phenomenon because these people are now holding bitcoins, despite not buying bitcoins from You or I. This is why my definition of money supply is useful: because it accounts for this phenomenon.

The factor by which the monetary base increases into the money supply is called the Money Multiplier.
http://en.wikipedia.org/wiki/Money_multiplier

It is not my definition. I quoted references.

The label "in circulation", while more precise than what you use, is also inaccurate. It's a bit more accurate to say that money supply measures what can be spent. You cannot spend what is not a medium of exchange. If there are 100 BTC in existence, and by FRB you increase them to, say 1000 (multiplier 10), it is still impossible to buy things that are more expensive than 100BTC, unless someone accepts the account balances as a means of payment.

Please confront my quotations that unambiguously identify acceptability in exchange as the reason why demand deposits are included in the money supply.

We already have.

DeathAndTaxes ignored my quotations and claimed I never posted them.

You replied that because a more simplified version of the definition skips over my point, it refutes it.

You have zero evidence that your interpretation is correct, and fail to address any of my objections. Instead, you repeat stuff that you made up.

I emailed to a professor of economics that belongs to the Keynesian school, asking him to address my claims. I recommend you write to a monetarist one. We already know that the Austrian school agrees with me, so we'll see how the others fare.

Let me try to explain how money supply works on the example of money velocity.

Let's say that FRB increases the nominal value of balances of Bitcoin demand deposits from 100 to 200. Let's say that the annual GDP of the economy is 400. If the demand deposits are not used in the exchange, on average, a Bitcoin "money" will be spent four times. If the demand deposits are used in the exchange, on average, Bitcoin "money" will be spent twice. If you put this into the equation of money velocity ( http://en.wikipedia.org/wiki/Velocity_of_money ),

V = GDP / M,

reformulated into

M = GDP / V

you will end up with the money supply being twice in the latter case as in the former one. This leads to the conclusion that usage in exchange determines whether a debt claim, such as demand deposit, is a component of the money supply.

Denying the requirement of an exchange medium invalidates the concepts of money velocity and/or GDP.

I tried to formulate a similar argument with respect to inflation, but I couldn't, because this depends on how you define the money supply in the first place and would neither support nor refute either position.

First off my name is Burt Wagner, not Bruce Wagner.  Burt Wagner = electrical engineer, Bruce Wagner = possible scammer and hated personality in the Bitcoin community.

Now here is what I have learned from LM:

The standard economics 101 textbook definition of the money supply is cash plus demand deposits.
The more accurate economics 201 definition of the money supply is all the money that is available to be immediately spent on goods and services.

For dollars these two definitions are basically the same and lead to the same number, for Bitcoins the two definitions do not lead to the same number.

To simplify let’s just look at checking accounts as an example.

Now a check for $100 is not exactly $100.  If you accept a check for $100 you know you do not have the $100 yet.  You have to cash it.  However checks for $100 are generally accepted as payment for goods and services.  This general acceptance of checks for goods and services makes the money in a checking account spendable and therefore part of the money supply.

Therefore for dollars the money supply is cash plus checking accounts and both definitions are accurate because checks are accepted as payment for goods and services.

Now if you have Bitcoins at Mt. Gox and you could spend them using Bitcoin checks and Bitcoin checks drawn on a Mt. Gox checking account were generally acceptable as payment for goods and services then this money in your Mt. Gox account would be counted as part of the money supply under both definitions.

But Mt. Gox checks do not exists yet.  Now I will bet you a few BTC that if people could write checks on their Mt. Gox accounts and these checks were generally accepted then LM would count them in the money supply.  So his point really is that not only do Bitcoin checking accounts not exist but that it is highly unlikely that the concept of Bitcoin checks will ever exist due to the ease of movement from your demand deposit account to your cash wallet.

So what it boils down to is there is a difference between dollars and Bitcoins.

Dollars: you can write a check, get your goods and services with it, and then the seller can convert your check to dollars at a later time.  In other words you don’t always have to go an ATM and get cash before you can buy something.

Bitcoins:  you must first get your Bitcoins into your wallet and then you can spend them, there is no ability so spend first then convert later.  In other words you must always “go to the ATM” first and get cash before you can spend BTC.

Finally and this is just simple math given what I just said:  until there is a way to buy goods and services with something denominated in BTC other than the actual BTC in a wallet (BTC checks for example) the maximum number of BTC units available to be spent at any given time on goods and services can never be more than the total number of BTC that exist.

I confirm that this accurately represents my position.

Well, approximately. There is no apodictic reason why it should be that way. The reason is more empirical. According to my analysis, the reason why people choose to use demand deposits as a method of payment with gold and fiat is that it reduces their transaction costs. With Bitcoin, this reason is absent. While we cannot entirely exclude the possibility that people would accept it, they lack the motivation to do so. This is what I originally attempted to explain in my wiki edits: someone who wanted to inflate the money supply would need to persuade others to accept the claims he issues as a means of payment, rather than merely a zero-maturity investment.

I have a whole chapter in my upcoming paper which lists how features which require money substitutes when using fiat or gold can be implemented in Bitcoin without debt claims. We already have BitBills, Casascius coins and Bit-pay mobile solutions. The examples how to create hypothetical "Bitcoin-cheques" have already been shown in other threads on the forum, and just a couple of days ago the guys from Strongcoin published tools that allow to create offline transactions. I already speculated in the past in my paper that if this is possible, an exact functional replication of cheques can be implemented in native Bitcoin: you create a transaction that transfers a balance from the issuer's account to a newly created address, and print the transaction, private and public keys of the new address as a QR code onto a piece of paper. The recipient tears the paper in two, and "lodges" this "cheque", i.e. injects the transaction into the bitcoin network. Then he scans the rest of the codes (private&public keys) into his wallet, and checks the balance. If the transaction was invalid, e.g. insufficient funds, the balance shows zero, which is the equivalent of a bounced cheque. In total, from end user perspective, this works exactly as a bearer cheque. Because this can be implemented without a debt instrument, there is still no demand for bitcoin-substitutes.

And for the record, I'm not claiming that such a method of deferred payment as cheque makes sense, I'm just showing that what I call "overglorified management of money substitutes", which composes of a large proportion of banking activities, would likely be completely absent with Bitcoin. That this would result in a more stable money supply is just a nifty consequence. I already posted elsewhere that if Satoshi anticipated this, he/she/they is a double genius.

FRB doesn't increase the nominal value of anything. It increases the money supply. I can't believe I'm still bothering to argue with you.


That conclusion doesn't follow from what you've presented. You have a very bad habit of assuming much more than what is said or defined. If the money supply(M) is twice as high due to FRB, then the velocity(V) is half. How does that help your argument?

My greatest apologies.

Concerning your post,
There are many ways to get dollars out of your bank. You can walk to your bank and get cash, you can use your ATM card, or you can use a check to instruct your bank to move dollars into another account. That's all checks are is an instruction to move dollars. They aren't more special than walking to your bank and getting cash.

Everyone realizes that lonelyminer has said that when you put your dollars in a bank that pays interest but has no checking services or electronic transfer services, that your dollars are no longer part of the money supply, right? As long as everybody's clear on that.

I think that is a great example!  Anybody remember the passbook savings account from my childhood?  I had an actual physical book and when I deposited my earning from my paper route into the account they would take the book from me and run it through a machine and it would print the deposit amount and the new total right there in the book.  This was an interest bearing account.  Now I could have tried to take the passbook to the comic book store to buy some comics but we all know how well that would have worked.

I had to go to the bank, ask for some cash, they would run the book through a machine that would deduct the amount I requested and print the new amount right there in the book.

I could not directly access and spend the money in the passbook savings account.  I had to first go and get the cash.  Therfore the money in that passbook was not spendable and according to the "spendable" definition it would not be considered part of the current money supply.

Once I left the bank with my comic book money in my pocket that money was ready to soon be spent and was therefore part of the current money supply.

So, in my example, the nominal value of money and debt instruments does not increase from 100 to 200? Are you absolutely sure about that?

Evidence? Quotes? I already provided mine, here it is again and expanded:

Wikipedia on fractional reserve banking: (http://en.wikipedia.org/wiki/Fractional_reserve_banking)

Some random guy on the internet: http://truthandliberty.com/Econ_5_4_FR_Banking.html

It shows that your explanation of money supply contradicts money velocity and/or GDP.

How come that all the "evidence" you provide ignores my point completely and never mentions it?

Once again: ask a professional economist. Absent that, it would be prudent to finally admit defeat.

When you use the cheque, the banks do not beam the dollars among vaults. Rather, they perform clearing operations on their books. This is why using a cheque that is not fully backed by reserves increases the money supply.

This is incorrect. It only cases to be a part of the money supply if the debt instrument they issued is used as a means of exchange instead of the reserves (i.e. exactly the opposite of how you portray it). If there are no ways of transferring it indirectly, then it still is a part of the money supply. Most likely, the bank in such a case would lend the money rather than store it in their vault (how else would it be able to afford to pay the interest?), and the recipient of the loan would then use it in exchange.

I don't exactly follow...

Let's look at the Net Asset Value of A, B and C

At the beginning:
A's NAV is 100 BTC
B's NAV is 0
C's NAV is 0, but since he have 100 BTC worth of goods, his NAV should be counted as 100 BTC

Now after the lending
A's NAV is still 100 BTC, he does not have any BTC, but he owns a 100 BTC loan contract which worth 100 BTC
B's NAV is still 0, since he owns 100 BTC value of goods and 100 BTC debt to A
C's NAV is still 100 BTC, since he owns 100 BTC

With each lending, the corresponding debt is created, the debt is always a negative NAV, the totally amount of NAV will not change, you can lend out the same BTC multiple times but that will not change the NAV of the whole system, and will not change the money supply

I created a gold coin, that coin can be spent hundreds of times if it goes into circulation, but that does not equal to creating hundreds of gold coins

For me the important difference is that with regular banks, customers must accept a 10% reserve bank policy because the law say so. But a bitcoin bank have to compete with other bitcoin banks with higher reserves to get customers. No bitcoin bank has chosen a different policy than 100% reserve as far as I can tell. And in a near future (https://en.bitcoin.it/wiki/BIP_0011), a transaction can require both your signature and the bank's. In this case the "bank" is called a wallet protection service.
But I don't like calling mtgox a bank. Banks are about borrowing and lending from my point of view.
In these sense, I would say there's no bitcoin banks yet.

I need a moderator to read this thread. Is there an economics moderator? lonelyminer is a troll.

Within this sentence, if you take out BTC and write in dollars, then this statement is still just as correct. But obviously the money supply of dollars increases due to Fractional Reserve Lending. So something must be wrong with this line of thinking somewhere.


Definitely.

I am sorry to break it to you this way Atheros, but you are the troll. I provide evidence, solid reasoning and integration into economic theories. You just whine and make up stuff.

You complained when I quoted Austrians that it's not mainstream. So I found quotes from Wikipedia and other sources, and stopped quoting Austrians (had I not done that, I could have easily provided many more references, because the Austrian school is the one I'm the most familiar with). As a reaction, you just ignore them because you ran out of excuses.

And when I ask you several times to contact a professional economist, after ignoring it for a while, you suddenly present this idea as your own and something that you expect to work against me.

You are not interested in having the issue resolved. What you want is to shut up people who disagree with you, because you can't find arguments to support your position.

Meet the Islamic Bank of Bitcoin (http://www.ib-bitcoin.com/). Coincidentally, Islamic law does not permit FRB, but in this example it's just a curious datum and not a part of my argument.

I find it curious how you can accuse me of this, while simultaneously claiming that because the quotes you found ignore my point, they contradict it.

Oh, yes. I forgot that one.
Sorry, I didn't read your point, just the first page of coments or so.
Islamic law doesn't permit interest, but what's FRB ?

FRB = fractional reserve banking, the origin of my disagreement with Atheros.

Actually, now that I googled about the relationship betwen FRB and islamic law, I came across this:
'The New Straits Times' Kuala Lumpur during August 1997 (http://www.islamic-finance.com/item1_f.htm)
This article makes an even stronger point than me, it claims that the ability to lend is a consequence of the acceptance of the debt claims as a means of payment. So even if my reasoning for the conditions under which FRB expands the money supply was wrong, according to this article, under the conditions stipulated (not accepted as a method of payment) it would not even come to existence. Personally, I don't think they are right, rather than FRB being impossible, it would merely be less likely, but you can clearly see that the line of reasoning I'm taking is widespread, rather than a fringe position of someone who insists on creating his own economic theory.

A related question...
Let's generalize from bank's credit to any form of credit.
When denominated in a given currency, does it cause inflation in that currency?
For example.
A and B go to the bakery.
A brings $1 but B doesn't.
There's only one loaf left and the price is 70 cents
A says, "here's the money, I'll take it".
But the baker trusts B and accepts his credit.
B says, "I'll give you 75 cents, next week"
B signs a paper IOU, gives it to the baker and takes the last loaf of bread.

Since credit can be used to bid in some cases, can it be counted as part of the money supply?
I specifically mean count as part of M in the equation of exchange (MV = PQ).

I think FRB just works like insurance, most of the time banks can loan out the deposited money without huge risk, due to the risk is diversified between different saving accounts. But if they fully utilize that credit, and a social or economy crisis come, most of the people will have to withdraw money to pass the difficult time, then banks will get hit badly

And, I think like government debt, it is always the first group of people entered the system benefit the most. The current banking system were mostly established after the world war II, at that time very few people were withdraw money from the system, they were keep accumulating through 20th century and now they are going to
withdraw, and anyone who joined this system today will have to pay older generation's pension, thus impossible to accumulate new wealth in bank's system

I hope I can explain how it works. Money supply calculation must always refer to a group of people that it applies to. This is what the terms GPD and money velocity also refer to. Nowadays, this roughly corresponds to countries, which have national currencies. In addition to that, people also sometimes accept debt claims instead of the "normal" money. There is an element of fuzziness here, typically, noone accepts all forms of money all the times. Some shops don't accepts credit cards. One usually cannot pay the taxes in cash. Shops close to country borders often accept both country's currencies. As long as people's preferences with respect to money are different, the money supply cannot be measured with complete accuracy. What we are stuck with is the general acceptance, i.e. what a typical person does.

In your example, it could be argued that from the perspective of the three people involved, the IOU might be a part of money supply, if A and B trust each other and A would accept B's IOU in exchange. From the point of view of a more meaningful scope of economy, this IOU probably would not be accepted by a significant proportion of people, most of whom do not know B. So it probably would not be a part of money supply.

The problem with the equation you mention is that it includes inflation, and that shifts the debate one step too far ahead. Just merge the inflation and real GDP into nominal GDP and it's fine.

That was one of my first posts to this thread.  If you read on you will find that I have learned how to make finer distinctions of definition and would now say that lending does not increase the money supply until the debt instruments themselves are generally accepted as payment for goods and services.

Why does every thread in this forum have to deteriorate into people calling each other trolls?  I have been enjoining this thread up to this point because it is one of the more civil threads I have participated in so please keep it that way.  You two shake hands and cut the crap and let's prove that we can have a clean thread for once.

Yes, the world is complex. But let's just assume for the shake of simplicity that there's only one country and one currency.

In my exmple only the baker trusts B, A doesn't. So the IOU is only from B to C (baker). It is not transferable.
My point is that credit (no matter if it's not from banks, if it is not quasi fungible, transferable) can be used as a medium of exchange.
For example, with ripple, ordinary credit (as opposed to the privileged credit commercial banks have nowadays) can be used as a means of exchange.


I didn't mean that there's inflation as a variable of the problem. That was actually the question.
Is ordinary credit between private parties equivalent to an increase in M ?

@bwagner I didn't get to your first post. Sorry for entering without reading at least the first page completely, but I got lazy when I saw there were 6 pages. I just read precisely until the cool graph with different reserve ratios. Shame on me.


Can we check this conclusion again for the case of credit going from a supplier to its customers?
In this case, although the IOU is not generally accepted later, the credit is participating in a transaction of real products and therefore it is directly competing with money in its role of tool for exchange.

I think time frame is very important in any kind of precise calculation of money supply and its flow, in any given time, there is only one fixed amount of money in the whole society

Ok.

In that case it's difficult to say. 50% of the population other than the issuer accepts the IOU. That can be interpreted either way. Three people is too little for this to make much sense.

Oh, of course it can. That's not the issue. I'd like to stress that this is not my objection. The issue is whether this would be widespread.

Yes, I know ripple. If Bitcoin was used as a basis for ripple payments, and this became a generally accepted medium of exchange at par despite overissue, that would increase the money supply. I think this is a more likely scenario than with a bank, because payment using a Bitcoin denominated bank debt instrument in general cannot provide a significant advantage compared to payment in native Bitcoin, while Ripple hypothetically can, for example, extra anonymity, latency, security. However, if it is possible to provide an equivalent service using native Bitcoin (and there are developments that suggest it can, for example multisigning -> security, fog/laundry -> anonymity, green addresses -> latency), then this likelihood would be minimised.

I already argued before that merely because there is a demand to hold bank liabilities (i.e. to have a demand deposit with the bank, to act as a creditor for the bank), it does not necessarily mean this creates a demand for acceptance of these liabilities as a method of payment. While there is a certain relationship between the two, they are not identical. This is in fact the chief objection I have to the pro-FRB position of George Selgin (whose work has otherwise been very helpful when attempting to understand money and FRB).

This depends on how likely this debt instrument is being accepted by a typical person in that group as a method of payment.

Burt, feel free to arrange an arbiter. I don't think I can affect Atheros' opinion in any way at the moment.

Just one more anecdote to support my position:

http://www.youtube.com/watch?v=rrSETU0p9Bs&feature=player_detailpage#t=622s

I cite sources and respond to his claims and questions. Then 24 hours go by and he doesn't remember, so he complains that I'm not citing sources and responding to his claims.

I've created this page where we can both explain. Hopefully we can keep the page at a reasonable length.
https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin

Atheros, I find it odd how you are presenting a simplification that ignores my point as as a refutation.

I really doubt that Keynesianism, with its focus on spending, liquidity-preference and marginal efficiency of capital, would support your claims. While I am not an expert in Keynesianism, this is what Keynes says in The General Theory of Employment, Interest and Money:

(I interpret this as liquidity being the determining factor for money)

(I interpret this as Keynes not considering deposits a part of the "quantity of money", i.e. what we call money supply).

(again, this seems to indicate that liquidity is a determining factor)

Keynes is particularly difficult to read, so I could very well be misinterpreting him. But I still don't see how he supports your position.

Furthermore, in the only link you provide yourself on the wiki article, says:

Nevertheless, since I'm not an adherent of keynesianism, I don't care much if Atheros gets that interpretation right or wrong. I have no reason to object to people presenting whatever they want as a Keynesian viewpoint. I'll however rewrite the Austrian section to eliminate non-Austrian influences, add references and explain money supply definition from the Austrian perspective.

As a side remark, I find it funny how, allegedly, both Austrians and Keynesians see Bitcoin as doing exactly what they want, even though these goals are opposed.

I don't have time to respond to all of that right now (it is Friday night). But I can shortly. I just wanted to say that you are certainly free to leave any Austrian quotes or references in as they help form the argument from your viewpoint.

Atheros,

you write on the wiki page:

I have said multiple times that I do not claim that FRB with Bitcoin is impossible. On the contrary, I provided several historical examples of bitcoin FRB. Why do you keep misrepresenting my claim?

Burt,

I think in retrospect that some of my claims were unfortunate and inaccurate. I reflected that in the latest edit of the wiki page. Please review.

The population would be greater than 3 people. There's no need for money otherwise.
So no, only C accepts B IOUs. My point is that he can bid with credit instead of money.

I wasn't referring to your objection. I just want to discuss if ordinary credit (not from the banks, not widely accepted) while competing with money as a medium of exchange (when used for bidding), effectively increases M.
Maybe it just reduces Q like stuff traded through barter would also be out of the equation.
Do money substitutes create inflation?

So you think btc denominated ripple would decrease the price of each btc?

Sorry, I don't get how this relates to my question.


No, B will have to give money or goods/services to C later to settle the debt. C can't pay another person with B's IOUs.
I mean, with ripple, he can, but not any person, only people who also trust B.

He can bid with other commodities or credit of those commodities instead of money too. The crucial difference from the point of view of money supply is whether such medium circulates or not.

Let me clarify this. The whole issue is a bit fuzzy, because there can always be cases where some particular medium or method of exchange is not accepted.

Money-substitutes (that's a term from Austrian economics) are generally accepted as a media of exchange just as if they were money proper. This is how they are defined. Therefore, they affect the money supply. For simplicity, let's assume that they are accepted at par. Whether this causes inflation depends on how inflation is defined. The definition I lean towards is the increase in moneys supply over the money proper. So yes, it would cause inflation.

That depends on how widespread the acceptance of ripple payments would be. It's also possible that two relatively large subsets formed, one that accepts ripple-bitcoins (RB) and one that does not (NB for normal Bitcoins). Ripple-bitcoins would only increase the money supply in the former subset. I think that under ceteris paribus conditions, this would eventually cause an outflow of normal bitcoins from RB to NB economy, causing a decrease in the price of BTC in NB until an equilibrium is established.

Sorry about that.

Only whatever is generally accepted as a method of payment counts as a part of M. That's what it means. As I said, it is a bit fuzzy, as nothing is universally accepted.

Note that RB are not fungible. They're always issued from one person to another.
Anyway, you're considering ripple a money substitute in the austrian sense, so maybe we should take it out of our example.
Let's just use regular credit transactions. I meant money substitutes as just other medium of exchange different from money, don't know if this fits with the austrian definition.
Referring to credit transactions, Gesell said this:

"We said that wares represent a demand for the medium of exchange exactly corresponding to their amount and quality. So, if there were any method of exchanging wares without employing money, the demand for money would be reduced by the amount of the wares so exchanged. This is self-evident when examined with the aid of our conception of the demand for money. Here again we may use a railway-line as an illustration. The demand for rolling stock is exactly equal to the amount of goods awaiting transport. But if a canal is built along the railway, the demand for rolling stock decreases by the amount of the goods transported by canal." (http://www.community-exchange.org/docs/Gesell/en/neo/part3/9.htm)

When I said inflation I meant price inflation rather than monetary inflation (what you defined as inflation). I don't care if credit it's going to be considered part of M or not. What I want to know is if prices would rise.
I'm interested in both the Austrian and the Keynesian view on this.

If we had only one country with one currency (say gold) and 100% reserve for banks by law, will private credit between partners push price inflation?

I am sorry but can you republish the link for me?

I did not put enough thought into my previous response to this post and it ended up totally wrong.  So I have deleted it and here is another attempt at a summary:

For simplicity, I was assuming that there is only one RB issuer. However, I agree that this is not a necessary requirement. Just like in Northern Ireland, Scotland or Hong Kong there are multiple bank note issuers, there could be also multiple RB issuers. To what extent they would be treated as fungible is of course another question.

I do not have a theoretical objection to any debt instrument becoming a money substitute. The question is the likelihood. It needs to offer something as a method of payment which the money-proper does not. With gold/fiat, this is straightforward. With Bitcoin, not so much. Even the hypothesised advantages of ripple might not be sufficient to cause enough demand, I just think it makes more sense than with classical demand deposits.

In Austrian terminology, as far as I know, money-substitute is a debt claim on money-proper which is generally accepted as a medium of exchange instead of money.

I've heard about Gesell, I read Alternatives to Legal Tender (or something like that) by Thomas Greco. I agree with the quote, however it neglects the informational function of money, i.e. the intertemporal and interpersonal coordination of plans, as well as the speculation (uncertain future). These needs might affect the outcome.

This is a slightly controversial topic in the Austrian circles. The main problem, as far as I understand it, is not really whether prices would rise (they might not, assuming the extra supply is offset by extra growth of the economy), but that the new money is "injected" into the economy without causing corresponding production costs. This causes a redistribution of purchasing power as the new money propagates through the economy, and leads to boom & bust cycles (Austrian Business Cycle Theory).

I am not an expert in the Keynesian school, but I think Keynes argued that if there is involuntary unemployment, expansion of money supply does not cause inflation.

Under typical circumstances, no. This is actually how the full reservist branch of the Austrian school sees a proper economy.

Ok.

I agree, merely would like to add that

• by this debt-instrument circulating, the risk of performing FRB is decreased and becomes more likely
• term deposits or other investment instruments, which do not have zero maturity, should not be considered relevant for this topic

I hope none of my dissenters will object to these two points.

I also agree.

I think you're not getting my point. I think I don't mean money substitutes the way you do.
I'm talking about credit from the provider to the purchaser of the good.

I'll put here another quote also from the same text.


If this is true, an increase in private credit or just an increase in bartering would cause price inflation (assuming zero growth to simplify).
Those things could also happen under a gold standard. So, even if cycles don't get worse through elastic monetary policies, the inflation/deflation cycles may also appear within an unelastic monetary supply. Of course, this assumes a money monopoly, which will never be the case for bitcoin.

You say that the money substitute should have an advantage over money to be used. I disagree. Sometimes the lack of money is enough of an advantage. What's the advantage for B when paying with IOUs instead of money? Well, he doesn't have the money. What is the advantage for C in accepting it? None, only a higher price.

In summary, the sentence by Gesell I would like you to agree with or to deny is:

"The daily demand for money therefore equals the quantity of wares daily brought to market, less the wares exchanged by way of credit (or barter)." (http://www.community-exchange.org/docs/Gesell/en/neo/part3/9.htm)

Note that when he says wares he includes all produced goods and services.

I think I get what you mean. You're talking about the substitution effect of credit. But unless the this private credit circulates, this is actually a shrinking of the economy, because the creditor is withdrawing his activites from the bigger market. If the creditor had a choice, he would not act this way because it's detrimental for him. I think this is the problem with the proposals of voluntary local debt-based systems like those Gesell proposes.

I agree. Inelastic money supply does not prevent all errors, just the systematic ones. Most of the issues only arise due to monopolies.

What you describe means that there is some sort of interference with the market. If a seller has the choice between selling for money and selling for credit, why would he accept credit? Merely because someone has an IOU does not mean anyone would accept this IOU. At par even.

I think this ignores investing (people selling future goods), but for simplicity we can leave it as it is. Otherwise I don't really have a problem with this formulated this way. I only worry that this leads to erroneous conclusions, much like the Keynesian C + I + G = Y leads to the assumption that by increasing G, one is increasing Y.

Your point that money supply would not include demand deposits if the demand deposits don't include checking services or EFTs? How could I prove a negative? How could I find a quote which directly says that that isn't the case? I can't. If someone were to assert that demand deposits are only included in the money supply if the depositor's last name starts with a vowel, I won't be able to find a quote to counter that claim. I'll only be able to explain why that definition isn't useful, as I have tried to do. (https://bitcointalk.org/index.php?topic=51899.msg621368#msg621368)

I agree.

I disagree because demand deposits are highly liquid just like cash. They also do not earn "the market rate of interest" that a normal "debt" would earn.

Concerning Keynes, I might not be getting FRB right either. "The General Theory of Employment, Interest
and Money" doesn't reference Fractional Reserve anything or Money Supply. I would have called my viewpoint the Mainstream Viewpoint, but I figured you would have objected.

I think that Keynesian economists like Krugman (http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/) would and do dislike Bitcoin (as well as a Gold standard) from an economic-good perspective and I think that they are justified. High deflation is terrible for an economy. Fortunately we aren't discussing the theoretical good or harm to the economy- we are mostly discussing fractional reserve banking.  :)

I contend that FRB is not just theoretically possible, it is possible and practical.

I can't tell what the first one means. What is this debt-instrument? You talk about debt instruments in your section but I do not. Can we thus not mention it in the introduction?

Concerning the second bullet, lets just leave it out if neither of us are talking about it.

Did anyone disagree on this? Fractional reserve banking necessarily increases the money supply. Did someone disagree?

We all agreed that FRB with Bitcoin is possible, we just disagreed on what it would entail, right? So why not just say that?

My View, which is probably Keynesian:
Fractional Reserve Banking increases the money supply, which causes inflation. Inflation is the rise in the general prices of goods and services in an economy over a period of time. The inflation would be limited because the money supply could only rise to a certain multiple of the monetary base. For example, the money supply could rise to two times the monetary base, but wouldn't go any higher.

Private credit wouldn't push inflation because it is not the case that two people both believe they have easy access to the same bitcoins; one person has the bitcoins and the other doesn't and they know it. IOUs are a little different; instead of lending you bitcoins, the lender lends you a product or service and expects payment back in bitcoins. OR you could say that he lends you bitcoins, and then pays himself with those bitcoins. Although the IOU is denominated in BTC, neither of you are actually using bitcoins yet. Thus the demand for BTC will be lower until you sell something to acquire BTC to repay the IOU. The IOU would lower the value of bitcoins by a very small amount: the same as if the two parties had decided to not use BTC in the first place.

If millions of people today started writing IOUs denominated in bitcoins which all required that they be repaid in a month, the value of the dollar would drop a little bit because people would have less demand for dollars. The value of individual bitcoins would stay the same for much of the month until people started acquiring bitcoins to repay the IOUs, at which point the value of each bitcoin would skyrocket.
(I'm ignoring the effects of instantaneously informing millions about Bitcoin for the sake of the example.)

So, according to your logic, because you cannot find a book that says that plasma does not exist, a high school text book claiming there are only three states of matter refutes specialist publications that mention plasma. This is what your argument boils down to.

I explained that your explanation does not match any economic theory that I know of and invalidates the concepts of money velocity and/or GDP. In your example, even though people cannot buy things that are more expensive than the money base but less than the value of the debt instruments, you nevertheless claim that the money supply corresponds to the higher value. What's the use of your definition? There is none. It cannot be integrated into any economic theory.

I worry you conflate liquidity and maturity. If you can only redeem the deposit at the issuer, why does it affect the supply? That's like saying that if I issue a zero-maturity debt instruments denominated in tomatoes, regardless of whether this instrument is accepted by the general public instead of actual tomatoes, it increases the supply of tomatoes. This makes no sense. You invented a new economic theory apparently.

The term "money supply" was popularised by the monetarists in the 60s. Keynes used "quantity of money" or "money quantity".

I agree that Keynesians probably dislike Bitcoin. I disagree that deflation is bad. See e.g. Deflation and Liberty by Joerg Guido Huelsmann (http://mises.org/books/deflationandliberty.pdf)

Your description, however, does not accurately reflect FRB as we know it. What you portray is more similar to an investment in general.

Debt instrument is a generic name for an obligation denominated in the unit. Demand deposits, cheques, EFT, bank notes based on gold, personal credit, these are all debt instruments. I introduced it to make my argument more accurate.

Excellent.

As I explained, money supply is the amount of money base plus debt instruments in circulation. But this is not a superset of FRB. These are two sets which contain a certain overlap.

Keynes claims that as long as there is involuntary unemployment, an increase in the quantity of money (which is what he called money supply) does not cause inflation.

The IOU has no effect on the money supply. The effect you describe is not an increase of the money supply, it is a decrease in the size of the Bitcoin economy, because there is a good that is not traded against Bitcoins anymore. The value of Bitcoins would only decrease if the change in size was not compensated by a change in the money velocity (in your example, it might or might not, we don't know).

The effect you describe is an outflow of goods from the "dollar economy" into the "Bitcoin IOU economy", and subsequently into the "Bitcoin economy". At the first stage, the size of the Bitcoin economy would remain constant, because there's no change in the supply or demand of Bitcoins. At the end of the month, the demand for Bitcoins would increase while the supply would be the same, thus the price would increase.

I'm still not sure though what this has to do with your position.

As long as the trust and reliability of if the bank is high enough yes.

First of all it is not fractional reserve any longer or a demand deposit if you have any kind of contractual restriction on redemption (well at least that isn't purely logistical as complying with the opening hours of the money warehouse). If you got some kind of restriction that let's the bank lend out the money you don't have a demand deposit you have a IOU, even if the bank actually repay it's debt instantly in 100% of cases.

Now if everyone believes the bank will be able to pay instantly in 100% of cases then it is likely those particular IOU will become as good as money and the money supply will increase anyway. But this should all still be ok since the price of money will still be correct and the market can account for trust and reliability of various banks.

But should actually not really happen, there is always extra risk of an IOU compared to money. So they should be traded at a discount. Just that the transactional fees of counting the discount might be higher then the discount if the bank is incredibly effective. Anyway the important thing is that the market can distinguish between money and IOUs and account for it accordingly which it can not do in a central banking system, in a system where banks lie or in a system where warehouse banking have special legal advantages over other warehouse storage services.

This could be a problem with Bitcoin at this stage because the institutions to prevent the lying like auditing is not really there. But then again who would an exchange be lending there Bitcoin too that wouldn't make there operation incredibly risky for them anyway?
I think it is fairly safe to assume all the Bitcoin are in there wallet. If they are running fractional practices in anything it is more likely to be USD...

rahl, since you have Mises as an avatar, can you review http://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin and comment on it?

During my research of Bitcoin, I asked genjix from Intersango and Darren from Tradehill about FRB. They said that they're not conducing FRB. Genjix was particularly opposed to FRB and said something like "it's not my money".

Thinking Mises is the 'specialist publication' and the Fed's website is the high school textbook is lunacy.

I won't be able to respond to what you say unless you speak more precisely. Nevermind. Don't care.

I also quoted wikipedia and some other guy I found on the internet. Ignorance is knowledge.

Ignorance is knowledge.

Macroeconomics: Private and Public Choice By James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David MacPherson (2010):

(emphasis added)
Not available online, but google books can provide this quote.

Ralph Byrnes (University of North Carolina): An illustrated encyclopedia of economics, 2009:
http://www.unc.edu/depts/econ/byrns_web/Economicae/moneysupply.html (http://www.unc.edu/depts/econ/byrns_web/Economicae/moneysupply.html)
(emphasis added)

Encyclopedia of Business http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Money-Supply.html (http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Money-Supply.html)
(emphasis added)

But please Atheros, feel free to deny and ignore.

I think FRB based on a simple fact that people do not utilize their saving in the bank until much later.

It works for 2-3 generations when savings are expanding, but when a country has matured and shifted to older populations, more people will be taking money out of the banks, FRB will have big trouble. In principle, all the saved money will be spend sooner or later, banks can not keep the same lending speed unless the growth/inflation is enough high to offset the slow down in saving

In response to lonelyminer,
Those quotes are good and clear. So if Bitcoin demand deposits are not in M1, they would certainly be in M2. And Fractional Reserve Banking can still be easily exercised with funds counted in M2. No substitutes-circulating-as-money are required.

You now have my admission that Bitcoin demand deposits might not be counted as M1, but rather M2.

In response to johny,
What do people do with money they take out of a savings account. Spend it, right? Then what do the people who receive the money do? Either spend it further or put it back in the bank.

In my opinion, those saved money is just an illusion, there is no corresponding wealth to consume when they start to spend those savings, so inflation is the first thing to come

But this is not very precise, I will try to use an island model to explain this, will be much easier

Oh, progress, there she is, I found you at last.

I admit that it is a bit less clear with Bitcoin demand deposits in M2 than in M1, but I still don't think it qualifies. Please bear with me for a minute while I formulate my argument.

The last reference I posted says this about M2:
Saving accounts or term deposits (typical examples of M2) can be converted into demand deposits at full nominal value. M2 stays the same, while M1 increases. If everyone did this at the same time, while it might cause disruptions on the markets if overissue was present, it is a possible course of action. With Bitcoin, this is not possible, because the amount is limited by the reserves.

The example of M2 at the wikipedia page on Money Supply (http://en.wikipedia.org/wiki/Money_supply):
seems to match the pattern.

In other words, I think that M2 and M3 only exist because typically, demand deposits are in M1. Since this is not the case with Bitcoin, I therefore conclude that Bitcoin demand deposits would not be in M2 or M3 either. I think that unless you can inflate M1 over the amount of reserves, M1 = M2 = M3. While people might think that M2/M3 functions as a store of value, if it neither acts as a medium of exchange, nor, nor can it be converted into one in an amount exceeding the reserves, it should not have an effect on the supply.

However, I admit there is a greater level of difficulty here and a more thorough analysis is necessarly.

I'm very glad we're making progress!

This doesn't make sense. What amount?


Use the word expanded rather than 'inflated'. The word inflated is already taken.
Why can M2 only be expanded if M1 can be expanded? There is no reason to think this.

Dollars in a savings account can't be converted into cash exceeding the reserves either, and they are still counted in the M2 money supply. Dollars in savings accounts don't act as a medium of exchange but are still counted in the M2 money supply. Both of your points are wrong.

And they should be counted. This is money that people think themselves to have. And they behave accordingly. When they need to buy something big, they do not need to work hard to acquire bitcoins/dollars; they simply can use their savings, which affects the value of all bitcoins/dollars.

From that wiki page's description of M0,M1, etc, I just see lot's of double accounting practice, M1 is just same money added multiple times, it's amazing this kind of calculation are used for government money supply control

For example:
-----------------------------------------------------------------------------------------------------
    * Laura takes the remaining nine bills and deposits them in her checking account (current account) at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
    * The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
    * The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
-----------------------------------------------------------------------------------------------------

M1 is just a number which added 90% of Laura's $900 to themselves (what is the use of this calculation???). Suppose this 900$ are all $1 coins, then the total coin supply is 900 coins, no matter what banks do, they will never get 1710 coins at any time.  (If they want to use M1 to calculate the money flow, then the time frame is very important, 1 month loan and 1 year loan will generate different amount of money flow, static money supply at any given time and dynamic money supply through en period are totally different concept)

Usually, banks can argue that those 900$ were just sit there and doing nothing, the lending will make use of it, but they forgot that 900 coins belongs to Laura, they do not have the ownership of coins, what Laura do with her money has nothing to do with banks (actually banks are borrowing from Laura, it is Laura who created money supply in the first place)

And based on my model, Laura's $900 must corresponding to either $900 worth of products, or other's $900 worth of debt (debt can be regarded as consumable products in the future), that products or debt is the real wealth in the society, what banks lend out is actually those products or debts, so they can not lend out more than these $900 worth of products anyway

In one word, commercial banks could not creat money supply, they just calculate the same money multiple times and add them together

That is the money supply.  Commercial banks can't increase the monetary base.  They increase the money supply by increasing the availability of money. 

You can define the money supply to be the total amount of money that has been loaned out multiple times added together, then the most important factor is the loan frequency, which is seldom discussed in the money supply topic

If the bank loan out once per day, then the money supply in the first day increase $810, second day, increased $729, third day, increased $656, etc... then during one month it created about 8000$ money supply

If the bank loan out once per month, then the money supply will only increase $810 for one month, which is only 10% of the money supply in the previous case

And, if the bank loan out once per year, the money supply will decrease to about $67.5 for one month, which is another magnitude lower

Well no.  The constraint on the money supply is the multiplier.  Monetary Base * Multiplier = Money Supply. 

The multiplier depends on reserve requirements.  Either statutory reserve requirements (like laws in US requiring US banks to hold so much in reserve) or practical reserve requirements (in that lower reserve is riskier and thus makes attracting deposits harder).

http://upload.wikimedia.org/wikipedia/commons/0/01/Fractional-reserve_banking_with_varying_reserve_requirements.gif

For example the max multiplier w/ 10% reserve is 10x monetary base.  In reality the effective multiplier is much lower because not all money is put into fractional reserve accounts.

This picture is correct, it compared the effect of different multiplier (under the same loaning frequency), and the difference between the biggest and the lowest amount is about 5 times.

And if you consider the different loaning frequency in my example, the money supply can differ 100 times. Unless loaning frequency always stay the same, it will have much bigger impact on the final money supply

I think by loan frequency you mean velocity of money.  No bank can exceed its reserve requirement thus the frequency of the banks loans is immaterial.  If a bank has $100 in deposits and a reserve requirement of 10% then it can only loan $90.  It can't then loan any more (no matter how fast it loaned the $90) until it gets more deposits.

Demand for money always exists.  If demand for money is well than what bank needs to achieve to loan out all of the no-reserve portion of its deposits the bank can simply lower interest rates.  If demand is too high it can raise interest rates.

If banks aren't loaning "fast enough" then in effect they have a higher defacto reserve requirement.  (i.e. bank with 10% reserve requirement but who can only find loans for 80% of deposits is no different than a bank with 20% reserve requirement).

@lonelyminer and Atheros
So both of you agree that if debt is not denominated in a currency and is not generally circulated, the debt doesn't create price inflation for the currency?

I disagree. Let's modify a little bit my previous example:

-A wants to buy bread for 1 dollar.
-B offers an "IOU 11 pencils from B shop" ($1.1)
-C sells the loaf to B

In this case, C can only redeem the IOU at B's shop.
Isn't this trade pushing prices higher as the IOU is competing with regular money?
Note that the IOU cannot circulate generally like bank balances.

But the "price" paid was 11 pencils, not 1.1 dollars.  Also, I assume that if there was another loaf of bread the shop keeper was still selling it for 1 dollar to the next customer.  He has not raised his price in general he just made a swap for 11 pencils instead of 1 dollar.  Are you saying that because of this one trade he will now start selling all future bread for 1.1 dollars?  That does not make any sense to me.

Atheros does not agree, he thinks rather than this makes these instruments M2 rather than M1. I disagree with him, because the only point of M2 is that it can be converted into M1 (with some delay), which is not the case with Bitcoin-FRB, because M1 is in general only Bitcoin itself. The quotes I referenced confirm that M2 can be converted into M1. If you put non-circulating Bitcoin-FRB demand deposits into M2, they cannot be converted into M1. So putting them into M2 does not match the reasoning by the authors of the quotes.

I already explained this, this IOU does not affect the money supply of the "dollar economy", rather it reduces its size. Inflation could follow if this change of size is not offset by a change in money velocity. There might be some mechanism that affects this which I'm not aware of so I'll rather say that we don't know whether this results in inflation or not.

No, I don't mean that. What I mean is that some of the trade would be conducted without money. So part of Q will have to be discounted (M * V = P * Q).
If there's the same money but half of the bread is bought with IOUs, there's more money to be used (to buy bread or another product) that can rise prices.

Not sure I did understand you, but you disagree there.


Exactly. This (like barter) reduces the dollar economy that results affected.
I don't see why V should rise. So I think barter and transaction credit do compete with money and create price inflation.

Yes it looks like Atheros and me are still in some amount of disagreement.

In general, I agree, that under the stipulated conditions (people switching from money to barter/credit, and no change in velocity), this would cause price inflation in the reduced economy.

However, the shrinking of the economy through voluntary action must have some sort of trigger. Why would the seller prefer non-money to money, even though it is less liquid? This already indicates that there's something fishy going on. So I wouldn't simply make the assumption that V would also be the same. If you view this from a long term perspective, the situation described by you would only require consideration if the relative amount of situations involving non-money to the relative amount of situations involving money changed. Why would this happen? Why would people voluntarily restrict the scope of their markets? The only reasonable answer I can think of is if the monetary economy is collapsing anyway and people are looking for a better money.

They could prefer the IOUs simply by charging more.
Or they could consider an IOU system, like Ripple or LETS, a convenient medium of exchange. So depending on your definition of money they could be looking for a "better money".
Mutual credit has some advantages over regular money. For example, most LETS comunities operate at zero interest and there's always enough liquidity to trade.
I said barter and credit transactions, but this should be also applicable to mutual credit systems and other complementary currencies.

But why do you expect the velocity of regular money to slow down in response to competition?

I still think that the situations you describe indicate that there is something hampering free market. For example, banking regulations, minimum wage laws, hyperinflation, confusing tax system and so on.

Charging more? Neglects the risk/liquidity and indicates a problem with the loan market.
Local currencies? This means that people voluntarily restrict their ability to trade. It makes no sense, since it runs contrary to the alleged goal.
No interest? This eliminates the ability for intertemporal plan coordination.
Barter? Same as local currencies.

If the "official" economy is screwed up, I can imagine that a LETS system might be an improvement, because the proximity and familiarity of the participants allows for better assessments than by someone in Washington. It might also work for groups that are intentionally isolated, such as the Amish. But I'm skeptical about the widespread viability of such systems on a free market.

I think that what you described is a symptom and has some deeper causes. So I think that we're not under a ceteris paribus assumption. Unless we understand the causes, we can't make the ceteris paribus assumption. That does not necessarily mean your conclusion is wrong, rather that there is step missing in the argument.

Indeed, if I just read that sentence, I think I disagree with the sentence. If people are circulating anything besides dollars, even if the instruments are denominated in dollars, then there is less demand for dollars at least for today...


...but when I read this example I'm just confused.  :-[

lonelyminer, I don't believe that the contracts are in M1 or M2. I believe that they would (slightly) affect the value of dollars because they affect the demand for dollars, not the number of them in existence.

Isn't this what types of money means? You are talking about MB, M1 or whatever, and they are including M2, M3, or whatever in their definition of the supply...

That's exactly my point. The reduction in demand for dollars (I don't have any reason to believe that the offer must drop accordingly) is what would cause the price inflation.

I'm confused. Do you believe a free monetary market with different options can exist?
Do you think that nobody would be using bitcoin if there wasn't an economic crises or if we were under a global gold standard?
Do you think money is a natural monopoly?


If I value more $20 than an IOU for $20. Isn't it logic that I demand, for example, an IOU for $21 instead?
If we set a deadline for the settlement of the debt, the difference is the interest. The IOU would work just like a bond.


They also restrict where the value can go. This way they know the value will stay within the community and also this makes the community less dependent on transport and oil, thus more sustainable.
Anyway, it seems that you're assuming they will only accept the local currencies, but that's just not the case, they circulate in parallel.
Thanks to the local currencies they actually perform MORE trade than only with the national currency, because there's no absolute limitation on liquidity.
When we use bitcoins or when people use gold dinars instead of rupiahs in indonesia they're also restricting the people who will accept the money.
Are we (and them) acting irrationally?


This is usual in LETS systems, but it's not mandatory. Ripple allows you to set the interest rate in each credit connection, but I believe the market forces would make it drop close to zero.


You're not going to be using barter in most cases, but if you're lucky enough to find someone who wants something from you and can give you something you want, What's the drawback?


This again leads me to think that you believe money is a natural monopoly. Or all the currencies in a free market must target global usage to succeed?
I think that, for example, bitcoin and ripple have advantages over state fiats even if there's no crises or hyperinflation.


I get your point. You assume that if alternative currencies are being used, is only because the main monetary system is having problems. And I'm not explaining what the problem is.
But I don't think problems are needed, at least not the ones that you describe. Like Gesell, I think gold-money is flawed and also leads to economic cycles (although doesn't postpone and make worse the liquidation phase through printing, like state fiats do).

By loan frequency, I mean the mature period of a loan: If a $810 loan gets paid back after one month, then the bank will regain the ability to loan out that money next month. If the pay back time is 10 year, then in 10 years banks will not be able to loan out that $810 again.

But I just noticed a strange but interesting thing: As soon as the borrower get the loan, the loan will be deposited into his bank account or someone else's bank account (if he purchased something right away). That means the bank system at a whole will immediately get back the loaned out money, thus can loan out again.

In such case, I can imagine that if the society as a whole is willing to take loan, then in a very short time the same money will be loaned out multiple times, thus quickly reach the theoretical limit of the money supply.

But then there comes another limitation, e.g. how many people are willing and be able to take new loan after they have made a 30 years mortgage?

Seems still like a Ponzi scheme: After majority of the people have taken their loan, the bank will not be able to further increase money supply