Bitcoin Forum

I've seen a few claims, on these forums and elsewhere, that bitcoins, because they are limited in supply, are free from inflation, and once or twice I've seen claims that this set supply would eliminate fractional reserve bank policies.  Would anyone care to explain this to me? 

The way I see it, the supply of bitcoins is limited, yes, but its akin to the supply of, in the US, physical one-dollar bills.  The majority of the US economy, however, is not cash - it is credit, or dollars on account, both of which are backed essentially by loan collateral.  This collateral forms the basis for more loans than it is actually worth, and thus we have fractional reserve banking.  The limited supply of bitcoins will stand at 21,000,000 maximum.  However, this in no way prevents people from establishing accounts with bitcoin-equivalent units in them that do not actually exist - exactly as credit and savings accounts are done today.  These pseudo-BTC would be traded, just as loan-based pseudo-dollars are traded today, and there is no limit to their number, nor any protection against fractional reserve policies.  Am I going wrong here somewhere?  I certainly hope so, because if not....then I really don't see the advantage of BTC at all.

That's right.

One of Bitcoin's big advantages is that you can be your own bank; you don't have to trust a government-backed fractional reserve bank to keep your extra cash safe.

If you WANT to trust a fractional-reserve Bitcoin Bank, feel free.  But don't go crying to your congressman if you lose all your money, please.

Bitcoin makes a difference between storing money and lending money. If you want to store your money, you just make a backup of your wallet, possibly encrypted, to a safe place. It's clearly distinguishable from giving the control of your money to an investment bank which lends them for interest. In the mainstream bank system it's different: you deposit 1000$, the bank lends 900$ of it to someone but still shows 1000$ as your balance, and so the money supply is inflated.

Also...  Any Bitcoin bank will have to rely heavily on it's reputation.  They might be able to practice fractional reserve banking, if they offer promises for Bitcoins.  BUT, they won't have nannies to print more money for them when they overextend themselves either through fraud or carelessness.  Then it's bye, bye.  I don't see the Bitcoin economy being completely dependent on fractional reserve banking.

Fractional reserve banking is unstable without a monopoly over the ability to print currency, due to the >0 possibility that a bank runs out of reserves. The way banking in BTC will likely work is that you will have On-demand deposits, and time-deposits.

On-demand deposits will be stored at the bank, and will not be lent out. You will likely pay a small fee for this service.

Time deposits will be lent out, but cannot be withdrawn at anytime. You will also have to accept the possibility of loss.

The Mises Forums offers a lot of info about fractional reserve banking; I would recommend reading there for more info on how it would work in a free market without a central authority (like Bitcoin).

That's like saying: "Gold atoms are unstable because quantum mechanics tells us that there is a >0 possibility that they will spontaneously decay."

Yes, in the very very very long run the universe will suffer heat death and there will be no gold (or any other atoms) left.

If the probability of bank runs is very small, then fractional reserve banking works.  Or, in other words, if banks can establish and maintain trust in their ability to repay deposits they'll be stable even if they practice fractional reserve banking.

I hope we'll eventually find out the hard way if, or which, Bitcoin banks can establish and maintain trust.

In this case the bank might just store your encrypted wallet to ensure you that your money won't be lent out. Or you could just maintain the backup yourself without a bank.

Not true. If I deposit 100 bitcoins at a bank, the bank lends out 90, and I want to withdraw my 100 bitcoins, the bank is screwed. Even if they lend out 25, the bank is screwed.

On demand deposits simply cannot be loaned out if a banking system is to ultimately remain stable. Sure, some banks can try to do it, but then they better not call them "on demand deposits". Deposits can be loaned out, but not with a guarantee of redemption. That is simply impossible as Bitcoins cannot be created out of thin air.

So long as on-demand deposits are not loaned out and time deposits are loaned out, we're fine. Alternatively, on-demand deposits can be loaned out, with a "maybe" promise of repayment. Try and see who will go for that ;) You might call this fractional reserve banking, but then we're just arguing over semantics.

Yep, but then you couldn't take advantage of remote checking services unless you provided the password to decrypt the wallet. But that's no different than just giving them the coins.

I fully expect that both types of services will exist.

I think everyone is missing my point.  Yes, if the economy operates on bitcoin transactions, banks are screwed, etc.  However, consider the following example:

1) I deposit BTC1000 in a bank.  They offer me 2%/yr interest.  They also issue me a checkbook and a debit card.

2) The bank immediately loans out BTC900 of my BTC1000.  My balance "stays" at BTC1000.  This is the creation of BTC900 new.  No new bitcoins were really created - that would require the use of computing power.  Rather, the bank is merely lying to me, telling me that the BTC1000 are mine, and telling someone else that BTC900 of those same bitcoins are theirs.  Thus, although no new bitcoins have actually been created, as far as the economy is concerned there are now BTC1900 in circulation, where before there were only BTC1000.  Inflation.  This, and not by the printing presses, is how dollar, pound, euro, yen, and rupee inflation occur too - merely by bank lies, not by the printing of bills.

3) Assume there are thousands of other people who have deposits on the bank, each with checkbooks and debit cards.  This works equally well if you want thousands of people with deposits in *any* bank, as the banking system as a whole simulates a single, enormous, monolithic bank.

4)Now, if a bunch of people want to go and withdraw their BTC to make purchases, then yes, the banks are screwed, because they have lied, and say that there are more BTC on deposit than there actually are.  However, using BTC to make purchases is *so difficult!*  You have to know an *address,* and run a *client,* and have an *internet connection....*  (A bit of sarcasm there...)....so people decide they're just going to use their debit cards instead. 

5) So, "Bob" buys BTC35 worth of groceries from "FoodMart."  The bank executes "BobAccount-BobAccount-35; FoodMartAccount=FoodMartAccount+35;"  No bitcoins actually change hands.  If Bob and FoodMart use different banks, then maybe some actual coins change hands, but only the difference between the number in the day that flowed from Bank A to Bank B, minus those that flowed from Bank B to Bank A, not the full amount.

6)Thus, as long as a decent percentage of the populace uses bank accounts of any kind, then the fractional reserve, inflationary system remains in place.  This is because although your money is *denominated* in bitcoins, the real money is bank account balances, which have none of the restrictions which bitcoins have.

The one saving grace which I can see is that if it were public knowledge precisely how many bitcoins exist, then people wouldn't be fooled by the bank balances - they would look at their balance and go "There's no way I have that percentage of the bitcoins in the world."  But this is assuming no governmental or business interests interfere with this, and its pretty optimistic about the logical reasoning skills of people in general.

A few responses to the earlier points...


You can be your own bank now - you can bury cash in your back yard or keep your entire net worth in dollar bills in a safe in your house.  Banks, however, offer something to entice the users to trust them.  If they offered interest in Bitcoins, people would trust them, just as they trust them when they offer interest in dollars.


No, this is no different from the current system.  If you want to store your money, you put your wallet in a safe in your house.  This is clearly distinguishable from giving the control of your money to an investment bank which lends them for interest.  In the bitcoin bank system, you deposit BTC1000, the bank lends out BTC900, but when you ask the bank, they still tell you BTC1000 is in your account, and so the money supply is inflated.


Really?  They can "print" money by moving fake balances into their accounts.  This is impossible for now, as doing so would probably make the number of BTC in circulation exceed 21M.  However, in a while, when natural deflation sets in, and a loaf of bread is .000001BTC, there's plenty of room for banks to fictitiously expand back up to the 21M limit.

Yes, but you're mistaking "print" currency on a printing press for "create" money in accounts.  Banks could still do this with bitcoins.  They wouldn't create real bitcoins, but it would certainly seem real to the population, inflating the currency.



There is no way at all that we can project what banking under bitcoins might look like.  That would depend on A) what is legal in a particular location, and B) What people can get away with.  The bitcoin itself does not control, or influence in any way, the nature of banking.


Banks don't store wallets, just as banks don't store dollar bills now.  They keep a cache or currency on hand based upon what they expect to need, and the rest is lent out.  It would work identically with bitcoins - what people care about is their "balance" - how much the bank *tells* them they have, regardless of how much is there.  This difference between reserve_cash and total_balances_sum is the inflation.  Banks lie to people about how many dollars they have, and they would lie identically about bitcoins, and people would remain ignorant, perhaps willfully, thanks to the promise of interest.  Transactions, by and large, are made on bank balances now, not on dollars, and would be made on bank balances then, not on bitcoins.

That's not true.  If a bank does a statistical analysis of the number of bitcoins needed in a day/week/month, etc, and can predict the number with very high accuracy, then if they keep that many coins on hand, they can satisfy depositors.  This has kept the banks in place since the middle ages - the ONLY time it failed was in the Great Depression.  The current crises is due to overextension, yes, but not so much that it created a shortage of cash.  Keep in mind that banks keep on hand enough money  such that they can satisfy all of your requests, and all of your neighbors, and all of the requests of, say, a thousand people.  They may have a million customers, though, which means they've lent out 99% of their money.  Unless, though, they get 1,001 customers in a day, they're completely safe - and they may know they won't get that many customers simply because there isn't enough time in business hours to process them all.


Yes, sadly, bitcoins can be created out of thin air.  More accurately, the perception of bitcoins can be created out of thin air.  People don't care how many dollars are in their wallet.  They care how many dollars are in their wallet, plus how many dollars the bank *tells* them are in their checking account.  If they buy things using the checking account, and the money goes to another account, then no money is even needed!  Simply, bank A subtracts a number from an acocunt, and bank B adds it in.  Similarly, you could tell people they had BTC1000, and if they never want *all* those BTC1000 in coin form, then they never know you don't have them.  You create the coins out of thin air by lying about the balance, not by minting them.  And, of course, you give interest, which tells Joe Schmoe "Leave your money in the bank.  Don't take it all out, because then you make less money!"  This works...it creates dollars out of thin air without a printing press, and it would create bitcoins out of thin air without the crypto algorithm.


Nope, you could use remote checking by just using your bank balance.  Not bitcoins need be involved.  People just need to believe that bitcoins are involved.  The only time you need bitcoins is if someone makes a withdraw to cash, not a withdraw to any other account.


The central mistake in all of this is that people are assuming that if the money is expressed in bitcoins, then bitcoins are being used.  However, bank balances, not dollars, are used for most transactions today, making it possible for the banks to lie and essentially print money.  I welcome further forum debate on the issue.  For a humorous explanation of how banks, not governments with printing presses, print money today, just as they would create money with bitcoins, see the two online films "Money as Debt" and "Money as Debt 2: Promises Unleashed."  They're not entirely accurate, and they drastically oversimplify the issue, but they dispel the common myth that governments, not banks, create money supply.

InterArmaEnimSil, you are basically right. It's a bit frustrating that many people here keep thinking that banks won't be able to use bitcoins like any other currency.

However, some things are worth noting. There is nothing intrinsically special about banks. If I borrow 1000฿ each from my pals Alice and Bob and promise to pay them back anytime they want then together we will consider ourselves to have more than 2000฿. That's exactly the same kind of inflation. And it's no big deal. It's no big deal because it quickly stabilizes and then there is no more inflation. The only way to have ongoing inflation is to increase the base money supply and Bitcoin prevents that.

The problem with many banks today is not fractional reserves. The problem is that their risks are guaranteed by governments. So they take huge risks and enjoy greats profits while it lasts. When it blows up taxpayers pay. To make it worse governments often pay with "free" freshly printed money. Again Bitcoin fixes the money printing issue but not the guarantee issue (or maybe a little if it makes it harder to collect taxes).


This sounds confused. In a bank run their problem is that they don't have enough real bitcoins and they can't create real bitcoins. What does the 21M limit have to do with anything?

Is this a time deposit or an on-demand deposit? I do not see interest being paid on on-demand deposits. That could imply that the bank is using that money and that it's not really there.


Agreed, the bank is lying to you. I hope it is clear to everyone why this is unstable, and can even be considered fraud. If the bank tells you that the deposit is on demand and always available, then it better always be available. If it's not, that's a contractual failure and fraud.

If your money is used to buy a bond, on the other hand, this isn't fraud. You know that the borrower can default and that there is risk, and you know where your money really is (it's with the borrower, not the bank). No lying.



Fractional reserve is OK so long as the banks aren't blatantly lying about what they're doing. Without a government ready to print additional bitcoins to bail out banks, you can bet that they will be more careful about what they're doing, since if they get caught in the lie, they're fvcked.


I understand what you mean, but what I mean is that there will be no backstop called the Federal Reserve to bail out the banks when they go bust, and trust me, the greedy ones WILL go bust.


Yes, I agree with you here. However, I would demand honesty from the banks. I can surmise others can do the same. We can never be entirely sure what's going on; the banks could lie, they could be running a pyramid scheme; what we DO know is that honesty is in everyone's best interests, because there is no Federal Reserve to just paper over the losses when the shit hits the fan. I cannot surmise HOW this will be, but I do know that it will be in everyone's interests to see that it is done.


You're forgetting that Bitcoins are not an inflationary regime. It will be much more difficult to keep the correct number of Bitcoins on hand when you can't just print them willy nilly. A bank might be able to find an optimal number, and again, there's nothing wrong with this. I just think that for the banking system to be honest, they need to fess up and seperate time deposits from on demand deposits. If people want to go with riskier banks that do fractional reserve with the on demand deposit, that's their business. If it takes a few busts to scare people off from that, then so be it :)

I essentially agree with everything you say, but I see the dynamics as being different because there's no Big Daddy to bail the kids out from their mistakes when they mess up, yet again ;)

At least in the US, what's special about a bank (National Association Organization, ie, Chase Manahattan Bank, N.A.), is that it has a charter to literally create money by lending out more than it has on reserve and demanding the full sum in repayment, ie, fractional reserve practices.  
This is not quite the same thing.  I agree the two situations are deceptively similar, but here is where they differ.

Borrowing Example:

Alice has 1000BTC.  Bill has 1000BTC.  Christina needs 2000BTC, so she borrows 1000 from Bill and 1000 from Alice.  Alice loses 1000, Bill loses 1000, and Christina gains 2000.  Total in play before transaction: 2000.  Total after transaction: 2000

Bank example:

BigBank has 3000 Bitcoins, but no one knows this except the BigBank CEO.  They have a fancy office, though, so everyone assumes they have millions of bitcoins.  Christina needs 2000 Bitcoins, so she goes to BigBank.  Christina signs a pledge to return 2,100 bitcoins at this date next year (5% interest), and BigBank opens an two "accounts" for Christina.  These accounts are nothing more than two lines on spreadsheets.  The first:
Christina - Line of Credit - -2000BTC
The second:
Christina - Checking: 2000 BTC.

Before the transaction, BigBank had 3000 Bitcoins, and Christina had 0 Bitcoins, for a total of BTC3000.  After, BigBank has 3000Bitcoins (they haven't actually given Christina any cryptographically-signed data - they just typed two numbers in a spreadsheet), and Christina "has" BTC2000.  Now, if Christina demanded the BTC2000 in cash, BigBank would have to turn it over, but she's not going to do that.  She's going to take the debit card that she got for her new checking account and leave. (Even if she doesn't do that in this instance, on average, most people will, because money in an account earns interest, so it "costs" them money to request it in cash.  Also, maybe the debit card is easier to handle, etc.  The entire fractional reserve system is based on the correct assumption that people will not demand cash an overwhelming percentage of the time).

Total Available to be Spent Before Transaction: 3000BTC (3000 BigBank + 0 Christina)
Total Available After Transaction: 500BTC (3000 BigBank + 2000 Christina).

The two thousand bitcoins that Christina got didn't exist before the transaction.  They were created out of thin air.  Of course, they really weren't minted.  BigBank didn't hash them using a client, so in fact don't exist.  But, through the "miracle" of fractional reserve banking, the following happens.

Christina goes to Dirty Dan's Dirtbike Dealership.  Dirty Dan happens to except Bit-Visa.  So, Christina swipes her debit card, and BigBank moves the 2000BTC number (which is in fact 0 real bitcoins) from her checking account into Dirty Dan's checking account.  These 2000BTC don't exist, as we established above, but nonetheless, Christina just bought a Dirty Dan Dirtbike because both she and Dirty Dan both *think* they exist.

Later, a year rolls around, and Christina has to work two jobs to pay back the 2,100BTC she owes BigBank.  What did those 2,100BTC cost BigBank?  Nothing.  They never even existed.  Probably, they don't exist now, because Christina's employer, Ernie's Elastics, has an account with BigBank...and he took out a loan with BigBank to cover business expenses, and so her salary is made of bitcoins that don't exist...and on and on and on....

Even though the 2000 BC don't exist, the *purchasing power* of 2,000BTC has just entered the economy.  This is the inflation that is problematic.

Thus, in the borrowing example, Alice and Bob lose money and Christina gets it.  In the BigBank example, no one loses money, but everyone trusts BigBank, and so their pledge that Christina has 2,000BTC to spend is just as good as those 2,000BTC, even though their pledge is a lie, and those bitcoins do not exist.

That is the situation which causes inflation, and it is in no way related to the underlying supply of pieces of paper that make dollar bills, or hashed kilobytes that make real bitcoins.  Its all, quite literally, imaginary.  Thus, Bitcoin is subject to the same inflationary pressures as dollars, euros, or pounds.


Governments do not pay with "freshly printed money."  The money isn't printed, nor does it go through the government at all.  The Federal Reserve, which is a private bank just like Chase or Wells Fargo or HSBC, merely writes an "account" for the troubled bank, and money pops magically into existence just like the example above.  The government only has to print enough money to keep the banks from running out of *what the people ask for in cash*, which, in today's world of credit cards, PayPal, etc, is a very, very small fraction of the total money created.  The rest of the money is blessed into existence whenever a loan is made, because to loan out five dollars of five trillion dollars, the loaning bank loses precisely zero dollars.  The same is true with bitcoins - the accounts are fictitious numbers, and in no way represent the number of bitcoins, or dollars, or whatever else, that physically (or electronically) exist.


The problem is not a bank run - the problem is inflation.  Why would people demand real bitcoins?  Why would they not just use their account balances.  Heck, a website for a bank account could look *exactly* like the Bitcoin client, and users wouldn't know the difference.  A run on the bank only occurs when people demand real currency (dollar bills, bitcoins, whatever).  However, most of the time, even with paper money, people are willing to trust their bank balances and don't demand cold hard cash.  If cold hard cash looked and felt and seemed exactly like the bank balances to most people (which they do with bitcoin - one computer screen or another, no one who's not a programmer knows the difference), then people, as with today, would not demand real bitcoins.  They can tell the difference between a bank balance and a dollar bill, but as far as they know, real bitcoins and bank balances are *exactly* the same thing.  So, a run on the bank is even *less* likely than with paper currency.  In the meantime, inflation and a run on the bank are unrelated.

Scratch the interest then.  The bank IS using money that's not there.  That's the whole point.  They're using dollars that aren't there today, and tomorrow they're using bitcoins that aren't there.  That is the definition of fractional reserve lending.

No.  Under the US Code and the code of every other developed nation, then they are only committing fraud if the percentage of actually available accounts falls below some threshold.  For standard savings in the US, that ratio is now around 11%.  Which means that 89% of all accounts are at any given point *not redeemable.*  They are lying to you.  It is fraud.  Its just not *legally* fraud.  And no one is ever going to convince a solid 11% of all bank account holders to go demand cash at the same time, so they will never be caught.



Fractional reserve is by definition the creation of liquidity (purchasing ability, or as I call them, "lie dollars") backed only by a borrower's promise to pay, not by actual currency.  This is, in your parlance, "blatantly lying about what they're doing."  I agree with you.  However, its legal with dollars and pounds and euros and it will be legal with bitcoins.  It SHOULD be illegal, but changing from dollars to bitcoins will not make it so.  

Also, you're correct that they're screwed if they're caught in the lie.  That's a run on the bank, and is a heck of a lot worse than even our current financial mess.  It causes everyone to open their eyes, go "the banks are lying to us!" and hide their money in their mattress for the next hundred years.  There are senior citizens today who don't have bank accounts because they were rudely awoken to the bank's fraudulent but legal system in the thirties, while the rest of us have the wool over our eyes.

I wish this were the case.  However, why would their be no Federal Reserve?  The Federal Reserve is independent of the US Bureau of Engraving and Printing - its just another bank.  Nothing stops a nation from creating such a bank with bitcoins.  They don't have to print bitcoins, they just have to engage in fractional reserve and seem big and strong and legit enough that no one will ever question whether they have the money they claim to have.


Absolutely!  We should all demand honesty from the banks, and an end to the pyramid scheme that is going on.  However, my point is that shutting down the literal printing presses, which Bitcoin does when it gets to 21,000,000BTC, does not do this.


I think you're both right and wrong here.  Yes, it would be more difficult to keep a day's supply of bitcoins on hand when you couldn't request more cash.  However, I also believe that, under bitcoins, no one would *EVER*, or almost ever, request real bitcoins.  Today, people know the difference between a piece of paper with a picture on it and a number on a bank website.   Even though they don't understand the bank's fraud, they know there's something different about the electronic number and the paper.  Therefore, the bank must keep paper on hand, because people might demand it, believing it to be more secure than the bank number on the screen.  However, the distinction between bitcoins and bank balances is *much* more difficult to grasp.  If you're a computer scientist, if you've read the bitcoin whitepapers, etc, you know that there's a difference between a real bitcoin and a number on a bank account website.  The real bitcoin is cryptographically generated, and is not a lie.  Its even far more true in its value than the US paper money, which is what bitcoin is going for.  However, for 99.99% of the population, there is *no* difference between a bitcoin and a bank's fraudulent claim that bitcoins are in an account.  So, no one would ever (or would very rarely) demand bitcoins, making the number that the bank had to keep on-hand far more manageable, and in fact probably just a bit above 0.


I agree that the fact that bitcoins are separate from any government makes a difference.  Its a significant difference, and probably the biggest difference between bitcoins and dollars, pounds, euros, or whatever.  However, I think that fractional reserve bailouts could still happen, unfortunately, because people will not demand real bitcoins, not knowing the difference between a bitcoin and a bank balance.

I believe that we've reached the point in our discussion where we see what is, and we agree on what ought to be, and the direction where the market goes is really something that cannot be predicted ahead of time. I just want to say that there's a reason that the US government went off the gold standard, even though everything you say applies to gold as well: Real gold keeps its value (as will real Bitcoins), and people eventually catch on to the game.

I don't have time to reply to your post right now, since it's almost midnight ;), so I'll leave you with some interesting reading to peruse at your own leisure:

Here are three interesting threads that I found that you guys might be interested in:

A big one:
http://mises.org/Community/forums/t/6197.aspx

http://mises.org/Community/forums/p/17430/339679.aspx#339679
http://mises.org/Community/forums/p/8938/273181.aspx#273181

I routinely pay with friends' debts as currency.

"Hey, Bob owes me a hundred; when he pays he can pay for me too."
"Sure."

Businesses do similar things and without banks they would do it more. Sure, BigBank is more efficient at it but the effect is there.


So how come there has been no such inflation in gold in the hundreds of years it has been used as a currency in fractional reserve banking?


There is one important difference. If bitcoins become widespread it will be more convenient and less costly to pay with bitcoins than with bank balances. That makes the demand for real bitcoins pretty high.

I see the issue now!  There's a disconnect between what we're discussing.  Let me try to be more clear.

Today's standard is fractional *in relation to the promises to pay that you (a bank) have on-hand, in deposit dollars.*  So, say you get five real dollars on hand, printed.  You then lend out fifty dollars because you have a 1/10 backing requirement.  Someone deposits those fifty dollars, and now you (the banking system, not necessarily the same company) have fifty-five dollars in backing!  Of course, you really only have the five dollars in paper money, but all that is required to make loans is that you have deposits, even if they're deposits of fictitious, un-backed money.  Now with fifty-five dollars on hand, you lend out another five hundred fifty dollars.  Someone deposits these into the banking system, and now five thousand five hundred dollars of loans can be made, and so on and so on, inflating the economy.  If you want to lend more, you just lend a little, then someone deposits that non-dollar-backed, fictitious debt money, that doesn't even exist in paper form, in *any* bank, then that bank can lend back even *more* money (than the money just fictitiously created) in loans.  Its all a cycle of fictitious dollars based on nothing but people's signatures on mortgage documents.  All you have to have on hand to back your loans are...loans.  Since you can make loans out of nothing, you can make all the loans you can imagine with no problem, with no backing.  All the while, you just need enough paper to cover a day's requests - not any percentage of the loans you actually make.

The gold standard was fractional in proportion to the number of pounds of gold you had on hand.  So, you could maybe lend out ten-gold-pounds worth of loans if you had one gold pound on-hand, but it stopped there.  There could be more money lent than gold on-hand because it was fractional, yes, but because it was based in gold and not debt, you couldn't just continue the cycle ad-infinitum.    Loans themselves could not form the basis of new loans.  In contrast, today, the basis of a new loan is nothing but another, older (sometimes only seconds older) loan.

Thus, I think I've found the disconnect between what I'm talking about and what everyone else on here is talking about.  I'm talking about fractional reserve banking where your reserve is just more debt - that's the current system.  You guys, I think, are talking about fractional reserve where the reserve is something solid - something that requires work to mine.  Bitcoins count for that. 

However, you're advocating going to the *bitcoin standard.*  Ie, if someone wants to make X-BTC in loans, they must have .10X-BTC in actual coins on-hand.

The forum and the central bitcoin website seem both to believe that converting to a bitcoin-denominated economy will create a bitcoin-standard economy.  This is not true.  Backing your money with bitcoins is a *huge* step beyond simply using bitcoins as the denominating money.

People can decide for themselves what currency to use, and I like bitcoins, and hope that the currency takes off, I really do.  However, even a bitcoin-denominated economy would still be a *debt-standard* economy.  Banks would see that people were using bitcoins, and they would go, "Ooh, we can make money offering services in bitcoins instead of dollars."  However, the law would remain that even though loans were made in amounts expressed in bitcoins, those loans had the backing of other loans, not actual bitcoins.

To get bitcoins used as currency, you just need adoption.  We're getting that, and that's great.  However, what do you need to eliminate the debt-standard and ensure that all loans created are *backed* with real bitcoins?

A government decree.  A law from Congress or Parliament that declared that loans had to be based in bitcoins, not debt.  GLHF.  Besides, even if we got that, it would eliminate inflation, but it would make bitcoins just another government-controlled, monopolized currency.  That would kill at least half of the point, right?

Please read: http://en.wikipedia.org/wiki/Agorism

Your most important sentence: "However, the law would remain that even though loans were made in amounts expressed in bitcoins, those loans had the backing of other loans, not actual bitcoins."

There is no law when it comes to Bitcoins, other than the law of human action. Sovereign fiat might create new money with impunity, but then again, sovereign fiat is required to pay taxes and it is legal tender. Bitcoin shares none of these "advantages". Nobody will accept "loans upon loans upon loans" if they are not required to by force of law (and they defacto aren't; please read the Agorism post :)), as the further this goes, the more unstable things get. I'll reply in more detail to your other post.

Except with Bitcoins, there is no force to keep people captive to a system that they know is ripping them off and no monetary pumping to paper over losses. No taxes, no legal tender laws. Anything operating in the Bitcoin economy survives (and fails) on its own merits alone.


So we both agree that the laws suck. However, these laws are just arbitrary points that have nothing to do with market forces and the banking system only survives because there is a lender of last resort. Such a lender of last resort cannot exist in a hard money system such as Bitcoin.


Fraud should be illegal, yes. If a bank says "Hey, we only keep 10% of your money on hand, so it might not be there when you want it!", then it is no longer fraud, but good luck attracting depositors ;)

Again, if it were not for legal tender rules and taxation, fiat currency would have a value of 0 with the kind of system we have in place today.


Those senior citizens know something many people today don't, because they lived through it.


Don't like the word "private" fool you: The Federal Reserve as as much an arm of the government as is the Treasury, Congress, or anything else.

Why would nobody ever question them? Why would anyone even pay any attention to them? They can say they have 10 million Bitcoins, but who cares? There is a limit to the amount of lying that can go on. "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."


"However, I also believe that, under bitcoins, no one would *EVER*, or almost ever, request real bitcoins. "

Why not? It's much easier to do so than it is to request a bar of gold, or even 1 million in physical cash.

You cannot have continual "virtual" inflation without a corresponding decline in the % of real reserves of Bitcoin. Such a system is inherently unstable since it increases the risk with every passing day.

Don't forget that banks are customers of each other, too. Maybe the average Joe won't care, but the larger the balance, the more people will care. I will bet you that banks will care that their deposits are being held in good hands.


I think it will be much easier to demand real bitcoins; in fact, I would expect that those with large balances (other banks, rich players, etc...) would follow their holdings with close scrutiny, as they have the most to lose from fraud in the banking system.

To summarize, I think we both agree on the mechanics of the banking system. Where we disagree is if everyone can be fooled under a Bitcoin banking system. I don't think they can. Even if 999 average joes with 50 BTCs each are fooled, all you need is ONE guy with a hundred thousand BTCs to keep the entire banking system in line.

This isn't to say fractional reserve banking won't happen, but it will balance at the point where the supply & demand for money balance out. I fully expect that it will take the form of on-demand deposits which are 100% reserved and time deposits which can be fractionated.

It cannot continue beyond the point of equilibrium without an ensuing credit bust. The only reason fiat hasn't busted is because the american citizen must use it to pay taxes and all other debts. There is a legal monopoly on the use of force which enforces the survival of fiat. Without such force, there is no way that a banking system that looks like the way things are practiced today could survive over a long period of time.

P.S. I thought I wrote those points? How come all of those quotes have db's name in them ;)

They *will* accept loans upon loans upon loans.  No one forces them to do it today.  Taking out a loan is what creates the vast majority of inflation in today's economy.  Want a house?  If you get a mortgage, you inflate the currency.  You also accept "loans upon loans upon loans."  So, don't get a mortgage.  You also save yourself from the risk of foreclosure, from interest payments, and from a myriad of legal fees if you just buy a house with dollar bills.  You could do that today.  Go down your street, though, and poll the people - "What percentage of homeowners do have or have had a mortgage?" The result will be well in excess of 95%.  No one forced them to accept loans upon loans, but they did, because they wanted a house now that they didn't have the money to buy. Greed made them accept the fictitious idea that loans can back loans, be those loans in whatever currency you wish. The same will happen with bitcoins.

You claim that "there is no law when it comes to bitcoins other than the law of human action."  This is true, but there are two caveats to that statement.
1) There is no law now, because the system at its current size is no threat to government control.  As soon as it is, there will be laws.  The government may not have the power to print the money, but they have the power to enforce...whatever they wish.

2)My quote about loans upon loans stands whether we're talking dollars, bitcoins, gold, or cigarettes.  Whatever your basis of money, there are two options - A)Banks must have X% in reserve at all times, and debt loans don't count, or B)Banks must have X% including debt loans on reserve.  The law in developed nations is that banks are entitled to count debt loans of bank balances *as backing toward identical loans.*  Whether these loans are indollars or bitcoins doesn't matter - the law on how the banks are allowed to operate is the same.  The state does not require banks to keep any percentage of paper dollars backing loans, and so the law stands that, with bitcoins, they wouldn't have to keep any percentage of real bitcoins backing loans.  The law is about the loan practice, not the currency.  We could use seashells for currency, and the law would apply just the same.

Why not?  The banks are legally able to rip them off with fake, invented bitcoins that exist only on balance sheets, just as they're allowed to with dollars.  If people don't want to go to the banks and only use real bitcoins, then fine.  But people can opt not to go to the banks today - they just choose to go to the banks, to take out loans that invent fake money (and which, in a bitcoin economy, would invent fake bitcions).  Thus, these people's complicity with the banks would inflate the bitcoin economy, just as they do the dollar economy.  Also, as US law stands, taxes must be paid on *dollar equivalent wealth.*  Get some stock benefits as part of your paycheck?  If they are theoretically convertible to dollar value, then you must pay taxes on them.  Generate bitcoins?  If you fail to report the income of the exchange-rate dollar amount of these coins, you *are committing tax evasion in the United States.*  There are tax laws.  The government might not track you down, might not prosecute you, might not even know, but the crime is being committed, whether you're caught or not.  Also, what's to prevent such "captive" laws as you mention from taking hold, as they surely will once (if) bitcoins take off?



Its true that banks are a lender of last resort.  But my guess is, in a bitcoin economy, if someone wants to buy say, a house, they're going to have to go to a lender of last resort.  Otherwise, they'd have to have enough friends lend them enough money to buy the house...which they could do today.  They don't do it today, though, they go to banks, because your friends don't want to take that kind of a risk (or don't have that much money).  Why can such a lender not exist in a bitcoin system?  There were gold-coin lender banks in hard-money systems before dollars...there will be bitcoin lenders of last resort as well.  They can exist and they will, not because people are forced by law to use them, but because they will hand over the money to buy a house or a car, an Joe and Shirley want that shiny new BMW now, not when they've saved for it.


Funny you should say that.  They attract *millions* of depositors.  Do you not have a single bank account?  I have several.  This 10% rule (close to that amount, at least) is how *all US banks* operate today.  They attract depositors - there's no way to deny it.  However, you're right that fiat has no value without the decree that it must.  We can wholeheartedly agree on that.


Well, you're right that the Federal Reserve might as well be part of the government.  Of course, Ron Paul and Dennis Kucinich(sp?) would say that the government is subservient to the Reserve...but that's another matter.  To quote Mr. Kucinich, "The Federal Reserve is as 'federal' as Federal Express."  You're also right that there's no guarantee that the people would pay attention to a Bitcoin-Fed, but what prevents the US government from passing a law requiring people to take their word, just as they have with the real Fed?  The fed wouldn't have all the bitcoins they claimed, but they don't seriously have the money they claim to have now, but there's nothing we can do about it without utter anarchy.  My point is that there's nothing inherent in the Bitcoin technology or system that makes a government requiring a people trust an obviously underfunded bank impossible.  Likewise, inflation will still occur, even though it will be, like today's dollar inflation, by virtue of lie-bitcoins just like lie-dollars.

No one will ever request real bitcoins because people will be ignorant of the difference between bitcoins and bank balances because they won't know the difference?  Why would they prefer to work with bitcoins?  Both are just numbers on the screen to anyone who doesn't understand cryptography and computers.  At least with paper dollars, the average Joe can see the difference.  With bitcoins and bank balances, people would believe them to be *identical,* and of course all the banks would say how much easier it is to use your bank balance - after all, with it all you need is a debit card, not a client, connection, and your wallet file.  Thus, banks would only have to keep a minuscule number of bitcoins on-hand, because unless someone was a techie, there would be no difference between the account and "cash" bitcoins.

As far as the virtual inflation without a corresponding increase in cash...I really don't know how to argue this, besides to say that you can, and you do, have it today.  Yes, you have real inflation, but you have *far* less real inflation than virtual inflation today.  Similarly, you could have virtual inflation (maybe less, but the argument was about whether bitcoins are completely inflation-proof) with bitcoins, because people don't realize that bank balances made from loans do not exist in any way.  They spend these loan-dollars without realizing they're fake, and more are created every day, and fake loan-bitcoins would be no different.  The system is inherently unstable, yes - Greece right now is an example of what happens.  But the system would exist with bitcoins.  The only way out is to make (by government decree) the practice of creating fake liquidity with loans illegal.  Its not illegal now, and it wouldn't be illegal with bitcoins without a change in the law, which the adoption of bitcions does not guarantee.

Will the banks eventually care that their money is fake-money?  You would think so...you would hope so.  It makes sense.  But 99% of today's money is fictitious...as long as they can buy groceries and yachts and jets, they don't care.  I wish they would.  Even though the money is fake (as in, not backed by dollar bills or cryptographic bitcoins), its real in that people will accept it as valuable.  The problem is that the economy is inflated when this fake-liquidity is created.  However, if you have ten billion dollars, and you dilute the economy by giving loans so that your ten billion can only buy the goods of nine and a half billion, my guess is, you don't care.  That's the position of the banks today.

I agree that the big players would follow their money closely.  Today, the big players have gold, silver, industrial stocks, and diversified currency portfolios - they already follow their money closely, and have items of real value, not fiat cash.  Sure, Warren Buffet and Richard Branson would probably want to have at least a solid portion of their money in bitcoins.  Even Buffet and Branson and Gates, however, only make up a small portion of the economy.  The rest of the seven billion schmucks on the planet wouldn't want bitcoins - they wouldn't know the difference between a bank website and a bitcoin client.

I decided that my small tech consulting business - just me, really - would accept bitcoins as payment.  I sent out an email to all of my clients.  I got back replies, and *all* of them basically said "WTF is this?"  People barely know the difference between paper and bank websites.  They wouldn't know the difference at all between bitcoins and bank balances, and thus wouldn't see any reason to request real bitcoins.

Now, this is a nice thought.  If the banks got careless, and a consortium of people could accumulate 21,000,001 bitcoins total across all their bank accounts, then they could call the bluff of the entire system.  That's certainly possible under bitcoins, and impossible under the dollar system.  Of course, the public would probably believe those individuals to be "hackers" or frauds, rather than accept that their entire banking system was a joke.


How can you fraction something and still have 100% available at all times?

Yes, but then people just blame the "evil bankers" or the "incompetent government," rather than see the real reason for the bust.


By the way, I'm not sure if I screwed up the quote lines...I've been copying and pasting them to make my partial quotes, so my apologies if someone's name is mis-credited.

The issue is not that Bitcoins are or aren't more stable than dollars - They are.  Their creation is independent of the government, they have a fixed amount, etc.  My point is that inflation will occur in a bitcoin economy.  The website states that it wouldn't, but this is simply untrue unless you change the law.

This is because banks will create fake liquidity by giving out loans which aren't backed by real bitcoins, just as they give out loans that aren't backed by dollars today.  This will not inflate the number of real bitcoins in the system, but it might as well, because it introduces new bitcoin-value-units into the economy. 

Could the banks get caught?  Yes.  Is it easier to catch the banks?  Well, yes, much easier, if people demand real bitcoins...but at the same time, much harder, because the difference between a bank balance and a bitcoin is not at all obvious to average people, leading them to trust bank balances even more than they do now.  ("What?  You mean that's not the exact same thing?  But they're both numbers on the computer!") 

Hopefully, the banks would hold themselves more in line because they would know that if a few people got smart, they could *prove* that the money wasn't backed by bitcoins by accumulating a mutual balance of over 21,000,000.  However...at that point, people would be trusting the balances anyway, so what would it matter?  We'd be back to dollars essentially, just paperless ones. 

The *only* way to prevent inflation is to tell banks "You must back your loans in bitcoins.  You cannot loan out balances which are not backed by bitcoins that you have on file."  This, however, requires the government to step in and mandate that the banks used bitcoin-backing for their loans.  Not only will this not happen, because the government would then be unable to spend like there's no tomorrow, but it would make bitcoins a government-endorsed, and almost certainly government-regulated currency...and we all know what fun government-regulated currencies are.

In short, just because you cannot print additional bitcoins does not mean that the economy will not be inflated.  To prevent backless-bank-loan-inflation, the law would have to be changed.  The implication that a bitcoin economy would be free from inflation should be removed from the website.  If the lead programmer or whomever maintains the site chooses to replace it with "inflation free given a change in monetary policy law," that's fine, but bitcoins do not prevent inflation, because inflation comes, at least the great majority of it, from loans rather than actual printing of cash.

Because it's so very easy to obtain authentic bitcoins, many merchants and employees will prefer to accept real bitcoins as opposed to a balance of bitcoins within a bank account. Many people would keep their checking and savings accounts on their own computers, backed up and encrypted in two or more physical locations. If I could store and transfer authentic dollars as easily as I can store and transfer bitcoins, I would empty out my checking and savings account tomorrow. The only reason I keep my money in the bank, is because it's more secure than in my house and it's easier to transfer than physical dollars. The interest rate in my savings account is just a bonus and not really important. The interest rate is very low because the balance is very liquid. I could go to my bank and empty out my savings and checking accounts with no fee. Term deposits on the other hand offer an interest rate that's higher than inflation, but it comes at the cost of liquidity. If I want real interest, I have to surrender many of the benefits of liquidity, such as the option to empty out my account and hit the road at a moment's notice. Imagine a bank that had a bitcoin checking account that is backed 100% by bitcoins but also offers 5 year bitcoin term deposits at a nice high interest rate. To make the illustration simpler, let's increase the early withdrawal fee to 50% of the deposited amount. The bank then lends out only 50% of the loan and pays interest based on the income that the bank is making on the loan/investment that they have made. So long as the bank is collecting its interest every month, that loan is backed 100% until just before the end of the 5 years. At the end of the 5 years, the bank has to collect their loan/investment and if they're able to do it, then they're still backed 100%. But if they can't, they either have to lie, tell the customer that they lost his money, or as would probably happen, get the money by taking out a long term loan from another customer/bank or by taking the money from their profits.

I agree with your logic, with the exception of two small points.

1)You and I and all the other tech-savvy individuals would prefer bitcoins to bitcoin-balances in banks.  We know the difference. (By the way, natural deflation is a nice interest rate independent of a bank).  However, your average Americans (or Brits, or Czechs, or whomever), would not see the difference.  Their knowledgeable friends would say "use real bitcoins."  The banks would say "Use our balances!"  The banks, also, would have multi-million-dollar advertising budgets, and the ability to offer services (of what form, I don't know) to entice people to use their balances.  I think I underestimate people's intelligence, and you probably overestimate it.  Personally, I don't think the people of the world, as a collective, would know the difference.  If history is any indication, they'd be easily swayed by the banks' advertising.

2)My point is this.  If people use banks, and I think that they will for the above reason, it is presently legal for banks to back loans with nothing more than loans and thereby inflate the economy.  Either the entire population boycots banks (which I don't think will happen - see above), or we have to have a change in the law.  Therefore, using bitcoins as a currency is not inflation-proof without a change in the law or utter destruction of the banking industry.  My point with this entire thread was simply to dispel the false notion that printing presses are to blame for inflation.  Loans are the real culprit, with no need to waste paper, ink, and electricity on printing.  Taking today's economy lifting out dollars and dropping in bitcoins and continuing on would have the same loan rules, and thus would have the same inflation, minus only the very small percentage that is due to printing presses.

InterArmaEnimSil , I believe our main point of contention is on how powerful the banking system in a free market will be vis a vis the customers. You appear to believe that the banks will be just as successful at practicing --in what we both agree is a fraudulent manner -- fractional reserve banking, without a lender of last resort (The federal reserve) and without a monopoly (taxation and legal tender laws). I don't agree with this, mainly because the current system would already be bankrupt without taxation and legal tender laws,and would also have collapsed long ago without a central lender of last resort with the power to manipulate the money supply at will.

Sure, there is a small statistical chance that everyone becomes fools, but do you really believe it? You are not fooled, are you? Do you think everyone is less intelligent than you or less able to see, particularly those people who have amassed a large sum of wealth and therefore have a lot to lose? Part of this is related to education; if people are ignorant, educate them. Part of this is also related to a sense of loss; the more you have to lose, the more you will educate yourself, guaranteed. Some people might not have a sense of self-survival, but most people do.

I'll go over a few points below:


This is a different problem altogether. Did you read my Agorism link? :) Such laws will only be effective to the degree they can have force in the digital world. This is not to say they will be without effect altogether; this is a real problem that the Bitcoin network will have to face should it become popular.


I think we're using different definitions of the term "lender of last resort". To me, a "lender of last resort" implies a sort of bank with basically unlimited pockets that can always lend to any other bank on request. Such a feat is possible with fiat currency, and perhaps possible with Bitcoin credit, but impossible with actual Bitcoins.

There is an implication within your posts that the banks are somehow a "collective" and form a homogeneous whole. I don't think we should treat the system in this way. Every bank will be a customer of another bank for some amount, and out of their own interest of survival they will scrutinize the other bank's operations a lot more closely than the "average joe" might. The worst case of your scenario can only happen should one bank somehow gain a monopoly in the Bitcoin world, but there is no artificial force preventing other banks from springing up, nor is there an artificial force people to accept this bank's rules and dictates.


Decree = value :) No decree, it would be the end of days as far as the fiat banking system is concerned.


Now, this is a nice thought.  If the banks got careless, and a consortium of people could accumulate 21,000,001 bitcoins total across all their bank accounts, then they could call the bluff of the entire system.  That's certainly possible under bitcoins, and impossible under the dollar system.  Of course, the public would probably believe those individuals to be "hackers" or frauds, rather than accept that their entire banking system was a joke.


How can you fraction something and still have 100% available at all times?
[/quote]

The on-demand deposits would be available at all times. The time deposits would not be, by design.


I don't know that this is untrue. In an honest banking system, people must give up liquidity in other for others to gain it. There is inflation if you sum the amount of credits + real bitcoins and consider this the money supply, but what effect does this have on the general level of prices? I would argue it only affects prices to the degree that the banking system is dishonest, because the money in circulation should remain stable.



There is no need to change the law.

The banking system is not homogeneous, and we don't need anywhere near 21,000,000 bitcoins to attack the banking system.

All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.

Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.

Bank B can try to borrow money from other banks, but there is a limit to what they will be willing to lend.

You seem to be implying that the entire industry can cartelize to keep things going, but there are several arguments against that:

http://mises.org/LIBERAL/CH2SEC7.ASP
http://mises.org/media/3686

Sorry, I didn't have the time to write a more eloquent reply, but I think that is our remaining point of contention: How successful the banks will be at fooling the people. Please also read the threads about fractional reserve banking:

http://mises.org/Community/forums/t/6197.aspx

http://mises.org/Community/forums/p/17430/339679.aspx#339679
http://mises.org/Community/forums/p/8938/273181.aspx#273181

P.S. No worries about the misquoting! Quoting can be a pain in the ass in these types of forums. I just got a bit confused, cause I thought I had written those quotes and then I wasn't so sure anymore ;)

Agreed.

You mention three things - a)A lender of last resort, b)taxation, c)Legal tender laws.

Pulling out the use of dollars and dropping in the use of bitcoins - what we're doing on this site - does not solve *any* of these three problems.

Lender of Last Resort:  Debt based upon debt remains legal, since we're not changing the law.  So a lender of last resort exists.  No, it can't issue bitcoins, but it can "paper over" losses with very convincing, nearly-identical-seeming things.

B)Taxation - Are you claiming that using bitcoins eliminates taxation?  Taxation is by definition graft perpetrated by the government.  Its "You give us x% of your income in dollars, or we throw you in jail."  If bitcoins become a smashing success....they'll be taxed.  The government will say "Give us x% of your bitcoins, or enough dollars to make that much value at the exchange rate, or go to jail."  Bitcoins do not eliminate taxes.

C)As mentioned above, nothing we're doing here changes the law.  So legal tender laws still exist.

So, banks might not be as successful without those three things...but they still have them under a bitcoin economy without law changes.  Maybe it can be decently argued that there would be no lender of last resort, but only if debt-backed loans are made illegal.  As we're not doing that...all three points stand, and so the banking system stands.

I agree with you here.  However, as mentioned above, using bitcoins doesn't cut the US government's ability to tax you, their power to create legal tender laws, or their ability to make something which is close enough to a lender of last resort so that they can either fool people or throw in jail those who don't believe it is such a lender.

Do I really believe everyone would be fooled by the bank system under a bitcoin economy?  Hell yes.  They're fooled now.  What was the initial reaction *on this forum* when I said that loans were not backed by paper dollars?  "No, that's not true.  If its an on-demand deposit, it is one hundred percent backed, one-hundred percent of the time.  Otherwise its fraud."  Not that people on this forum are fools - but if even the people here believe your bank balances are backed...what do your teachers, truck drivers, doctors....basically anyone who hasn't taken the time to study monetary policy, going to think?  They're fooled.  Not because they're less intelligent, but because they haven't invested the time and effort to figure out what a sham the system is.  Of course, some are less intelligent, and still others are simply unwilling to believe that a banker can create an unlimited amount of money with keystrokes and not even a printing press.  You should have seen the face of one member of my family who has devoted his life to building bank balances when I told him there was nothing - literally nothing - that backed his balance, and that a loan for five thousand dollars was literally five thousand dollars of new liquidity popped into existence without real dollars just by keying in "5000" on  a spreadsheet.  I might as well have said the Earth was flat.  Now, those who are particularly wealthy have a vested interest in figuring out how the system works.  You're right about that.  They can and will figure it out, as will those of us interested in the mechanics of the system for whatever reason.  However, other people just don't care as long as they can pay their bills, and bitcoins remove the only obvious difference between banks and cash to those who don't understand - the fact that cash is paper.  You also say that we should educate people - this is valid, and we should try, but the government has a near-monopoly on education, and there's a reason they teach civics and "economics" without a single breath about monetary liquidity policy and the nature of loans.

Then we agree - bitcoins do not inherently remove the power of taxation and legal tender laws.  I agree that they make things more difficult for the government...but digital things that make things more difficult for a government all have a habit of skipping town or getting attacked - Napster, Pirate Bay, Wikileaks, all the rest.  No government will allow its tax base to atrophy by what is essentially the use of an untaxable resource.  That would be a threat to its control, and governments love their control.  However, my issue is not with whether we will be taxed.  I don't have a problem with (justly done) taxes.  Someone has to pay for the roads on which I drive to work and the men who ensure that the water in my tap isn't laced with lead.  (Now, whether the current administrations do well at these jobs is another story, but I'm not an anarchist in theory).  My issue is with the inflation that *will* exist in the bitcoin economy unless banks are either boycotted or made by force of law to back their loans.  We're not changing the law here.  If anything, we're a thorn in the government's eye, making the law *less* likely to change in our favor.

Agreed.  However, unless the law is changed, "bitcoin credit" is what the economy will use.  The only alternative is for everyone to refuse to honor it...which they won't do, because those who don't care to research the difference won't know the difference.  If you're right, and I'm being pessimistic, and everyone would get wise to the difference, then a legal tender law would just be passed forcing us to honor backless credit with BTC in front of it instead of $....we can thank the financial sector lobby for that.

Honestly, I think that if it weren't for antitrust laws, we'd wake up tomorrow and Chase, HSBC, UBS, RBC, BoA, and WF would all have had a merger.  However, I don't mean to imply that these bank corporations do not compete with one another now.  What I mean is that un-backed credit from *any* bank forms the basis for additional un-backed credit from *whatever bank* gets the un-backed amount as deposit.  Its not that each bank doesn't want all the money for itself, and to keep competitors in check or subservient.  I mean that if Wells Fargo gives me a loan (fake magic spreadsheet money) and I pay you, and you go and deposit it with RBC, then RBC can make more loans fake loans, etc.  Its not that they're all cooperating, but merely that the system is a closed loop (Think "system" as used in physics) which constantly inflates the numbers.

Actually, faith=value.  Decree without faith gives you Greece right now.  So, with no decree, if people didn't understand, then they would still think the dollars had value.  The original bankers worked in gold.  They just hid from everyone the fact that not all the depositors' gold was available.  No decree existed then, but the system worked.  Then, when people began to *trust* the banks (faith comes in here) the banks wrote out checques (scrip) which *claimed* to give the bearer the right of ownership over gold in a vault.  However, the bankers soon got the idea that they could just write these scrips, in which people had faith, for gold that didn't even exist.  That was the root of the modern backless system.  Does it crash if people get wise?  Yes.  Do people necessarily figure out that they're being scammed?  Nope.  If they had figured it out here and now, we'd have riots on our hands.  Instead we have "loan modification programs" and everyone's happy.  Besides, even if people figure out what's happened, the scammers are either dead, having lived lives of luxury at others' expense, or they've taken up a private island in the Pacific and no one can get to them.

You're right that in an honest banking system, your claims hold.  However, what is it about adoption of bitcions that makes the banks honest?  We still have the exact same laws...just with bitcoins...no change in what the banks *can* do, no change in the fact that legal tender laws *force* us to accept their credit as money....no change in the system.

As far as the amount of money in circulation - Can you buy things with a credit card?  Then its in circulation.  A debit card?  Then its in circulation.  Cash?  Then its in circulation.  Cash is backed.  (Only by paper, but in a bitcoin system, cash would be backed by bitcoins).   Debit cards might be *partially* backed.  Credit is not.  However, this un-backed credit has the power to move goods and services in the real world.  Therefore, it is in circulation, and part of the money supply, and because it is, the money supply is inflated.  Thus, if banks can issue bitcoin-credit loans, and people accept these loans, then these backless credit loans are in circulation, and the money is inflated.  The amount of cash is not inflated, but cash is only a portion of the money supply.

There is no need to change the law.

...

All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.

Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.
[/quote]

This scenario is valid.  The problem is that Bank B, in this case, is not only dishonest, but stupid.  They allowed one investor to accumulate more wealth than they kept on reserve.  No bank would do this - they have statisticians with Poisson distribution graphs that will tell them that if they do this, they will go bust.  Bank B, if they had one investor with 100,000BTC, would keep 100,000 on reserve (and then some).  Why?  The chance of that one person at some point (say once in a span of thirty years) finding a better bank and moving the money is very, very high.  However, they know the number of coins they have to keep onhand to have only a 1/1000 of 1% chance of having a run...all the others, they will lend out unless legally required to do so.  Is this a change from today's system?  Yes.  Does it eliminate inflation?  No.


I don't mean that the banks are a cartel, but a closed system (see above).  In reality, though, lets say bitcoins became popular.  In fact, they become so popular that they replace dollars.  Essentially, take today's economy, swipe out the dollars, and replace them all with bitcoins.  One of the following threads will then occur without a forced change in the law, which the use of bitcoins does not necessitate.

1)  People remain fooled by the bank system.  They, as a whole, don't know the difference between bank balances and bitcoins, and they use a combination of both, relying mostly on bank balances, as with today, because of the promises of interest, the use of debit cards, and the advertising budgets of the financial sector, along with whatever other reasons.  Banks continue to give backless loans, inflating the money supply by typing numbers into their spreadsheets, and then these numbers, assumed to be bitcoins by the population, move goods.  Inflation happens.

2) People get wise to the backless fractional scheme, and refuse to accept bank credit because it causes inflation.  However, backless-bitcoin-bank-credit is legal tender, like backless-dollar-bank-credit is today.  So the people go "I know this bank credit is worth nothing, and I won't accept it, but I want to get rid of it.  Its legal tender, so I'll use it to pay my bills!"  They try to use it.  The people they owe for electricity or gas or food say, "That's worth nothing, and we know it."  The payer takes them to court, and the court decrees, "Bitcoin-Bank-Credit is legal tender.  Legal tender was offered and not accepted, so the debt is null and void."  People don't get paid, services shut down, anarchy.  Inflation?  No...but ISPs and electricity companies have their accounts being declared null and void, so they shut down...so bitcoins are at an end.

3)Say that people don't try to screw others over by paying their bills in useless credit.  The banks certainly will .  The end result is still a massive wave of businesses not getting paid and the end of organized services such as power and Internet access as we know them today, putting an end to bitcoins.

The root of this is the legal tender law.  Whether dollars or bitcoins are the legal tender, backless credit denominated in those amounts are still legal tender.  Meaning that it is literally impossible to reject these inflationary forms of payment and have the courts enforce that you receive what you are owed.  Thus, to end inflation, a repeal of legal tender laws or a repeal of the right of banks to issue backless credit is a necessity.  In all other circumstances, the result is inflation or anarchy.  Bitcoin use does not change these laws, therefore, either the current system, or no system, remains in force.

 

All of these are monetary policy issues.  My only complaint is that the website seems to imply that widespread use of bitcoins fixes them.  It doesn't.  Only abandonment of the current system, which requires abolition of legal tender laws, then either a boycott of the banks or abolition of the right to issue backless credit, solves them.  Bitcoins are better than dollars, yes, but they do not solve these problems.

I think we've advanced a bit further in our discussion. We've now come to the agreement that it is mainly government intervention into the market, in the form of legal tender laws and taxation (among other things) that keeps a dishonest currency stable and prevents it from collapsing. Am I right on our agreement on this so far?

Let's say that we don't have government intervention into the Bitcoin market. I know we can argue on if and when it is going to happen, and I don't see it as a very fruitful argument because there is no way to really be sure on how effective government intervention would be or what form it would take. For the sake of a free market analysis, let's look at the situation without intervention taking place.

I believe that you've made two main points as to how you see a dishonest banking system operate:

* Loans are compounded upon loans, therefore increasing the amount of money chasing goods and creating general inflation.
* The banks stay solvent by "not being stupid"; by ensuring that the ratio of deposits to reserves does not get so out of hand that it is possible for a single depositor to single-handedly bust the bank.

I don't deny that it may be possible for a bank to loan out some of their "on-demand" deposits and thereby create some inflation by creating more liquidity than was saved. I also don't deny that they might be able to keep up the charade for a long time by advanced management of their reserves. What I do deny is that such a system can possibly expand without limit, either in the aggregate or for individual banks.

I also think you made the same case yourself, in your answers above. Let's look at our "stupid" bank scenario again:

Our wealthy depositor deposits 100,000 BTCs at a bank which engages in aggressive fractional-reserve banking. They tell him that the funds are available anytime, but in reality they keep some in reserves. There are 500,000 deposits total. In order to avoid being busted out by a single reserve, they decide that they need to keep at least 150,000 BTCs in reserve.

Let's say that our banking system continues to give backless loans, which are used to make new deposits, which are then being used to create ever more loans.

Let's say that our wealthy depositor is one of these guys. He takes out a 100,000 BTC loan from another bank, and deposits them at his bank. We must also assume that his bank will accept credit from another bank in place of actual Bitcoins.

What happened then? The depositor now has 200,000 BTCs at the bank, but the bank still only has 150,000 BTCs in reserve. If they don't want to be "stupid", then they must somehow acquire additional BTCs. Since it turns out that the amount of real BTCs in the economy is fixed, this might lead to trouble for the bank.

The alternative is that we end up denominating the depositor's account in the form of two currencies: 100,000 in BTCs, and 100,000 in (private bank) quasi-BTC currency. They would not be the same currency, since the second one would not be redeemable for actual BTCs but would merely be "BTC-backed". We then end up with an exchange rate between the two, and it is possible that that bank's currency will go bust.

Without legal tender laws forcing people to accept private credit as equivalent to actual BTCs, or confiscation of actual BTCs in exchange for paper credit (much like what happened with gold in the 1930s), there is simply no way that such a system could perpetually inflate ad infinitum. As total credit increases, the ratio of credit to real BTCs increases. Therefore, the ratio of reserves to credit decreases. Even with statistics, a bank will eventually be caught since their deposits will be too large in relation to their reserves. We have also ignored the effects of interest until now, but interest also has a damping rate (on the demand side) on the expansion of credit since loan interest must cost more than deposit interest pays in order for the bank to make a profit.


What I would like to know is how the government is going to force people to accept a quasi-BTC currency in place for the real thing. I have already shown how it is impossible for the banking system to expand BTC credit without hitting a wall somewhere. I don't think the government can go and confiscate BTCs and/or force people to accept quasi-BTCs in place of the real thing. A government would have to be totalitarian to have that kind of reach, especially in the digital sphere.

Where the trouble lies is at the Bitcoin boundary with fiat currency, the physical world, and government regulation. These are all separate issues, and we could probably start another thread to discuss those. Also, BTC's don't need to replace the entire system, they just need to be good enough to compete with it :) Currency monopoly is not desirable IMO.


Agreed; however, I believe that the current world order is simply a stage on our continual evolutionary journey to the future. I have come to the belief over time that the only moral system of contract for humans is a voluntary contract, and the most efficient economic system is one that is based on such voluntary contracts and subjective value. All involuntary impositions are a form of servitude, to one degree or another. I don't think we're ready to live in a world without government and taxes, yet, but I believe now is a good time as any to increase the competitive pressure on government and to increase the choices out there.

More interesting reading:
http://blog.mises.org/12890/credit-expansion-vs-simple-inflation/
http://en.wikipedia.org/wiki/Anarcho-capitalism
http://athousandnations.com/

I've enjoyed this conversation with you; thanks for the good discussions so far!

I just disagree that everyone would use credit bitcoins if bitcoins became widespread. People often think other people are not intelligent because the other people are not well versed in the specialty of the first people. People are quite capable of being well versed in what they need to be versed in. A very large portion of the population have a very thorough understanding of very complex topics, such as automobile repairs, amortizing loans, various retirement investments, home repairs, landscaping, gardening, child care, balancing financial accounts, cooking meals, varied types of cleaning, planning camping and road trips, social and civic skills and profession specific knowledge. Sure, everyone is not an expert at everything, but most adult humans are capable of understanding very complex systems. Bitcoin doesn't make sense to these people right now because bitcoin is on the fringe. But really, from a high level perspective, Bitcoin is much less complicated than many other things in people's lives. If bitcoin were to become the predominate currency, people would understand it just fine.

Banks are the specialists of transferring money electronically, but if people could transfer authentic dollars just as easily, if not more easily directly with their customers and clients rather than through a bank, then where is the incentive to use the bank? Banks loan out money and that loaned out money usually just goes straight to someone else's bank account, but that's only because it's not safe or economical to pull out $20,000 in cash and mail it overnight across the country or world. If people could securely pull out cash and securely and instantly transfer it to whomever they wanted, for free, they would. Dollar bills are easier to authenticate and trade than gold, but in comparison to bitcoins, they might as well be lead bars. It is very hard to transfer a large amount of real dollar bills long distances and that is the reason why banks stay in business. Turn the real dollar bills into electronic bills which can be securely and easily transfered between any two people for free and without the risk of double spending, and suddenly there's really very little reason to use a bank. Would you have opened a checking account when you were 14, 16 or 18 if you could move around authentic dollars as easily as bitcoins? If you were a professional accountant at a business, wouldn't you prefer for the business to be paid in authentic hard cash rather than a soft bank balance if it could be done securely, easily and for free?

Edit: Added the text below.

And as for all this talk about banks lying or otherwise deceiving people, sure they might not understand the intricacies of fractional reserve banking, but if you ask random Joe on the street how the bank can afford to pay interest on savings accounts, they'll be able to explain that the bank makes their money by loaning out borrowed money at a higher interest rate than they pay out to the people who deposit their money at the bank. This simple 5th grade explanation shows that people do understand that the bank doesn't keep 100% of their deposits on hand at all times. And if a bank run was rather a bank walk, everyone can pull out their money. The bank just has to slowly collect the loans they have given out.

Last year,  read a great article about Burma's bank-free cash economy.  As I recall, buying a house entails delivering Mg-scale quantities of paper, which is counted by hand, and then rebailed.

Why place a deposit in the bank in the first place? For me - it is simply convenient that I can have my money without physical form, and instantly pay for anything over the Internet. I could care less about 2%-5% income a year. Bitcoin replaces any reason to make deposits for me if it becomes widespread and shops will accept them.

Taking a Loan is a different thing though, because large amount of money is sometimes needed and needed right now. But where are they going to get that money if nobody have a reason to make deposits?

Interest rates are just another price. They are the price of money now in terms of money at some point in the future. The market can determine the price of money just like it determines the price of onions. If no one is interested in 2-5% then it will be 10-12% or 30-35% if no one wants to lend for less than that and no one wants to pay more to borrow then there won't be such a thing as lending (I think that's about as likely as everyone deciding the production costs of onions are more than they are willing to pay, but what do I know?). 

Agreed.  The culprit is a combination of three things:
1)Banks can do BS things legally, like backless loans.
2)The whole "sheeple" complex, where people don't know that this is going on.  This is not because they're stupid, its because between studying for their MDs (using smart people as an example here...)and getting kids to soccer practice and paying their bills they don't have time to study monetary theory.
3)For those who do wake up, the fact that fake-money is legal tender means that there's nothing they can do about it.  By law, they have to accept the garbage.

Without government intervention, and provided people aren't blind, then all you've been saying is right.  However, if the economy is in bitcoins, and we want roads and schools and troops to prevent China from waltzing over us, there will be government intervention.  *This* is where I primarily differ from you.  The laws which screw up the ideal analysis of Bitcoin's inflation-proof nature are in place because the government exists.  As long as it exists (provided that it doesn't suddenly grow a conscience), the legal tender law, which is the ultimate stopgap against responsible people demanding real money, remains in place.  My contention is that we shouldn't claim...
For now, this is true.  Banks are not issuing bitcoin loans, and so bitcoins are inflation-proof.  However, nothing prevents banks engaging in fractional reserve policies and creating backless bitcoin-credit (since its all still legal) if they wanted to, and thus, to imply that using bitcoins in the context of the present, law-bound economy is proof against these inflationary actions is untrue.  Maybe Satoshi wasn't meaning to imply this, but as someone who's very concerned about these matters, that's what I took from the statement, until I further analyzed it later on.

Agreed.


The central issue is not the loaning out of deposited money, but the keystroke-creation of money that doesn't exist.  However, I suppose that this does make it "on-demand," as you can theoretically go "You just loaned me $500,000.  I'd like that in twenties."

However, most likely, a bank would say "Sir, I just loaned you one million bitcoins.  That's 1/21 of the entire world economy.  You don't want it on a flash drive - what if you lost the drive?  To protect the economy and you, its our policy that you must use our super-secure, ultra-safe servers.  What? Is it real bitcoins?  Um...I'll have to check with my manager....but I"m going to go with....yes?" Thus, the bank can prevent a run by a matter of policy - essentially admitting that people cannot take out all of their money at once, but its not because the bank doesn't have it (which they don't).  Instead, its because the bank wants to protect you....

Thus, the banks eliminate even the *possibility* that people demand large sums in cash.  I'm not sure if this is the present policy with dollars - I'm tempted to drive to the bank tomorrow and ask someone.  I know that its the current policy with ATMs - most accounts have a $500 or $1000/day limit, to prevent this scenario at the ATM).  However, as this eliminates the possibility of a run on the bank, the only option left is that people don't trust the banks.  As mentioned before, legal tender laws force people to use the bank credit, whether they trust it or not, protecting the entire system and leaving the only alternative as anarchy.

As you say, this system cannot, and does not, perpetuate eternally.  Not even today.  Today, banks continued to give backless loans, and they ran analyses to guarantee that if people continued to make their mortgage payments or houses were reposed at current house prices, then they'd be fine.  Of course they couldn't provide enough dollar bills, but they could cover their debts.People did not pay their mortgages, because markets crashed, companies lost money, and laid off employees.  "Fine," say the banks.  "Repo."  Because with a repossession at the current market price of the house, they could cover their debts.  But there were so many repossessions that supply and demand drove down the cost of a house, and the banks couldn't cover their debts.

Cue the Fed.

The problem with bitcoins resolving this situation (which otherwise, they would), is that you can easily have a Bitcoin-Fed which issues fake, backless bitcon loans.  Even if people figure out that its a sham, the legal tender laws prevent them from doing anything about it.  As bitcoin does not address these laws, it is not inflation-proof.

You're assuming the investor would be able to get a second loan.  In fact he wouldn't - Experian, TransUnion, and Equifax take care of that.  You're right, though, that if there were no cartel elements and banks could not determine how much the man had outstanding, this would crash them.  Unfortunately, they can and do see all outstanding obligations.  If somehow they were prevented from doing so, they would probably cease giving loans entirely - and while I don't like fractional-reserve banking or backless loans, its undeniable that an economy with no loaning institutions would stagnate at best.

This is true, provided that legal-tender laws to not require that the two be equated.  My central point of contention now is that they would, as they do today.  Therefore, to make users "safe" from banking practices the use of bitcoins must somehow abolish these laws, which it does not.

Agreed, at least provided that people realize that bitcoin-credit is not bitcoins.  However, legal tender laws will not be abolished, so the theoretical situation varies from the practicality, in which the only way to resolve inflation is honest politicians (heh) or drastic measures which would destroy the economy anyway.

They force people to accept quasi-bitcoins by the following manner.  Assuming that fake bitcoins are legal tender...
1)A bank issues fake-bitcoin credit.  No one wants it, so the bank issues it to its CEO.  He'll still take it.
2)The CEO owes his power bill, grocery bill, etc.  He offers legal-tender bitcoin-certificates (digital, I'm assuming), which he got in exchange for the bank loan.  These, like the loan, are not backed by anything.
3)The power company and grocer politely tell him that they will not accept it, as it is not bitcoins.
4)He takes them to court.  The law invalidates his debt to them, since he offered legal tender and it was not accepted.
5)His friends see that they can pay their bills in worthless credit, not sacrificing any bitcoins.  After all, Mr. CEO did!
6)The businesses are left with three options - 1)Accept credit, 2)Go bankrupt because all of their accounts are declared null and void when people try to pay with credit and they reject, and 3)Rebel, which leads to jail or getting shot.
7)One of the three options happens.  Number 2 leads to massive depression or anarchy as businesses close en-masse.  Number 1 puts the banks back in power like today.  Number 3 scares all the other business owners (they don't want to go to jail), and thus leads to number 1.

Agreed, wthout legal tender laws.

They did it once.  Wilson said "We're off the gold standard, guys," and suddenly everyone had to accept quasi-valuable paper.  Not that gold is inherently valuable, but neither are bitcoins.  Through legal tender laws, they could force us to accept whatever they wanted.  As far as confiscating bitcoins, they wouldn't have to.  As soon as quasi-btc were legal tender, then 1BTC=1Q-BTC, and as the number of Q-BTC increases, a real BTC becomes less valuable, and thus is subject to all the problems of Q-BTC.

Yes and yes.

Honestly, I would like the entire system to be replaced with something that is inflation-proof, but again, the whole issue there is legal tender laws.  However, I agree that this is the best solution.  Hopefully, bitcoins will become a big deal while still remaining "under the radar."  Most likely, this will be the case, as the USD isn't going anywhere any time soon.  That way, legal tender laws for BTC will not exist, and if anyone is stupid enough at some point to accept a backless Q-BTC (if anyone would ever issue those...), we can just reject it.

Agreed.  Bitcoins are, for the time being, a nice way to enable a contribution to a future voluntary order.  The issue arises, of course, when those with the current control (who of course don't want to give it up), realize that this uninflatable, very difficult to tax currency is a thorn in their side, and they employ their mastery (through legal tender laws) to screw up the ideal.


And I.  Its good to know that there are people who both understand and are willing to hash out the details of our current...predicament.

I agree with the first portion of your statement, and disagree with the last.  I'm not saying that people are too stupid to understand bitcoins.  I'm saying that many, many very intelligent people today don't understand monetary creation policy because they don't find it worth their time to study.  If they don't find it worth their time in dollars today, they won't find it worth their time in bitcoins tomorrow, and thus will accept credit.  Per my last post, however, even if they do understand and won't accept credit, they can be legally forced to do so.

With all of your comment up to where I cut, I agree.  However, no, I wouldn't have opened a checking account at 18 if I could have moved the money as easily.  However, I opened a savings account at 6 or 7, and not to move money, but because the bank promised me free money in interest if I let my cash sit in their vault (or so I understood at the time).  Free money is very tempting, and thus, people would continue to use banks.  As for the accountant, yes I would prefer my balances be paid in real BTC-cash.  I run a computer programming business today, and I'd prefer that everyone paid me in gold chips.  However, legal tender laws don't give me a choice, nor would they give a choice to the accountant in the BTC scenario.


I agree.  What people don't understand is that a mortgage for one million dollars is created by typing in "1,000,000" and by nothing else.  They think the bank is taking deposited money, loaning some of it out, making money, and paying interest.  In reality, the bank is *inventing fake money,* loaning *that* out, and making money.  Only a tiny, tiny actual deposit s needed (if any - I'm not sure of the current status of the law).

I wish everyone would be so nonchalant about interest.  In reality, though, a million dollars in the bank can net *four thousand dollars a month* in interest.  That's enough to live, and well, without spending any of your initial investment.  Of course, the natural deflation of bitcoins can provide a sort of interest, as well.


Please see the above posts.  In the US, any company with an "NA" after its name has the legal authority to create liquidity just by claiming it exists.  Then, they can take that loan and request dollar bills from the Fed.  Even if the Board of Directors of the bank were the only ones to deposit any "real" money, the scheme would still take off.  Thus, in a bitcoin economy, someone takes out a loan, the bank issues Quasi-BTC credit, and the person uses this to buy their house.  As a seller - don't want to accept Q-BTCs?  Tough - legal tender laws say you have to, or you don't get anything and still have to turn over the house to the buyer.

I'd keep almost all cash and no bank balances if I could get paid in cash and didn't have to cash checks and if I didn't need to fly in order to move; I can't expect TSA and other Feds to leave me and my stuff alone in an airport.

You guys keep talking about legal tender laws.  However I know there are businesses that do not accept Credit.  They aren't obligated to accept checks, and if they don't have credit card machines they aren't going to be accepting credit or debit either.  Now obviously limiting payment options limits your potential customers, but inability to accept a certain type of payment doesn't mean the customer is not obligated to pay.

Babylon,
Credit Cards are not the same thing as Credit, not by a long shot.  Credit cards are a particular credit that is issued in a particular way by a company, and can be rejected.  However, it can only be rejected for other forms of the same backless credit. "Credit," in our discussion refers to any liquidity (purchasing power) that is not backed by items of real value.  Say, taking out a mortgage and getting "Federal Reserve Certificates" for it.  The value of the mortgage is the credit - the unit of payment is still dollars, not Visa or MasterCard.  If I take out a mortgage, a banker keys a number into a spreadsheet, and suddenly that much more money (not backed by dollars) is put into flow in the economy.  If people didn't accept credit, that's not akin rejecting Visa, its akin to rejecting Federal Reserve Notes, which we call dollars colloquially.  I can pick up dollars for a portion of this spreadsheet-mortgage, and go and spend those dollars.  Those dollars are still credit.  Even though they have nothing to do with a credit card or debit card, they're representation of value issued by a bank (the Federal Reserve) with no real value. 

Now, this does raise Bitcoiner's (and others') point that with no Federal Reserve the backless credit system would be very limited.  They advocate that it would be difficult to create such a "lender of last resort" with bitcoins.  I disagree.  It used to be (Google pictures of these) that the US Treasury printed bills that were Gold-Certificates or Silver-Certificates.  You could go to any bank, at any time, hand them a twenty and demand an ounce of gold.  (Which now costs $1,200, or 600x what it did when we were on the gold standard.  Inflation.)  This was not credit, it was commodity-backed by something with rarity, just as bitcoins have rarity.  However, now, your dollars are "Federal Reserve Note, Legal Tender" and are not redeemable for anything of value.  However, if someone offers you these Notes and you do not accept (because they're not backed, and thus worthless), the transaction is null and void.  Why did we switch to these notes?  Because the government couldn't keep enough gold on hand to back the economy.

Fast forward ten years.  The government pulls out dollars and puts in bitcoins because bitcoins are so darn neat.  (or whatever reason).  Because Congressmen don't read laws, they never read Satoshi's specification for the system, and they assume they can mint all they want.  For those who don't have computers in their places of business, they issue Bitcoin-Redeemable-Certificates.  You can walk into any bank, give them 1BTC, and get 1 of these Certificates, or, you can give them 1 of these certificates and get 1BTC.

The above scenario would be called the "Bitcoin Standard."  It is identical to the Gold Standard scenario above.  Dollars (bitcoin certificates) are backed by gold (bitcoins) held by the government.  You can hand over a twenty (certificate) and get an ounce of gold (bitcoin).

However, April 15th rolls around, and facing a new fiscal year the Congress issues an order to print more Gold Certificates so that they can have a deficit for this year's budget.  At some point, they realize they don't have enough gold to back all the dollars for the budget.  So, immediately, they invoke legal tender laws.  A bank, the Federal Reserve, is given the authority to issue a loan to the government.  This loan is paid out in "Federal Reserve Notes," because its not backed by any gold, so they can't call it a "Gold Certificate."  These notes are "credit," as they are based on a loan and nothing else.  Obviously, they're worthless.  However, a law is passed - known as a legal tender law - which states, essentially - "I know, American People, that you guys are all using Gold Certificates.  However, if someone offers you a $1 Federal Reserve Note, you MUST treat it as if it were a $1 Gold Certificate.  You can't go get gold for it, so you essentially lose $1 in gold, but you either accept the Federal Reserve Note or you get nothing at all.  To make sure people treat these identically, Gold Certificates can no longer be traded with us for gold."   People resist and refuse to accept Federal Reserve Notes, because they're worthless.  They don't get what they're owed at all, and so eventually everyone caves.  Federal Reserve Notes are treated identically to Gold Certificates, and no one is able to get their gold. Anyone who has gold sits on it and makes a mint because people like shiny metal.

Identically with bitcoins, Congress realizes that they can't print more Bitcoins, and so they can't spend whatever they want.  They create a bank that issues "Quasi-Bitcoin" loans for which no real bitcoins exist.  These loans are issued by any organization that gets a charter to type them into existence.  A law is passed: "Anyone who has our Bitcoin Certificates can no longer get Bitcoins from the government in exchange.  Also, if someone offers you a Quasi-Bitcoin, you must accept it, or you get nothing."  Now, the government can get all the Q-BTC it wants to spend whatever it dreams.  People with real Bitcoin Certificates are screwed, and everyone must accept *credit*.  People with real bitcoins?  Well, humanity has this fetish for shiny yellow metal - it doesn't have the same fetish for cryptographically-signed kilobytes - so bitcoins go the way of the dodo, or at best become pretty much what they are right now - a novelty for those who understand them.

Notice, there were not credit cards or checks involved in the above scenario.  The credit is the Federal Reserve Note, which you must accept, not Federal Reserve Notes managed by a particular company (Visa) which you can reject.  Even if you reject the Visa-managed notes, though, you have no option but to accept Notes from another source, all of which are equally backless.

You are changing the terms from the previous debate now.  Previously you were talking about bank balances, now you are talking about federal reserve notes.  Nobody has to accept bank balances.  Yes, the government can print money, but that is a different process from magicking money into existence by changing the ledger lines in a bank.

Your argument is based on government force, not on a free market. The same can happen with banks if government forces it's citizen not to use bank payments. In free market BC can dominate bank system. In your example I would simply try to form it as a gift, well, for some BC of-course, but who can prove that I received them and received them for the house?

I am not changing terms.  Federal Reserve Notes == Balance with Federal Reserve Bank of the US.  Equally worthless, because each is backed by nothing. 

Also, Federal Reserve Notes == Dollars, whether those dollars are printed, or not.  The granting of Federal Reserve Loans (and thus the inflation of the value of Federal Reserve Notes) by "magicking" loans is no different in its effect on the economy from printing money.  Do you think that with the Fed gives Fannie and Freddie one trillion dollars, they actually print these dollars?  No.  The dollars may or may not be printed later on, if there becomes a need for them to be stuffed in someone's pocket.  Until someone demands them as wallet-filler, though, they exist only in the form of balances in accounts.  Most dollars are *never* requested as cash, and therefore, never printed.  They're circulated by means of checks, credit and debit cards, Automated Clearing House transfers, wires, Paypal payments, etc.  As they can move goods in this "unprinted" form, they "exist," but are backed by nothing other than a loan by the Fed or another bank.  Thus, they are bank balances and nothing more, whether printed or not.

My argument is based on government force, yes, in the form of legal tender laws.  This is because although bitcoins are a free market now, if they become anywhere near popular enough to make a dent in the dollar, there will be government force in play.  My initial claim was that plucking out dollars from the economy and dropping in bitcoins would be just as inflation-riddled as today.  This is because the government force which causes dollars to be inflationary is still in play under a bitcoin system - I.e. nothing about using bitcoins eliminates the government's ability to make legal tender laws for fake-bitcoin notes (digital or otherwise).  To claim that bitcoins, if widely used, would remain a free market is naive - the government, any government, will not give up its power without a fight.


I did not say that you would not be able to take BTC for the house.  I said that if Q-BTC (Fake backless Bitcoin-denominated loans) were legal tender, then if the buyer offered you Q-BTC and you refused, the courts would give him the house anyway.  If he chose to give you BTC, then that's fine - take them and be happy he's not ripping you off with backless currency.  However, if he offered you Q-BTC, you couldn't reject it because its not real BTC.

As as "who could prove...," I can only assume that you're talking about taxation.  That very "proving" is what IRS Auditors are for....that's another discussion altogether.

This is wrong. Loans multiply the printed money by a fixed factor but the root of inflation is the printing. Printed fiat money has inflation problems; the more money printed the greater the inflation. Gold does not, despite being lent and banked just like other kinds of money. This is simply because mining gold is hard while printing paper money is easy.

The Zimbabwean dollar is a very clear example. Was the huge inflation caused by people being really enthusiastic about lending and borrowing Z$? Or was it caused by the government printing 100 000 000 000 000-dollar bills?

Yes, most of the money in circulation is created through loans. No, that is not the cause of ongoing inflation.

Yes, but you know - spears are good for a lot of things, they are not, however, good for sitting on them. To control BitCoin you need a true totalitarian country, and those regimes won't last long. The only reason the current system is relatively stable is because general public find it acceptable.

Wow, that's some totalitarian country you live in if you can't exchange your property for what you want. In my case I would rather burn down the house if court ruled it that way (even if I will have go to jail for it).

I was talking about avoiding Q-BTC. If governments forces to accept them then I will simply try to avoid the laws of that governments to best of my ability.

I question how totalitarian it would have to be.  Yes, it would be more difficult than controlling dollars...but there certainly would be ways, given social engineering, malware, whatever, to de-anonymize the swarm and track the motion of its funds.

Sarcasm about how terrible such a theoretical country is gets us nowhere.
Its the USA, Great Britain, France, and every other nation, my friend.  Go, sell your car.  When you agree on the price in dollars and he pulls out the bills, say "I'll take that in silver bullion only."  Under the law, because you are refusing legal tender payment, the debt owed to you is void.  Would the buyer know this?  Probably not...but if he did, he could sue you for the car and win.


Evasion of the law is not the same as a sound system operating within the law, and I would hate to think that for Bitcoins to operate well, we'd all have to be criminals.

The Zimbabwe case is different from the present US case.  Was the money printed, causing inflation, or did the money get created by loans, and then get printed so that people could take the loans in cash?  The order does not matter.  In Zimbabwe, it was the first order.  In the US, it is the second.  Money is not printed to finance anything - its printed so that already-created liquidity from "magic loans" can be taken in the form of wallet-stuffing.  In original fractional reserve banking, loans were only a fixed portion of the actual, printed money supply, which was limited only because the Treasury turned off the presses.  You're right about that.  That rate fell and fell, though, until it was last seen at 9% or so.  At that point, as far as I know, the fractional reserve requirement rate was eliminated, at least for most kinds of organizational and government loans.  Yes, your local bank that gives you a car loan is limited by law in how many car or house loans they can give, but the issuance of government bonds, the main driving force of inflation, is not.  The money is printed only to supply people with technology-free access to the already-created liquidity.  It does indeed inflate the economy, and in Zimbabwe it was the primary cause.  In the US it is secondary to Fed loans which are "paper-ized" only later, when they are needed in wallets.  Again, do you think that the loans given to F&F were all printed?  They money didn't exist in paper form, yet the banks were still "propped up."  Most of it has yet to be manifest in paper.  Of course, this paper does inflate the economy - a digital loan is not "converted" to paper, simply, more paper, which is liquidity in its own right, is printed so that Joe Schmoe can take the dollar bills he wants.  Still, though, non-cash inflation is a far larger problem in the developed world than paper inflation.

Regardless, this does not address the legal tender issue.  If Q-BTC were legal tender, then the inflation-proof nature of BTC based on the limited ability to generate coins would be moot.

That may be, but it has to be after the actual deal was signed by both parties, right? If I create a contract upfront which states that I only accept "X" then, if he signs it - he will have to follow it. Before any signs are placed the property still belongs to me - is it not? If they think they can rob me just for refusing to accept X _before_ the actual deal, then I will accept tender and burn it with the car.

Sure, but as a business you do not have to accept bank balances as payment.  If you don't accept checks, debit card or credit cards there is no way for you to accept bank balances.  I have patronized several different businesses which only accept cash payments, there is nothing illegal about this.  I know that cash=federal reserve notes and is not backed by anything, but there is still a distinct difference between printing money and magicking it into existence with double entry book keeping.  The inflationary result may not be any different but the process certainly is and if, for instance, I have a hot dog business which takes only cash, but I allow regular customers to run a tab, their debt to me is not going to be wiped out when I say that I cannot accept a check, debit card, or credit card payment to clear their tab. 

You raise a very good point.  My inclination is to say that no, you're not permitted to enter into a contract in which legal tender is not *an* (not necessarily the only) accepted modicum of exchange.  Just like you're not allowed to enter into a contract as a landlord that says you can evict a person on zero notice - the tenant is protected by legal proceedings and warnings, etc, and you cannot enter into a contract which breaks these laws.  However, this does seem to be rather counterintuitive....I will do some research on legal tender laws and see how the law stands in the US.

You don't have to accept the balance of any little bank out there.  You *do* have to accept bank balance of the US Fed.  Dollars are, by definition, US Fed Bank balance, and you must accept them.  What form they take - credit card, check, cash, money order - doesn't matter.

Is computerized loan-giving different from printing money?  Yes, in that people can't put it in their wallets.  However, it has an *identical* effect on the economy as a whole, because it inflates the amount of liquidity in play.  This liquidity is in play whether or not it is actually printed.  Could all privately-owned businesses refuse to accept anything but cash?  Sure.  If we boycott the banks entirely by using only cash, we eliminate their ability to inflate the economy.  However, as long as banks are in play at all, the giving of loans is identical in its effect on the economy as the printing of money.  Also, we *cannot* legally boycott the Fed Bank.  So, we could eliminate the power of all banks except the Fed to inflate the economy, but we can't boycott *all* the banks.
 

I agree.  However, you are once again mistaking credit for "credit card."  Printed US money - cash - is Fed credit.  You must accept it.  Knowing that cash is credit and is backless, you might demand gold, silver, bitcoins, or oil, for your hot dogs.  You are not permitted to do this.  You *must* accept Fed bank balance - cash. (Note that you officially must accept *something* denominated in Fed Bank Balance Dollars.  So, a business may refuse cash, or credit cards, or checks, as long as they take *some* form of dollars, *all* of which are equally US Fed Bank Credit).

Think of it this way.

You own a hot dog stand that takes Bitcoins. You carry on for a few years, everything is fine.  The government passes a law which says "You must accept our electronic Bitcoin-Account-Denominated coins (BADcoins) as if they were BTC.  We can't print more Bitcoins, so these BADcoins are not backed by anything.  However, you must accept them.  We're digitally creating 1 bilion bitcoins worth of this stuff tomorrow morning."  Suddenly, the government might as well be able to print as many bitcoins as it wants, because it can print BADcoins, which you are forced to accept.  Also, it authorizes any bank to digitally create BADcoins if that bank can attract customers.  If a private bank can't attract customers - which you're describing - then that bank can't inflate the economy, no.  But the Legal Tender Reserve Bank - be it the Fed or the BADBitCoinBank or whatever, can, and will.

That is the current system, and why Bitcoins are not inflation-proof.

One advantage here is that bitcoins are NOT legal tender, nor are they likely to become so.  The government is not going to surrender their control of money to something printed by everyone.

Indeed  ::)

It appears that Bitcoin was designed to be free and private.  If the system became subject to government force, what point would there be in using it?  Just go with PayPal  ;)

The claim that governments wouldn't give up power without a fight is certainly correct.  However, many governments are already losing that fight, and free and private currencies like Bitcoin will just facilitate the process.

Exactly. If they stop printing, inflation stops.

Suppose it didn't. The central bank stops printing but inflation continues. After some time an apple costs $10000. People will try to withdraw cash from their banks but can't because the cash simply does not exist. *poooof* Collapsed banks and a massive appreciation of the currency.

Cross-posted from "http://bitcointalk.org/index.php?topic=57.60"

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)" (http://freedom-school.com/money/how-an-economy-grows.pdf)

http://freedom-school.com/money/how-an-economy-grows.pdf

It does not solve the essential problem of there being two claims to the same property simultaneously, which is the fundamental flaw in all Fractional Reserve Systems.  I agree that people should be free to bank with whomever they choose, fractional reserve or otherwise, but you should do so knowing fundamentally that the institution is bankrupt.

Fractional reserve banking only works[1] because of the FDIC insurance system.  Depositors will be bailed out with depreciated funds due to their bank's profligacy and that's what creates the trust which exists in this system.  When the confidence that the FDIC will be able to pay depositors, well, then the system has reached its limit.

Bank Runs in the classic sense don't happen now.  Digits are moved from one bankrupt institution to another of slightly higher perceived solvency.

[1] - for very small values of 'works'

To be honest I think this thread is missing the real nature of bitcoins - I haven't read the entire thread (it's very long) so apologies if I'm repeating.  Think of back when the USD was gold-backed (pre-1970 or so), and gold was in (approximately) fixed supply.  On the back of that gold, many dollars, both real and credit, were issued.  The gold itself never lost value, but the dollar did.  Now, just as banks then couldn't make more gold, the bank you're suggesting couldn't make more bitcoins (except by hashing them out like everyone else).  They could issue lots of credit on the back of bitcoins in storage, but if that bank goes flop, the bitcoins will survive just fine, just like gold did back then.

Comments?

What a perfect topic! Thanks everyone, especially the topicstarter.

In the meantime, how do you think, how long time it takes to literally print trillion dollars?
I guess, that cannot be done in several weeks, it takes longer, months perhaps?

I mean, that in a large volume economy, as is American economy, rapid printing of inflationary-significant
amounts of money will be limited by the physical properties of  paper money.
Um, Zimbabwe's economy is less tougher.

How do you think, how much space will take trillion dollars in 100$ papers?
I think it will be tens of thousands of cubic meters. Compare that to the volume of your house.
Paper money is so much a trouble. And electronic loans is so sexy,
that BitCoin too will not escape it's seductive shackles. What a sorrow!

I can't believe it all will just repeat over and over and over again...

money is rarely printed relative to electronic growth, it's a number on a computer.

But even then this is irrelevant, the US government could simply print extremely large notes in the form of bearer instruments.

One of the things that should be apparent is that Bitcoins are backed by "luck".  Essentially it is an ongoing lottery system that allocates bitcoins at random (and generally small amounts compared to the total available) as an allocation system.  Some have said that bitcoins represent electricity or CPU cycles, but neither is very accurate.  Probabilistic random chance is much more accurate, but done in a controlled manner.

As far as I know, Bitcoins is the first monetary system backed by such a commodity.  How "the public" will react to that concept remains to be seen.

Fractional reserve banking can indeed happen with bitcoins, although it will be limited to deposits given to that banking institution.  Will that "inflate" the money supply?  Certainly, but it will be kept in check and there isn't a "central bank" to run off to if you run short.  There are perhaps other banks with which to get a "temporary" loan, but covering the deposits would certainly not be as easy it currently exists for those banks tied to a central (government derived authority) bank.  A bank run would most certainly be a very real possibility and happen much faster due to the electronic nature of the currency unit.  I don't know what a "network time" bank run would be like, but I think a really bad one could happen in minutes before it is over and the bank is insolvent even with no single depositor having more than a 1% stake in the bank.

Whatever bitcoins is backed up with does not matter. Even gold is backed up by nothing. What matters is that 1) bitcoins are scarce and 2) People can't just dilly willy print whatever money they want.

Not to pick on Bitcoiner, I've seen this line of reasoning in lots of threads. However, it is bunk as it leaves out obviously everyday solutions currently in use.

Obviously if there is "a run" on a bank's cash reserve, their obviously most common solution is to BORROW cash at interest from another bank. Sometimes this money comes from a central bank, but normally it comes from one of the other banks who are not experiencing "a run" on their cash.

A bank does not "go bankrupt" when it runs out of cash. It goes bankrupt when it runs out of credit worthiness. Banking is always based upon trust in the bankers making the decisions.

By the way, your bitcoin wallet is never "a bank" for any sense of the term "bank" that doesn't start with "piggy". It is more properly termed "a hoard". In the same sense that storing cash in a mattress, safe or piggybank would be a hoard.

A bank's deposits are always in the economic flow. That is the only way banks are able to pay interest. The interest comes because other people use the cash to create more commodity value, that in-turn translates back into cash to repay the loan with interest.

The last thing you want your bank to be doing is hoarding your cash. They couldn't pay you any interest, and would have to charge you a fee for safe storage of your money. It would be cheaper to put it in a mattress and buy a gun. So much for 100% reserve banks. They would be worth-less than fractional reserve banks to everyone.

A bank that fails to meet deposits upon demand is said to be "in default", not "bankrupt".  A minor technical difference that to ordinary depositors doesn't really make any difference either.  There are also the additional problems of theft and embezzlement that can put obligations as higher than assets (money owed the bank through loans).  At that point the bank really is bankrupt and out of cash no matter how much comes in from the loans.  Borrowing money from another bank isn't going to help.

A huge problem with Bitcoins is that there is no "central bank" to run off to in terms of acquiring a quick loan between banks.  There may be some banks that are larger in terms of Bitcoins accounts and better run, but a central bank in the traditional sense like the Bank of England or the U.S. Federal Reserve simply can't exist for Bitcoins.  The very nature of Bitcoins precludes any potential bank of last resort, or somebody deliberately debasing the currency with a huge influx of new money created out of nothing.  Yes, Bitcoins does have a coin generation system, but that is very egalitarian in nature and random in terms of who will get that money.

Given that I actually agree with you up to that point, how is my line of reasoning bunk? My point still stands. The supply if Bitcoins is limited: The banking system in aggregate cannot find enough Bitcoins if it loans its on demand deposits out! Why should the depositor accept quasi-bitcoins in the form of banking credit instead of the actual thing? On demand deposits simply cannot be loaned out if a banking system is to ultimately remain stable. Sure, some banks can try to do it, but then they better not call them "on demand deposits". Some might get away with it, but sooner or later, someone will find themselves between a rock and a hard place. Deposits can be loaned out, but not with a guarantee of redemption. That is simply impossible as Bitcoins cannot be created out of thin air.

So supposing that there exist bankers that take on-demand deposits of BTC and make sound-loans of BTC that pay interest in BTC. What I'm saying is no fraud or scamming by bankers. And no hedging on my part, these are fractional reserve banks. They lend out any 90% of depositor's BTC and keep 10% on hand as easy "cache".

What you are proposing (and I hear proposed by others as if it were a common case) is a run on all banks at the same time of all "on-demand" BTC deposits.

Now, one unacknowledged possibility is the "on-demand" deposits are paid with BTC from term deposits like CDs. But perhaps you considered those "on-demand" with penalty and the run includes those.

Now if "good banking" is going on and there is no BTC in-house, then all the BTC is out on BTC interest producing loan and is backed by collateral. That makes these loans nice low risk "BTC income producing properties". So at that point the banks can sell these nice low risk BTC income producing properties to other investors willing to pay BTC now in exchange for more BTC later. If there is a default the investor claims and sells the collateral.

If you unwound every loan this way, all the BTC would be returned to the depositors, and outside investors that used to have cash, would now hold sound low risk BTC income producing properties. In effect, they would be the new banks, but they would also be their only depositor. If they wanted their BTC back, they would have to sell their investment property to someone else.

If I've explained this coherently, can I consider the BTC fractional reserve banking myth "de-bunked". :-)

---

One of the best things about BTC is that it is a high velocity currency. We don't talk about that much. But because it is, it would be much faster to unwind this situation than with the lending of gold or paper. That is why banks deal with electronic currencies so much.

--

However, I still maintain that with planned monotonic deflation, BTC banking will not evolve. Deflation simply causes too much risk. (see the thread on negative interest)  There will likely be speculative high-risk/high-reward investments, but they will be done by "the bitcoin rich" rather than by average individuals pooling their money in on-demand banking.

I see two kinds of "deposits" into a bank:  "Investments" in the form of perhaps even a stock purchase into the bank itself, and "certificates of deposit" or some other time-based "bond" that has a defined expiration date and guaranteed rate of return.  Both could conceivably create the initial pool of money that could then be used for making loans.

The traditional "on demand" bank deposits with Bitcoins seems to be something that has all of the disadvantages of a conventional bank and none of the advantages.  Mainly, you are dealing with an extra level of bureaucracy and people telling you that you can't necessarily have access to your funds and sources of embezzlement and fraud.  Normally the advantage a bank offers is the ability to carry on transactions electronically or in a "light-weight" arrangement where you don't have to cart around a briefcase full of money (or gold).  That is something which isn't even remotely a problem with Bitcoins.

If most "depositors" in a bank were actually shareholders, it would also put an interesting twist into the relationship between the customer and the banker.  In theory this already happens with credit unions in America, but I've never seen it put into a formal relationship in terms of actual shares of the bank itself.  This is why "checks" are called "share drafts" by credit unions, as you are in theory giving away shares of the company when you purchase items from your account in that manner.... but that is more of a ruse than anything legitimate.  It would be interesting, however, if you could make corporate shares fungible as a sort of alternative currency in and of themselves with their own exchange rate.

No need for a full bank run; only 10% would be necessary in this case. I already went through all of this in my previous posts, though. What exactly is it that you believe is a myth or bunk? Money cannot simultaneously be lent out and kept as an on demand deposit. If one bank lent out too many BTCs and has a deposit call, then another bank has to have correspondingly greater reserves in order to lend that bank BTCs. The banking system cannot in aggregate practice fractional reserve banking to a significant degree and remain stable over time. The market will determine where that point is, but I doubt it is as high as 90%.


Sure they can. What they can't do is simultaneously create such a paper and let the depositor withdraw the capital backing said paper! That would hollow out the bank. In order for a bank to create a paper and remain honest, what it needs to do is this:

Bank receives 100 BTCs from A. Bank gives A a paper in return, only redeemable at a future date.
Bank lends those 100 BTCs out to other people as loans.

What it cannot do is this:

Bank receives 100 BTCs from A. Bank credits A with 100 BTCs at its bank which can be withdrawn, spent, or transferred at any time.
Bank lends 90 BTCs out to other people as loans.
A withdraws his 100 BTCs <-- They no longer exist.

It cannot do this unless it sells the 90BTC of loans to another party in return for real BTCs which it can then use to back its deposits. It cannot back its deposits with paper, because the depositor does not want paper, he wants BTCs. That's what he agreed to and that's what the bank promised.

Yes, the bank can now borrow BTCs from another bank in order to pay out the depositor, but a banking system cannot do so in aggregate. Loans need to be backed by savings.

To summarize:

It is fraud to place two property claims on the same BTC. To say that the depositor owns a physical BTC at the same time as a lendee owns that same BTC, while telling the depositor that the BTC is solely and wholly his and can be withdrawn, spent, or transferred at any time, is fraud.

It is NOT fraud to give the depositor a paper which represents future BTCs and tell him that he no longer owns any physical BTCs, because he gave them up in return for the paper. It is furthermore not fraud to then lend these BTCs out, since they no longer belong to the depositor but they belong to the bank. This is otherwise known as the depositor purchasing a certificate of deposit or bond with the bank.

I agree with you here, RHorning. There would be less of a case for actual on demand deposits within a Bitcoin economy. A banking system based on shares and time deposits (i.e. bonds) would be honest.

Ah, I finally see where our disagreement lies! Call me slow!


I agree with your statements above! Woot!

But I'm making the claim that your checking, savings and CD accounts are the SECOND situation not the first. When you sign up for a bank account you sign a contract with the bank. It is a transaction just like any other. You SELL them your money, and you BUY their "paper" that promises that they will perform as stipulated. If the stipulation is "on-demand withdrawal" that means if they don't give you some of THEIR BTC when you demand it, they are in default on the contract and you can sue them.

I claim that, in no way, is the BTC you give the bank still yours after you make a deposit. The abstract "account" specified in the contract is yours and the contract binds the two of you to certain behaviors.

However, the bank does sell other services that match your FIRST situation. They call them "safe-deposit" boxes. You rent them from the bank fill them with YOUR property and the bank itself never has claim on your property.



OK, so we agree on the following. That was what I was saying in my previous post.


Furthermore in the previous post, I claim, if you can do this efficiently you can quickly convert  "loan properties" to BTC by quickly selling them to investors on-demand. (in this case investor money means hoarded BTC)


So loans don't need to be "backed by savings" in the sense that there is BTC in a hoarded address. I needs to be backed by an asset liquid enough to be converted back to BTC on-demand. (gold would probably qualify)

Want to kill off Bitcoin really fast? Call it money!

Make up some catchy slogans calling it cash.

Compare it with the FRN. No, even better, claim that one Bitcoin equals xxx FRNs!

As for a call on over 10% of deposits, the bank can always purchase BTC on the market.  Your assumption is that the bank is limited to a single commodity in its holdings.  I can also foresee purchasing call options to hedge the impact of expected demand.  In any event, there are many ways a market can operate to service exaggerated demand.

What term would be appropriate?
Would virtual tally sticks be better - A way to record transactions that is not money,currency or commodityhttp://en.wikipedia.org/wiki/Tally_stick (http://en.wikipedia.org/wiki/Tally_stick)


lmao the government fails again.....


Bitcoin - a distributed tally stick ?

Crypto-tally?

I offered one term, that wasn't immediately accepted. I'll lay back for a bit to see what else might work. I do know that today's commercial jargon is not appropriate, and can only get us in trouble.

Well, it could have been called "network resource allocation units", "secure stamps", "reusable proofs of work" (like its competitor, RPOW), or any number of other such techno-jargon and flown under the regulatory radar for a while.   Of course, it would be rather difficult to market it is a payment system using such euphemisms.   Who's using RPOW, for example?

But ya wanted to market it as, you know, _money_, so the cat's out of the bag.   It's  called "Bitcoin" and people are using it to "pay" for things.  So it's obviously a financial system (for purposes of e.g. money laundering regulations and similar restrictions).   But because it's not a government currency it's not "money" for the UCC.  So for example in the U.S. you can't write a check for "10,000 BTCs", it won't be considered a legal negotiable instrument.   So you get almost all the financial regulation, which will regulate it as money transfer, but not the respect of the UCC, which will just treat it as an ordinary good (or possibly even a service, putting you outside the UCC and into common law)  if you write it into a contract.  (Caveat: I am not a lawyer, folks who are seriously using this stuff should consult real lawyers).

The idea sounds plausible but in real life, who would buy that asset if everyone is too busy holding onto their BTC?

For this to work well, the loan to equity value of these assets would have to be very, very small indeed. E.g. a house with a current value of BTC1,000,000 might only be enough security for a BTC300,000 loan in order to cover worse case scenarios.

Also, housing is probably very poor collateral in a nose diving economy - who's looking to buy a house? It would only be investors keen for a bargain but with enough capital to hold onto their investment until after the economy recovered.

Yeah. Bad choice. Now that you know we made a wrong turn, do you want to keep on going?


Slow down! You're making a big assumption there.

Bitcoin is a computer program that is run over a P2P network. Everything else you wrote is incorrect (and misguided by a few poorly-chosen words on this website). The Bitcoin units can be used to keep an economy straight, if it chooses, but that economy is entirely separate from Bitcoin.

So, saying the Bitcoin is "worth" something, say ten cents, or a shoelace, is totally incorrect. An independent trader may give you something for your Bitcoin, and vice versa, but the Bitcoin and the Bitcoin system have no involvement in that trade other than to record the movement of Bitcoins.

Sir you are correct in some ways in that the US dollars are over represented in our present fractional reserve banking in that the banks loan out much more than they have and have collateral (hopefully real and valuable collateral not collapsing housing priced collateral) but with bitcoin you can avoid all that by only dealing with real bitcoins. Accept nothing that is supposedly backed by bitcoins only deal with actual bitcoins and then you will not be taking part in a fractional reserve type system because those systems always fail especially if not backed by gold.