Both ways solve the problem equivalently. But if my understanding of the operation of blinded public keys is correct, it means the number of public keys each user would have to store in his wallet is minimized.

I'm not exactly sure of this particular use case, but it doesn't have any bearing on the proposed solution.

I know this is not a decentralized as you would like, but you asked for partial solutions.

In the general case this problem is solved by Certificate Authorities who check people's real world credentials. In your case, you could have people add their SSN or other national ID to a standard 509 certificate. I bet that has already been done somewhere.


NOTE: If people are unclear the difference between a public key and a public certificate: A public key is pure mathematical data no identifying information about the user. A certificate is a signed document that contains a public key. It deliberately contains other structured information about its owner. Normally name, email, sometimes phone or physical address. But really you can put anything you want. It is signed by a trusted authority to avoid web-of-trust issues. However, you can generate your own certificate and sign it yourself if you want.

Nope, this is a much different solution.

The general public doesn't get to see any transactions or balances.
It already solves the issues you pointed out. It's right there in the thread.

Edit -----

OK, there are probably some weaknesses, but the thread at least attempts to solve the ones you pointed out. :-)

Thank you very much NewLibertyStandard!

I'm moving to France! I've got to try for some cooptation!

Without denying that I deserve some of your grief... ;-)

Give me another crack at justifying my point of view.


I really do stand by my definition, "If I can barter for it. It is a commodity."  as capturing the true spirit and semantics of the word commodity as used in standard everyday American English. Commodity is really used to mean, "something, that can be bought, sold, or traded." Perhaps that makes a better definition.

There are other more restricted definitions that have different connotations depending upon industry. Usually "the thing" is something fungible, but even that usage is flexible. Used cars are not fungible but to the used car industry, they are simply commodities. The same is true for diamonds and the diamond industry.


I hear you saying that "the thing" must have some use other than being a currency in order to be a commodity. I don't see this restriction. I don't think it is up to you to decide if or what use a commodity is.

However, federal reserve notes are often considered commodities when traded against other currencies. I don't expect that if a currency trader, said he was a commodity trader that you would call him an idiot.

----

Two questions for you or anyone else:

Supposed someone told you his occupation was a "commodity trader" and you asked him what he traded. If he responded, I buy and sell widgets based upon their price fluctuations to the dollar.

Would you have to reserve judgement on whether he was "really" a commodity trader until you could learn more about widgets? Or are widgets obviously a commodity based upon context?

----

If I told you each bitcoin contained a public key, and that pubic key could verify the authenticity of any file signed by the owners secret private key. Would this give each bitcoin enough outside utility to be considered a commodity? How much non-currency value is enough to make something a commodity?

@ Galuel

I thought we were reaching some common understanding with a few quantifiable places where we disagree. But now it is seeming less so. I need to validate my understanding of your positions before I feel comfortable proceeding.

-----

It now seems this universal dividend concept is just a proposed solution to "the bootstrap problem".

Meaning, we want a new currency to exist, but it can't exist until we distribute some amount of it.
If we create and distribute this amount of currency out of thin air now, "to be fair" to people who come later, we must continue to create X() amount of currency from thin air forever.

Is that the only problem you are trying to solve?

Or are you saying, the EU should be paying a universal dividend every year, because they created a new Euros out of thin air and "to be fair" they should/must continue to do so?

-----

It also seems you are trying to recreate the Christian notion of "original sin" in your economic system.

Meaning, you were born into this world/culture. As such, you owe us for all the nice things we have provided for you. This is a debt you can never repay. No matter how much you donate, we will always say that there are other intangible things to which you continue to benefit, therefore you continue to owe us. And if that seems unreasonable, think of future generations, you owe us because of your debt to the future.

Is that your philosophy? Is there ever an amount of money or commodity I could give to "society" where they would say "Thanks! you don't owe us anything now. Everything you earn now is guilt free!"

-----

When you speak of work that benefits society but is otherwise not directly uncompensated you seem to know its value in total (5%/yr), but deny that anyone can fairly put a value on any of the composite parts.

For example, say I enjoy writing Vogon poetry. There is no current market for Vogon poetry because everyone knows that reading Vogon poetry akin to torture. But that doesn't matter. I'm contributing to society anyway by writing Vogon poetry. You can make no judgement as to what value future generations might place on reading Vogon poetry. Who knows? After all who could have predicted people gullible enough to listen to trance music.

But you decide I'm entitle to payment now, on speculation that it might benefit society in the future. Is this your logic for everyone receiving a share of new money?

-----

Anyone feel free to tell me I'm totally misunderstanding these ideas. I'm not trying to be sarcastic. This is the way it is seeming to me.

I can give a rational, but probably not a better definition than those I already included.

I'm assuming you meant my use of the word "commodity" rather than "first" (hyperbole), "master planned", or "scarce" (supported).

I already defined commodity stealing from the dictionary above.
"A useful or valuable thing, such as time or water"

But my best definition is still:
"If I can barter for it. It is a commodity."


Allow me to rationalize by stealing from wikipedia as well.

"A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. Commodities are substances that come out of the earth and maintain roughly a universal price.[1]It is fungible, i.e. equivalent no matter who produces it."

Bitcoins seem to fit here. Except for the "come out of the earth" part which just seems silly there.

"one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets."

Bitcoins seem to fit here as well.

"There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced."

They've included electricity, so commodity is an acceptable term even for something virtual.

Interestingly, currencies are often traded as commodities rather than being used for their value in facilitating trade.

Wikipedia defines "commodity trader" and from their references lots virtual things like debt that "can be seen as a commodity." It also references currency market from there.

So nothing seems to exclude my use here.


But really I use the term for the reasons I gave above. People tend to draw more parallels to bitcoin's "gold-ness" then to it's "coin-ness"  "Scarce like gold", "invest in it like gold", "discovered over time like gold"

Nobody says it's round and shiny like coins.

I think it is a commodity for the reasons I posted in another thread. I'll repeat them here.

Edit: In summary, I think Satoshi created a digital commodity by code fiat. I think the user base as a whole is utilizing Satoshi's commodity to mentally mint and trade coins.

Most common discussions tend to equate bitcoins to a commodity backed currency like gold coins.

----

In reality bitcoins are the first master planned scarce COMMODITY. It is unique to this commodity that we know it's total available quantity in the universe. We also know exactly how hard it will be to discover this commodity over the next XX years. Also this commodity is generally seen as easily divisible and fungible, but otherwise it is useless.

The only thing not master planned about this commodity is what people will do with it. Since there are no other known uses competing for this commodity, some people think bitcoins should be used as money. Others think this is a highly implausible foundation for monetary policy.

----

commodity |kəˈmäditē|
noun ( pl. -ties)
a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.
• a useful or valuable thing, such as water or time.


If I can barter for it. It is a commodity. What I choose to do with it is up to me.

Most of the discussion on this list as it relates to bitcoins comes from a barter mentality. Perhaps you haven't noticed.

Really, no European says, "My salary is an investment in Euros". American's don't say, "I'm putting penny's in this piggy bank waiting on an increase in demand for pennies."

Money is a medium of exchange. I swapped an ounce of gold for 1000 loaves of bread, using $1000 to speed the process. I did three months of work and I'm going to buy a car with it after my vacation, using the $20,000 in my wallet.

If there is "excess demand" for money, that is a flaw in a monetary system not a feature. It is only when you think of commodities that such terms make sense.

----

Actually I was writing an example of third party trade but it was a lame example so I erases it. Yours was much better.

I think we are in "violent agreement" on the topic. :-)

I prefer my currency as an abstract accounting that, I feel, should not have commodity characteristics.

My best example is I don't think currency should increase in value as a result of demand. All commodities have this characteristic naturally.

Some feel differently and certainly commodity currencies have existed in the past but they died out. I think that is less conspiracy than a diminishing in utility compared to non-commodity based currencies.

Your English is much better than my French!

No it was not a joke. It was sincere thanks. Thank you again!

The reason I wrote it that was is because early in the thread I saw value in contrasting your ideas with the more common ideas held by people posting on this site. I though the contrast would help bring their ideas into focus. Instead it focused my own. :-)

I'll write about my insights later.


Yes, that is the way current money creation is perceived.

I'll argue later that money creation should not be symmetrical in time or space. I'll also argue that money bubbles and holes cannot be prevented using fixed preset formulas. As such, money *creation* should not be seen at stable, but money itself should.


I'll argue symmetric redistribution is simply a social policy tool. It should be kept separate from monetary policy.

One equation can't serve two masters. :-)

Agreed, the percentage of *arbitrary* inflation does not matter for this discussion. (Non-arbitrary inflation is discussed at the end.)


OK, I said some inflammatory things prior to this section. I guess that justifies the defensiveness of this reply.

Rich in this context meant - Currency rich. i.e. Those who possess their wealth in currency.
Poor in this context meant - Currency poor. i.e. Those who possess their wealth in stuff (Me).

I'm well familiar with wealth that is not currency. Most everyone is. Please interpret all my responses from that point of view.

Bread is an important commodity because it is perishable. I know I'm going to need to buy lots of it next year, but I can't buy it now. It serves as a common archetype for consumption.

It doesn't make sense to "back a currency with bread" in the same way as you could with a non-perishable commodity like gold. But you knew that.

By making specific examples for discussion, I'm not misunderstanding the economy as a whole thing. I'm simply trying to address the economy as a sum of individual commodities and the desires of those who consume them on one fashion or another.


Absolutely, that is why the amount of currency available is trivial compared to the amount of commodity value in existence.


The birthcoin example, did not arbitrarily inflate as bitcoin is currently doing. It merely attempted to remove the tyranny of time from the fixed currency model. There is a lot of discussion of what constituted "fair" on this site. Also what constitutes "sound money". The birthcoin example was intended as a "fairer" way to initially distribute coins, without introducing too many variables at once.

I've already addressed elsewhere that the idea of bitcoin trickling money in over time is completely inconsistent with of principles of a fixed quantity of currency. I find it curious that bitcoiners use inflation as an incentive to sell future deflation.

I've also discussed in detail (elsewhere) the fact that I personally feel, building persistent price deflation into a currency is completely counter-productive.


In reality, I think (when averaged over a whole economy) generalized price deflation is "a bad thing". I also think generalized price inflation is bad as well. However, the balance point is NOT at zero. A little deflation is a lot worse than, a little inflation is. That point is supported elsewhere on this site. Therefore, defending against generalized deflation is a priority, and if that cost a little inflation, overall its a general win.

But to be clear, adding more inflation when you are not in danger of deflation, is "a bad thing" from my point of view. I am not "a progressive" in this regard.


Fair enough. No one could think of a better number to quantify growth.


Thank you for the restatement. We are in complete agreement.


You didn't accept or reject this statement. Is that an oversight?


I do write open source software. I have considered everything above. It has no effect on the point I made.

I can write a book or a post and give it away. That doesn't mean I have received no benefit. My perception of the benefits for doing so is up to me not to you or society at large. That is why I only respond to certain posts. Some are not worth my time.

But if I have freely given away an insight to you that you use to benefit you and the others around you...
Then let me stipulate for the record, "You owe me nothing! Ever! Not even if you get rich in supermodels!" I've already taken my personal benefits thank you. While I speak for myself here, I'll make the stronger point that this hold true for everyone.

The same moral rights I assert that protect me from your taking my benefits, also protects your productivity increase share. This hold true if you bought my ideas, or I gave them to you for free.


I wish to understand this statement but I don't. Can you restate it, please?

Are you saying, how can open source writers continue to write open source software if they can't figure out how to support themselves? If they can't figure out how to support themselves, that doesn't make their problem into my problem. Nor does that make it OUR problem. Why on earth would you think it should?


Stipulated for the record. I think that currency levels should increase decrease as necessary so that (on average over the whole economy) prices remain constant. Where the most important prices to remain constant are the prices of the things that most people need to preserve their life and livelihood.

As non-inclusive examples of the category: Food, electricity, water, fuel, internet access!
Commodities that could inflate or deflate relative to the above without me caring: Gold, luxury goods, recreational drugs

The reason my example included a deflationary economy was purely so its differences could be compared relative to bitcoin.

Thank you Galuel!  The contrast you provided allowed for an epiphany.

The funny thing is, the revelation was that the current central banking mandate is the correct one! :-)
At least from my perspective it is. And I feel confident I can coherently explain why. No conspiracies required. Who'd a thunk!

Maybe I'll start another thread.

I'm learning that what you think are "psychological benefits" I see daily evidence of being "psychological drawbacks".

Stipulated: that ONLY investing currency should cause an INCREASE in net value to you. You're hoard of currency shouldn't work when you are not working.

However, your 100% winner statement is either absolutely wrong or absolutely unsupported.
If you increase currency levels 5% and prices increase 5%, then each equivalent share has exactly the same commodity value. If 1.00 original coin bought a loaf of bread before. 1.05 in inflated coin will buy a loaf of bread.

Because you gave "something" to everybody doesn't make the process a "win" for everybody.

The rich lost in their personal value as measured in loaves of bread.
The poor won in their personal value as measured in loaves of bread.

You know this, so I presume the deception was on purpose for persuasive effect. FAIL


I think you mean "taking money from people. I do welcome others taking money to me! :-)

But stipulated. People don't like taxes.

Again this is a deliberate deception. It still fails on me.

Creating money is welcome to those without money. Not to those who value money as a commodity. It doesn't matter to me if I receive more money, but still lose value. That concept only effects the naive or stupid. That is often why they don't have money to begin with.


This is an argument in favor of "price inflation". Since it makes rich people's currency worth less, they will spend it on things that either 1) generate additional currency to make up for the loss or 2) commodities that increase in value as measured by the currency.

Stipulated: This makes it EASIER and CHEAPER for smart people with productive ideas to borrow money and create additional commodity wealth.

Woot! A point of personal agreement! Don't make it unnecessarily hard for smart people to move quickly.


NOTE: I just notice I made an error in my previous post. I'll fix it momentarily.

Stipulated: Everyone is richer on a per-capita basis when using a ratio that compares (total commodity value in existance)/(number of people currently alive)

This ratio increases not with mere production increases, but instead with productivity increases. (i.e. each person produces more value now than they did then)

In my proposed system you still continue to get richer in total commodity value. However, prices drop so it takes less currency to buy a loaf of bread. (This was a mis-statement on my part previously).


I don't understand this. Can you restate it?


This is confusingly stated, but it seems like a purely standard liberal political platitude.

I couldn't disagree more strongly, but I am quite certain even your average "right winger" in France would seem a "leftist" when measured relative to where I live.

So my general response is, if I am "one of those people generating great value for all" then no. Hell no, does it make any sense at all for me to create great value for you, then to have you take my share of the value I created also.

This requires an example.

Say, I create a process for baking bread that uses less than half of the energy, time and man-power than the existing process. Using my new process I bake bread faster than most others. Now there has been BOTH an increase in *production* and an increase in *productivity*.

Because of the increase in productions, YOU and everyone else "receives great value" because the price of bread fell by half. So the money you already own buys twice as much bread. That is huge value for YOU.

But the productivity increase is the root of MY value. I baked more bread than others, I sold it at a lower price than they did, and still took some profit for myself. That value is MINE. I deserve every bit of it. If I want to give it away, that is MY business not yours.

I assert with all possible strength the following statement:

IF I increase my own personal productivity and/or the productivity at of others, while at the same time bringing society as a whole additional aggregate and individual value as a direct result of my increased production,...

THEN, there exists NO MORAL REASON for you to take ANY of the value I gained as a result of my productivity invention. In European terms, I would say I have "moral rights" to my creations and to profit from them. Exactly the same moral rights as if I had written a book, or made a sculpture.

Yes, agreed. Absent of outside verification, there is no know way to assure one-and-only-one account is created for each human.

However, we do have outside verification. Each state tracks births and issues birth certificates. It does the same for death certificates. The world outside bitcoin including the legal system relies on these certificates. Even the federal government relies on these certificates when they create social security numbers.

Since there are 50 plus entities doing this, I'd call it a decentralized system. Though one made up of mutually trusted peers. So there does exist a decentralized system that can serve this function. However, I do accept your assertion that such a function cannot be arbitrarily decentralized and still remain verifiable. (a la bitcoin)


But given that there is a plausible way to create a trusted mapping of initial accounts, births and deaths, I'd argue that my hypothetical is well supported enough for discussion of its monetary policy benefits relative to other monetary policies.



Yes, I'll stipulate to that. However, I'm not as skeptical of central authorities as many Libertarians. Nor am I as trusting of central authorities as many Liberals/Socialists.

Generally I trust individuals to act in their own self-interest. But contrary to what Liberals believe I see clear evidence that un-coerced cooperation is self-perceived as being in ones self-interest. I find this true of rich and poor people alike. Cooperation is simply fundamental to human nature. Even for Libertarians like me who want to retain the fundamental right to be uncooperative.

It is written somewhere that after bitcoin generation stops, transaction fees will provide the main incentive for people to keep generating blocks and verifying transactions.

I've always thought that statement was silly and unnecessary. It should be deleted to avoid confusion.

Currently fees are charged to avoid "transaction spam" as identified in the source code. Also for verifying very complicated transactions. I think both policies are simply deterrents for known annoying behaviors. They are not intentional incentives.

The main reason people will continue to validate blocks into the future absent new coin generation, is personal self interest. If you hold lots of value in bitcoins and you don't defend them, no one will. The people with the most coins have the highest incentive to make sure the system remains safe and secure.
 

Galuel:

What is "Progressive Cooptation". Also I'm not sure I'm understanding your use of "Cooptation". That is a word I haven't seen in common US English.  Could you define both for me please?

Also, I used you as an example in another thread. Just FYI.

Also, you called yourself "deeply liberal". That may not translate into US English as you expect it to.

In the US we have a scale that theoretically goes "Left" to "Right".  (Forgive me Libertarians, but you tend to draw yourselves off the scale as part of a triangle.)

Communist -> Socialist -> Liberal -> Conservative -> Fascist

However, in common political usage here we only use two terms. "Liberal" often associated with Democrats. "Conservative" often associated with Republicans.

When Europeans say they are "more liberal" they often mean, "less socialists". But in the American mind that makes them WAY LEFT of mainstream Democrats here. And it doesn't sound anything like our equivalent phrase "I'm more conservative".

I think we had the same idea Liberty.

I was considering posing for discussion a currency with the following monetary policy.

1. At birth every real human person is given 100 "birthcoins" bTC.
2. On death of each real human person 100 bTC is removed from circulation.

In such a system, the quantity of currency would grow in direct proportion the the number of people. In effect, "Our money is backed by ourselves."

My goal was to remove the tyranny of time for the new comers, but maintain "sound money" principles.

------
People will argue about, how you remove bTC from circulation. Having the government burn it from the collected tax revenue makes sense.

However, I came up with another way in my head. I think this is what the universal dividend is touting. But I might misunderstand it. I was reading an auto-transalated version. Galuel please correct me if I'm wrong.

What if we couldn't come up with a "fair enough" way to ever remove money the dead people's money from circulation?

In that case what we would need to do is keep a running count of how many people had been born (B) since the start of the currency. (i.e. The total number of allocations of 100 bTC.) We would also need to keep a count of how many people had died (D) in the same time period.

Then we would simply make new birth allocations using this ratio so the relative allotment per birth doesn't diminish over time. Let's call these coins "Inflating Birthcoins" (IBC).

The birth allocation ratio would be = (B)/(B-D)  It's simply the amount of bTC ever created divided by the current population. When someone is born, that is the share of currency that *represents* their birth. By its nature that would be an ever increasing ratio. But for any moment in time let's call it the "universal standard" for equality.
Each birth dynamically generates (100 IBC * B)/(B-D) and that amount is put in an account for the new baby.

So at any point in time, you could measure your wealth against my originally stated monetary policy at the top by using the inverse ratio = (B-D)/(B)   That dynamic ratio always takes you back to "universal stand currency".   (100 bTC = 1 person)

------

I would call both IBC and bTC "sound money" because neither is randomly inflating based upon outside whims. But I may be misunderstanding the definition others use for sound money.

And though there is monetary inflation of Universal Standard Currency as the population grows, there are no "Progressive" policy goals. Simply stability goals.

My aim for the system would be that if a loaf of bread cost (1 bTC) in your grandfather's generation. It would cost (1 bTC) in your grandchildren's generation. Of course it would cost a lot more in IBC, but using the universal standard ratio, everyone could see that things were remaining stable.
The previous statement was a mistake. The system proposed here is obviously a "price deflationary" system. As there are productivity increases, the total commodity value will grow relative to the total currency. Just as with bitcoin.

Given the electronic nature of birthcoins, it is actually trivial to do all the accounting in IBC internally, but to always display prices and trade in uBC. That keeps people from having to change paper price tags every time a few people are born.

Let's make it a more concrete example, maybe that will help us see if I'm full of it.

----

It is commonly known that bitcoin's fixed-quantity monetary policy is popular among libertarians.

Galuel recently proposed an expand at 5%/yr monetary policy with a distribution sure to be popular with French socialists.

Right now bitcoin's market cap is trivially small. It is not inconceivable that Galuel could find a wealthy French liberal to back a bitcoin alternate that better suits their (slightly silly) view of the world. All this is extremely cheap as political statements go. He could do all of this for 10% the price of one TV commercial.

Let's say that Galuel realized that Knightmb has lots of BTC sitting around doing nothing. So he cut a deal with Knightmb to buy up half his stash for French Euros. All this took place off the market so it didn't effect BTC prices elsewhere.

Now let's also postulate that Galuel doesn't auto-generate coins like bitcoin. Instead he just generates 1 Trillion ZTC into his own account. Then he sets monetary policy by giving them out however matches his short and long term goals. He also has an initial stash of Euros/Dollars from the wealth Frenchman.

Now he starts promoting zitcoin as the progressive alternative to the regressive bitcoin system. All socialist should shun bitcoin and use zitcoin.

He sets a price to sell his unlimited zitcoins at one bitcoin or the equivalent in Euros. Now like here, people show up just to see what zitcoin is about and to help support global socialism. They realize all of this is cheap and buy some ZTC just on principle using Euros.

To support the currency, he promises to buy ZTC for equivalent BTC, but only from merchants. Now there is a merchant incentive to take them. People have them, why not take their money. Those people don't have BTC and don't want BTC.

Now keep in mind Galuel has a 100% reserve of Euros backing his ZTC at current BTC to Euro rates. But he has no need to spend it. He also has a stash of BTC he bought from knightmb. At the current volume, say he could keep ZTC trading at parity for at least year. Remember initially Galuel is simply slowly selling the cheap BTC at a profit in Euros.

That is enough to gain traction and to give his currency the same perceived value as BTC in most people and merchant's minds. People will begin to trade these among themselves at parity as well. Every time a merchant doesn't trade a ZTC for a BTC, he can support the currency longer.

Eventually he announces it is time for a 5% "progressive" bonus for each user rich and poor alike. So he start handing out more money. Then more and more. By its very nature, this will upset BTC libertarians because it effects the total volume of things that people see as fungible.

Eventually the libertarians will pester the socialist NOT to peg their ZTC to the BTC. Galuel will quit swapping any excess BTC he has left. And will tell merchants to swap it on the exchange. Prices will start to diverge.

It seems plausible as a hypothetical.


What happens next I'm really not sure.

It seems to me that at least initially, people would save their BTC and spend their ZTC. As BTC customer numbers declined, it seems hard to resist the number of customers offering ZTC.

I could be wrong though. Show me.

====

Disclaimer: I'm NOT proposing that Galuel's progressive inflating currency is a good monetary policy. I think it is a silly policy.
I'm posing ZTC as a type of Gresham bad money vs BTC as Gresham good money.
 

Understood, but I don't think your point is well supported.

In my example, I specified that I manipulated the price so both coins initially traded at parity. Meaning if the merchant takes either to Liberty's exchange he gets the same amount of $. If he takes them to another exchange he can swap them one-for-one for bitcoins.

What does he care in the short run? Why would he choose not to accept what people had to offer?
It's actually less significant than someone saying, "I'll sell it to you for $10 greenbacks but I don't want a $10 roll of quarters." That's just bad business.

As the relative value diverges, there is always a ratio that represents equivalence. Why would a merchant not trade at that value for zitcoins? If he was going to immediately spend them there is no reason to care what equivalent representation he passed along. If he wanted to keep them he could immediately swap the zitcoins for bitcoins. Again no reason not to trade in them.


Nothing is stopping me from requiring my customers to pay me in gold. Except the fact that my customers don't have an easy cache of gold. Sure they could trade their dollars for gold and then buy my warez. But I doubt they would bother if a competing merchant sold the same warez for the dollars they already have.

Yay! this is actually coherent enough to address!

So the reason what you write sounds so obviously unsound, is you are only writing about HALF of a banking system.

Loans are barter. I give you something. You give me something.

When I loan someone $9,000 I take something worth $12,000 as collateral. That assures that the borrower has at least 30% "skin in the game". If his idea sucks, he loses more than he borrowed. Now that gives me two ways to win. If he pays me back, I get interest. If he doesn't pay me back, I claim the collateral and sell it. Think of it as loan insurance. It is what real bankers do instead of showing up and breaking the borrowers knee caps. It may be less fun, but it is more profitable.

If you look around, you will see lots of disreputable lenders offering collateralize loans they know people are "overly optimistic" about paying back. Pawnshops are an easy example. The same is done with use car loans.

Now, when the business man puts his $9,000 in my bank its because he needs to pay bills over time. He knows they will come up, but he doesn't need to spend the money now. He may not have to spend it at all if he has sufficient cash flow.

And when I lend that money out again, it's because I do have real value backing that loan. In this case collateral is a very valuable "claim check". If they don't pay, I claim the house, car, company, gold, tools, etc.

So I lend $8,100 and take $11,000 in collateral. If that person deposits the money with me, I can do it all again.

I have the money, its all cash. None of it was made up or came from the Fed.

If someone comes in and want more cash than I have on had, I can go to any other bank for a loan. I can use my collateral as collateral on that loan. It is perfectly sensible to do so.

If everyone requests their cash at once, all my collateral assets get pledged to other banks who happened to have more cash on hand. And that is still perfectly sensible. Because I now have no risk. I paid all my depositors off. The other banks have the risk so they hold the collateral.

Or I can simply sell my loans to an outside investor. They are investments guaranteed by collateral. And the best thing is, as the loan gets paid back the borrower's "skin in the game" increases. Since they have more to lose, they will work harder to make all payments. Who wants to lose a car for missing the last car payment?

Notice, in no case did I go running to the Fed. In most banking transactions the Fed is not required at all.

Where the fed is needed is when all your cash is out on loan, but there is still more opportunity to grow the economy.

Say I did your progression. I lent out all that money and took gobs and gobs more in collateral. Everything is going smoothly, people are making payments. But now I have no cash on hand available to loan.

Now say Fred comes in and has a great business ideal. He also has collateral to back the loan. The problem is I have no cash. So in this case I go to the bank where I can borrow money the cheapest. (sometimes the fed but most banks can't borrow there directly) So I borrow money, and pledge his collateral to back my loan. I do the paperwork, charge him more interest than the fed charges me. Everyone gets paid back.

There is no magic and no scamming.

Unless you SUCK AT BANKING! Which has happened recently. It is not a scam, it is a bunch of fucking morons who failed to do proper risk assessment or take proper collateral. They should all be lined up and SHOT for sucking so much at their one and only job. Most of the fault actually lies with so called "investors" who created a market by purchasing sets of prepackaged loans, without knowing what the fuck they were doing! It is really easy to create and run a hugely profitable business if you customers are fucking morons! And most of the "investors" who bought the loans were fucking morons. They'll claim the guys who packaged up the unvetted loans scammed them. But it is easy to scam a fucking moron.

----

By the way, EVERYTHING I wrote works for fractional reserve bitcoin or gold lending as well.

Stick that in your FAQ.  :-)

This is unsupported. I doubt it is true. Central banks and/or collateral simply doesn't work like that.

Feel free to support this point if you want.

Changes in reserve percentages don't effect anything I said. If you have more cash on hand you lose the value that comes from lending it. But you save on time consuming interbank transactions to manage cash levels.

Really this is not quite as intuitive as it seems.

Suppose I started a currency just like bitcoin (zitcoin is an ok name) and say I got Satoshi to mod the standard client so everyone who trades bitcoins could trade zitcoins as well. They didn't have to if they didn't want to. But it would be trivial to send either or both.

So now let's say I could control the minting rate of zitcoins dynamically. So I manipulate the quantity so that it would trade at parity with bitcoins. At least for a while. But as a general policy, I decide that zitcoins would remain value neutral while bitcoins increase in value.

There is an interesting effect called Gresham's Law that says "bad money drives out good." What that means is that while currently both coins are trading at parity, if you were conducting commerce using both, you would tend to save in bitcoins, and spend in zitcoins. So would everyone else.

So very quickly, zitcoins would become the defacto "currency" while bitcoins would revert to more of a "commodity". As the price diverged later. People would trade 1 bitcoin for 2 zitcoins, then spend them. If they received excess zitcoins they might trade them 2 for 1 to bitcoins, hoping that when they traded back they might get 3 zitcoins.

A few merchants would continue to demand payment in bitcoins, but if there were alternative places that took zitcoins they would tend to prefer them.

So the open question is, if this were to happen how long would there be enough demand to encourage people to continue saving in bitcoins? Sure bitcoins are a limited commodity, while zitcoins are inflating. But is that enough inherent value?