Fractional reserve banking is not a con: When you make a deposit in a bank, you know the money is going to be loaned out.
Banks should offer two services and clearly differentiate between them:
Either you want to store your coins securely with them. They won't lend them out, that means you'd get no interest (maybe even pay a fee).
Or, you allow them to lend them out. However, then you don't have any coins, and you know they are invested at risk, but you get dividends (interest). The bank mediates that risk but could go bankrupt itself.
The (almost) creation of new currency is just a side effect, and can happen even with Bitcoin.
Right, but up until now you can differentiate between a real Bitcoin and a Bitcoin IOU easily. You can't use Bitcoin IOUs to buy some stuff at bitmit or room77. However, ripple.com may very well enable that scenario.
The only part of it that seems fishy to me is that it works like this:
Individual loans $10 to Bank A
Bank A --> $9 to Bank B
Bank B --> $8 to Bank C
Bank C --> $7 to Bank D
Bank D --> $6 to Bank E
and so on...
The effect of this is that much more currency is produced, and I don't know what a legitimate reason for this would be.
Right, that's why central banks exist and determine a prime interest rate. That's how they can roughly regulate money supply in a top-down way. Needless to say, this has always been an ugly patch upon the monetary system, trying to control symptoms rather than treating causes. This approach must become obsolete.
