Fractional Reserve Banking and the creation of the Debtcoin

[Tacticat]

In the years to come, if banks jump on the Bitcoin bandwagon and start offering Bitcoin deposit accounts, Bitcoin will become affected by Fractional Reserve Banking.

While I'm not entirely against FRB I am worried that, as a community and a society, we repeat the sames mistakes from ages past. In this case, believing that the coins deposited in our accounts are actually Bitcoins.

Both cash and gold require the existence of Banks in order to be transferred from one place of the world to another. This is the reason why, until now, almost everybody has and uses a bank account. With Bitcoin, though, being able to completely avoid this problem I don't need a bank account in order to receive money from China and I might not want to accept a Bank's debt.

It is important that the common man, or at least Bitcoin users, be aware that the dollars, euros or bitcoins they have in a bank account are not real dollars, euros or bitcoins, but just a promise of your bank to pay you back that amount when you need it. (While it uses the real currency for something else).

Why is this important?
Let's say the bank owes you $100 (ie. you have $100 in your account) and transfer that money to your friend's Bank account. You're not really transferring money but your debt. Instead of owing you one hundred dollars, the bank now owes your friend that amount.

As you might know, this increases the money supply allowing banks to create money out of thin air. This is only possible because virtually everybody accepts this debt thinking of it as actual dollars (or euros or bitcoins). In reality, as you can see, we are dealing with two completely different currencies: Actual bitcoins (M0) and a promise (M1).

With Bitcoin though, it is completely unnecessary that I accept such a promise in order to receive money from china. It is completely unnecesary that I even own a bank account. I can, at my own discretion, refuse to accept these promises and ask only for real Bitcoins. Even if I accepted this type of money with Bitcoin it would be feasible that I inmediately withdraw all my funds to a cold storage wallet leaving my account empty at almost all times.

For this reason, since we can easily avoid bitcoins created by fractional reserve banking, it might be necessary to call them something different. Call them Bank-bonds, Debtcoin or whatever but now we have the chance, as a community, to make a distiction between the two and start using different terms which, in the end, will increase public awareness.

[townf]

This issue has been brought up before, nobody seems to understand or care very much for some reason. It's a hard problem maybe is why.
https://bitcointalk.org/index.php?topic=193837.0
https://bitcointalk.org/index.php?topic=200175.0

[Hawker]

Fractional reserve banking means that you get more interest on your savings.  Its a good thing - not sure why you would want to go back to the Medieval period when it wasn't available.

[Le Happy Merchant]

Fractional reserve banking means that you get more interest on your savings. 

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

The reason interest had to exist in the first place, was to incentivize actually putting money into the banks, now the only reason to do it would be security. Additionally, if inflation didn't exist, I think people could learn to be happy with a 0% ROI in banks. With Bitcoin, it may even be reasonable for banks to charge anti-interest to accommodate the deflation that will arise. So long as the interest matches inflation, the system is fair, and you never lose purchasing power parity from your savings.

[solex]

Fractional reserve banking means that you get more interest on your savings.

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

The reason interest had to exist in the first place, was to incentivize actually putting money into the banks, now the only reason to do it would be security. Additionally, if inflation didn't exist, I think people could learn to be happy with a 0% ROI in banks. With Bitcoin, it may even be reasonable for banks to charge anti-interest to accommodate the deflation that will arise. So long as the interest matches inflation, the system is fair, and you never lose purchasing power parity from your savings.

Got to disagree there.

Interest is the key driver or mechanism which gets money from the hands of savers who have spare money into the hands of producers who need it for expansion or more efficient production. Producers benefit society and living standards. This is the essence of capitalism.

Today the whole system has gone horribly wrong because borrowed money is being used for consumption (cars, holidays, houses), and reckless lenders (banks) are constantly bailed out by central banks. It is bankruptcy which is the cleansing process in capitalism releasing money from the banks back into society. Interest can work in an economy with an inflexible monetary base (Bitcoin).  In the example of a bank with 20 mil BTC offering 6%, it would soon go bankrupt, releasing BTC to the system and restoring normal conditions.

Central banks create moral hazard by manipulating interest rates, encouraging reckless lending (for consumption), excessive credit money, enabling excessive government funded by excessive debt, diverting funds from producers, stealth taxing savers, and thereby creating a system where eternal inflation is an essential feature.

[Hawker]

Fractional reserve banking means that you get more interest on your savings. 

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

...snip...

With fractional reserve banking, the 21 million Bitcoin in existence would equate to 200 million or so Bitcoin certificates in circulation.  All banking is based on the assumption that if all depositors try to reclaim their deposits on the same day, the system collapses.  Bitcoin banking will be no different.

[townf]

Fractional reserve banking means that you get more interest on your savings. 

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

...snip...

With fractional reserve banking, the 21 million Bitcoin in existence would equate to 200 million or so Bitcoin certificates in circulation.  All banking is based on the assumption that if all depositors try to reclaim their deposits on the same day, the system collapses.  Bitcoin banking will be no different.

Fractional reserve lending means a lot of things. If the reserve type is bailout proof and idiot proof, then it can be a sustainable, useful thing. If the reserve type is something like "monetized government debt", then that's a joke. The system will devour itself like it is now. Gold obviously wasn't bailout proof. We fell off the gold standard by bailing out banks. I'm not sure crypto can be bailout proof, but maybe it can be by way of it's cryptographic nature.

Even if it is bailout proof, it probably can never be idiot proof. If you don't bail out an entity that is suffering a run on reserves due to stupidity or irresponsibility or whatever, they go broke, but yet it is still the note holders who suffer the most.

The links in my earlier post were calling for ideas on how to implement a decentralized note issuing mechanism, maybe with FRB if it can be bailout proof and idiot proof, but i can't see that's possible, but maybe it is, with the decentralized use of math to enforce various ratios.

[Hawker]

Fractional reserve banking means that you get more interest on your savings.

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

...snip...

With fractional reserve banking, the 21 million Bitcoin in existence would equate to 200 million or so Bitcoin certificates in circulation.  All banking is based on the assumption that if all depositors try to reclaim their deposits on the same day, the system collapses.  Bitcoin banking will be no different.

Fractional reserve lending means a lot of things. If the reserve type is bailout proof and idiot proof, then it can be a sustainable, useful thing. If the reserve type is something like "monetized government debt", then that's a joke. The system will devour itself like it is now. Gold obviously wasn't bailout proof. We fell off the gold standard by bailing out banks. I'm not sure crypto can be bailout proof, but maybe it can be by way of it's cryptographic nature.

Even if it is bailout proof, it probably can never be idiot proof. If you don't bail out an entity that is suffering a run on reserves due to stupidity or irresponsibility or whatever, they go broke, but yet it is still the note holders who suffer the most.

The links in my earlier post were calling for ideas on how to implement a decentralized note issuing mechanism, maybe with FRB if it can be bailout proof and idiot proof, but i can't see that's possible, but maybe it is, with the decentralized use of math to enforce various ratios.

I see what you are saying but I don't see why it matters.  Idiots are perfectly qualified to do business in the idiotic ways they have always done so.  You will be perfectly free to not do business with them.  In a free market, if the currency is Bitcoin, there will be fractional reserve banking.  You of course will be able to keep your Bitcoin in a usb stick under your mattress but the vast majority of people will use banks that pay interest.

[alexeft]

... if banks jump on the Bitcoin bandwagon and start offering Bitcoin deposit accounts...

Now, there is a contradiction in terms!!! 

[townf]

I see what you are saying but I don't see why it matters.  Idiots are perfectly qualified to do business in the idiotic ways they have always done so.  You will be perfectly free to not do business with them.  In a free market, if the currency is Bitcoin, there will be fractional reserve banking.  You of course will be able to keep your Bitcoin in a usb stick under your mattress but the vast majority of people will use banks that pay interest.

The idiots I'm talking about is the FR lenders themselves. If a community surrounding them are all using their notes, and the FR bank idiotically creates way too many notes and suffers a run and goes broke, all the note holders get screwed. You aren't "free to not do business with them" because the only way to achieve that is to never do any business with any of them ever, ie never use notes.

Note holders aren't ever "free" from this risk, even when they are perfectly free to choose whose notes they use. I agree that FR bankers will always be "free" to be idiots and go broke with note holders getting shafted.

However what about using cryptography and decentralized networks to somehow make a FR system bailout proof and idiot proof in order protect note users from this risk?

[Hawker]

I see what you are saying but I don't see why it matters.  Idiots are perfectly qualified to do business in the idiotic ways they have always done so.  You will be perfectly free to not do business with them.  In a free market, if the currency is Bitcoin, there will be fractional reserve banking.  You of course will be able to keep your Bitcoin in a usb stick under your mattress but the vast majority of people will use banks that pay interest.

The idiots I'm talking about is the FR lenders themselves. If a community surrounding them are all using their notes, and the FR bank idiotically creates way too many notes and suffers a run and goes broke, all the note holders get screwed. You aren't "free to not do business with them" because the only way to achieve that is to never do any business with any of them ever, ie never use notes.

Note holders aren't ever "free" from this risk, even when they are perfectly free to choose whose notes they use. I agree that FR bankers will always be "free" to be idiots and go broke with note holders getting shafted.

However what about using cryptography and decentralized networks to somehow make a FR system bailout proof and idiot proof in order protect note users from this risk?

Again, assuming that everyone who uses the notes does so voluntarily, what's the problem?

[agentbluescreen]

Fractional reserve banking means that you get more interest on your savings.

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

The reason interest had to exist in the first place, was to incentivize actually putting money into the banks, now the only reason to do it would be security. Additionally, if inflation didn't exist, I think people could learn to be happy with a 0% ROI in banks. With Bitcoin, it may even be reasonable for banks to charge anti-interest to accommodate the deflation that will arise. So long as the interest matches inflation, the system is fair, and you never lose purchasing power parity from your savings.

Got to disagree there.

Interest is the key driver or mechanism which gets money from the hands of savers who have spare money into the hands of producers who need it for expansion or more efficient production. Producers benefit society and living standards. This is the essence of capitalism.

Today the whole system has gone horribly wrong because borrowed money is being used for consumption (cars, holidays, houses), and reckless lenders (banks) are constantly bailed out by central banks. It is bankruptcy which is the cleansing process in capitalism releasing money from the banks back into society. Interest can work in an economy with an inflexible monetary base (Bitcoin).  In the example of a bank with 20 mil BTC offering 6%, it would soon go bankrupt, releasing BTC to the system and restoring normal conditions.

Central banks create moral hazard by manipulating interest rates, encouraging reckless lending (for consumption), excessive credit money, enabling excessive government funded by excessive debt, diverting funds from producers, stealth taxing savers, and thereby creating a system where eternal inflation is an essential feature.

Higher usury-interest coupled with reserve (once gold-receipt) counterfeiting are actually the number one causes of inflation (devaluation or demeaning) of the Medium of Work-Resource Exchange "currency" (money). By this I mean undue profiteering (excess inflation) in excess of the goodly need of an economy and it's "currency" to "grow properly" (inflate properly and naturally in a well-regulated manner) based upon the ever-increasing (enlarging)  exportable value growths of the increasing values of all of the fruits of all it's also-growing workers (EP Export-Product) labours.

The reason the crime of interest usury originated was so that fraudulent gold-smiths could lend out counterfeited gold-reserve receipts, (first coin-tokens then paper receipt-notes) to people who had no gold deposited with them. They knew people didn't want the bother of the damned stuff and would never come back to claim any unless they were moving away, so figured why not rent out phoney ones as well as good ones? Their unfairly criminal (and costless) competition in the lending business inflated rates of usury, since real lenders could not accept risks reserve-counterfeithers could, and consolidating counterfeiters ended up repossessing everything..

The security of the Bitchain system makes this fraud impossible with a Bitcoin Funded Credit Swap OTC derivative-coin. Smiths cannot duplicate Bitcoin OTC derivatives to lend them out in a "reserve loan-counterfeiting" fashion. (unless idiot morons are allowed to mint or ever stupidly agree to accept physical Bitcoins that cannot be "confirmed") The Tory "Federal Reserve Printing Company" or "WB-IMF" Trotskyite reserve-counterfeithers could, however, "intervene" (price-fix or crash) the Bitcoin "penny stock" market, but if we always out-maneuver them to price the BTC at a mid-point between USD and Euro they would always lose and we all should always profit.

The fact that BTC are traded on hundreds of discreet markets also foils them, although dangerous preeminence of the vulnerable Mt Gox monopoly is a serious global-threat to our currencies safety.

In 48 BC the Pontifex Maximus, Julius Caesar outlawed private coin-smithing/usury and minted the first publicly owned for public profit public coin-currency, which could only be rented from the Republic. With it's profits domestic taxation became obsolete, and he was able to complete vast expensive public projects. As with Lincoln and JFK, this was why he was assassinated.

[townf]

I see what you are saying but I don't see why it matters.  Idiots are perfectly qualified to do business in the idiotic ways they have always done so.  You will be perfectly free to not do business with them.  In a free market, if the currency is Bitcoin, there will be fractional reserve banking.  You of course will be able to keep your Bitcoin in a usb stick under your mattress but the vast majority of people will use banks that pay interest.

The idiots I'm talking about is the FR lenders themselves. If a community surrounding them are all using their notes, and the FR bank idiotically creates way too many notes and suffers a run and goes broke, all the note holders get screwed. You aren't "free to not do business with them" because the only way to achieve that is to never do any business with any of them ever, ie never use notes.

Note holders aren't ever "free" from this risk, even when they are perfectly free to choose whose notes they use. I agree that FR bankers will always be "free" to be idiots and go broke with note holders getting shafted.

However what about using cryptography and decentralized networks to somehow make a FR system bailout proof and idiot proof in order protect note users from this risk?

Again, assuming that everyone who uses the notes does so voluntarily, what's the problem?

I guess there isn't a problem if we don't mind going through the entire local-bank-panic-so-merge-with-another-bank-over-and-over-again-until-it-becomes-a-behemoth-cartel-composed-of-very-few-members-that-hijacks-the-government-and-turns-everybody-into-debt-slaves cycle all over again

[Hawker]

...snip...

I guess there isn't a problem if we don't mind going through the entire local-bank-panic-so-merge-with-another-bank-over-and-over-again-until-it-becomes-a-behemoth-cartel-composed-of-very-few-members-that-hijacks-the-government-and-turns-everybody-into-debt-slaves cycle all over again

Lots of people borrow to their credit limit and rely on the repo man to provide them with motivation.  You could even argue that some countries like to borrow right up to their credit limits and then only start to work.  That's the way capitalism works - no amount of math will change that.  I appreciate that you'd like people not to behave that way but its the way things are.

[myrkul]

Lots of people borrow to their credit limit and rely on the repo man to provide them with motivation.

Think about why they do that. Does the base inflationary system encourage savings, or borrowing? Would a base deflationary system encourage savings, or borrowing?

[Hawker]

Lots of people borrow to their credit limit and rely on the repo man to provide them with motivation.

Think about why they do that. Does the base inflationary system encourage savings, or borrowing? Would a base deflationary system encourage savings, or borrowing?

Step back from ideology a second. 

Is going to work fun compared to lying in bed watching TV?  For the vast majority, no. 

What's the rational thing to do? Lie in bed and idle as long as possible. 

What's to stop you idling forever?  Your credit limit. 

No social system will change the fact that most jobs suck.  Therefore, no social system will change the need for credit.

[agentbluescreen]

Lots of people borrow to their credit limit and rely on the repo man to provide them with motivation.

Think about why they do that. Does the base inflationary system encourage savings, or borrowing? Would a base deflationary system encourage savings, or borrowing?

A so-called base-inflationary publicly owned and operated monetary token system is an absolute and critical necessity to all and any economic growth. It also provides the new excess liquidity (in accompaniment to exportable workforce productivity) necessary to loan it to new enterprises or to finance public projects without taxation. Then private lenders may also participate through their invested savings as well.

A privately owned for private profit inflationary, private monetary token debt-enslavement system requires regressive boardroom-socialist public taxation to pay off the enslaving lenders, and enslaves all new entrepreneurs and the state as well, to the fiat dictates of the secret insider trading monopolist boardroom-socialist (FED) high-preisthood tyrants who own, operate and monopolize all. Other private lenders cannot participate in lending because their costs of lending cannot compete with the monopoly counterfeiters.

A deflationary currency (like limited gold, platinum, palladium or antiques, fine arts or other rarity "Medium of Savings") when stupidly abused as a Medium of work-Resource Exchange "currency" that constantly becomes ever-rarer and ever-more valuable with any and all growth is a totalitarian Austrian fascist recipe for and sentence to eternal abject bonded debt enslavement to elite "winning" monopolist gold-pharaohs, ad infinatum.

[myrkul]

So much fallacy...

[townf]

...snip...

I guess there isn't a problem if we don't mind going through the entire local-bank-panic-so-merge-with-another-bank-over-and-over-again-until-it-becomes-a-behemoth-cartel-composed-of-very-few-members-that-hijacks-the-government-and-turns-everybody-into-debt-slaves cycle all over again

Lots of people borrow to their credit limit and rely on the repo man to provide them with motivation.  You could even argue that some countries like to borrow right up to their credit limits and then only start to work.  That's the way capitalism works - no amount of math will change that.  I appreciate that you'd like people not to behave that way but its the way things are.

I'm risking being chastised by myrkul because im going to dis on a free market, but i don't know how else to explain this.

I'm not talking about joe shmoe borrowing past their credit limit or even a government borrowing past its credit limit, although this debt slavery is fairly inevitible with free market FRB run amock through its full cycle.

I'm saying if you have a free market providing FRB services, which produces usable money in the form of notes and accounting entries on reserves, the vendors in this market who happen to be idiots or unlucky or victims will issue too many notes and suffer panics on reserves and therefore become absorbed or merged or bought by another FRB.

This process happens over and over and over and over until there are only a very few big players with all the reserves all pooled up in just a few places. They then cartelize. When a cartel in something as important as creating the money supply gets big enough, it starts influencing the government.

We've run the whole gamut with this already from Andrew Jackson days to 1913 when the cartel was made the official true monopoly in the form of the FED, continuing until now, where the government is pretty much a total tool of this cartel.

It happened in Europe in pretty much every country. It happened in the US. You can't deny it. It cannot not happen again if we start all over again with the same system.

[townf]

If we can think of a way to distribute the proceeds and risks of FRB equitably, instead of letting it be private profit and dog eat dog for would be oligarchs and plutocrats, maybe it would turn out differently.