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Author Topic: BitCoin, Fractional Reserve Banking, and lesson of history.  (Read 2055 times)
jahabdank
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July 03, 2011, 12:57:03 PM
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Hi Great BitCoin Community!

I made a video where I explain what is the impact of the fractional reserve banking on the economy, and how bitcoins can fix that. Additionally I discuss how did we handle corrupt bankers in the Europe during the middle ages (small hint: burn baby, burn  Wink )
http://www.youtube.com/watch?v=eE2WwimVhtI

Please comment, and thanks for watching!

Cheers,
Jozef


I think my work on youtube is valuable your time. Go to my YouTube profile: jahabdank
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bitrain
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July 03, 2011, 02:40:34 PM
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Good one, thank you!
 Bitcoin era is coming... Hope to see "Cryptocurrency" techonology in Civilization X (the game) ...

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July 03, 2011, 02:48:01 PM
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Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

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July 03, 2011, 03:05:10 PM
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Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

If you deposit $100 into the bank and they lend it out....how come you can go withdraw $20 to buy some lunch?

Because the money lent is largely 'created' on the borrowers signature.
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July 03, 2011, 03:16:28 PM
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Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

If you deposit $100 into the bank and they lend it out....how come you can go withdraw $20 to buy some lunch?

Because the money lent is largely 'created' on the borrowers signature.

False question as you assume the money you have deposited is put into a drawer called "freetx cash" and then lent out again as a lump sum with your name on it.  But in real life, you know that's not how banks work.  The $20 you take back for lunch is just cash from the pool of funds the bank works with.  Its not part of the $100 cash you deposited.

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July 03, 2011, 03:27:03 PM
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False question as you assume the money you have deposited is put into a drawer called "freetx cash" and then lent out again as a lump sum with your name on it.  But in real life, you know that's not how banks work.  The $20 you take back for lunch is just cash from the pool of funds the bank works with.  Its not part of the $100 cash you deposited.

I suggest you read "Modern Money Mechanics" published by no other than the Federal Reserve Bank of Chicago.

Pay attention to page 6:

"...Banks do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].”
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July 03, 2011, 03:35:56 PM
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Thanks - your Chicago quote says exactly what I told you.  The $100 you deposited was not put in a special box called "freetx money" it was added to the funds of the bank.  The $20 you withdrew was not taken from a box called "freetx money" it comes from the banks funds.  So if I go to that bank and borrow $100, I am not borrowing your money.  I am entering a contract to make payments in return for access to cash that comes from the banks funds.  Or as they so elegantly put it "What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts..."

The funny thing is that we both already know this.  I'm not sure what point you want to make.

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July 03, 2011, 03:45:08 PM
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Thanks - your Chicago quote says exactly what I told you.  The $100 you deposited was not put in a special box called "freetx money" it was added to the funds of the bank.  The $20 you withdrew was not taken from a box called "freetx money" it comes from the banks funds.  

I never even implied that was the case. You are largely off on a tangent agruging against yourself on that.


So if I go to that bank and borrow $100, I am not borrowing your money.  I am entering a contract to make payments in return for access to cash that comes from the banks funds.  Or as they so elegantly put it "What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts..."

The funny thing is that we both already know this.  I'm not sure what point you want to make.

It doesn't come from "bank funds" and that is the whole reason why Fractional Reserve banking leads to money supply creation. When you sign you name on the dotted line, that new $100 is created into existence. Its known as "balance sheet expansion" as a nice name, but in reality its just money printing.

This is really elemental stuff. Maybe you should take a look at this wikipedia page as it gives a basic overview of how the money creation process works (http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_creation)
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July 03, 2011, 03:54:11 PM
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I made a video where I explain what is the impact of the fractional reserve banking on the economy, and how bitcoins can fix that. Additionally I discuss how did we handle corrupt bankers in the Europe during the middle ages (small hint: burn baby, burn  Wink )
You say that it devalues gold way below its "real value", but it cannot. The real value of gold comes from its ornamental and industrial applications. Bankers can't touch that. All they do is help reduce the artificial additional currency value that distorts the market for actual, physical gold.

"How dare the financial system take away from the miners the extra value the use of gold as a financial instrument creates."

No, that extra value is harmful. It makes computers and jewelry more expensive than they should be. An ideal system *would* drop that extra value to zero to the extent it can.

I am an employee of Ripple.
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July 03, 2011, 04:02:02 PM
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Thanks - your Chicago quote says exactly what I told you.  The $100 you deposited was not put in a special box called "freetx money" it was added to the funds of the bank.  The $20 you withdrew was not taken from a box called "freetx money" it comes from the banks funds.  

I never even implied that was the case. You are largely off on a tangent agruging against yourself on that.


So if I go to that bank and borrow $100, I am not borrowing your money.  I am entering a contract to make payments in return for access to cash that comes from the banks funds.  Or as they so elegantly put it "What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts..."

The funny thing is that we both already know this.  I'm not sure what point you want to make.

It doesn't come from "bank funds" and that is the whole reason why Fractional Reserve banking leads to money supply creation. When you sign you name on the dotted line, that new $100 is created into existence. Its known as "balance sheet expansion" as a nice name, but in reality its just money printing.

This is really elemental stuff. Maybe you should take a look at this wikipedia page as it gives a basic overview of how the money creation process works (http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_creation)

It would help if you watched the original video.  His concern is that the lending halves the value of the gold.  My correction is that the bank has acted as a middleman so whatever else you worry about, having the value of gold halved is not one of them.

EDIT: around 03:49 in the video is the point where OP expresses his worry about devaluing.

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July 03, 2011, 04:16:26 PM
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It would help if you watched the original video.  His concern is that the lending halves the value of the gold.  My correction is that the bank has acted as a middleman so whatever else you worry about, having the value of gold halved is not one of them.

As you say, this is elemental stuff. 

When the bank issues certificates that have no backing, they are in effect counterfeiting the gold. This "lowers the value of money" (ie. causes inflation) since suddenly the market thinks there is more gold available than there really is.

Your characterization of banking (ie. being the middleman between savers and borrowers) is the ideal of how banking *should* be in an honest system.....but it has little relation to how banking actually works today.  A bank today is not really a middleman, its simply a money printing machine that creates money upon signature obligation.

Even the money that make deposits, are actually just money created from some previous loan.
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July 03, 2011, 04:25:52 PM
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freetx please watch the OP's video particularly around 03:49. You are raising issues that are nothing to do with the value of gold being reduced.

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July 04, 2011, 02:21:15 AM
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OP, in the video you say that Bitcoins is the ultimate answer to fractional reserve banking. While I would like to agree with you, I can not. Bitcoins, like or more so than gold, are easily mishandled/stolen and must be properly secured which limits their use in common exchange. Hopefully this is a temporary problem, but it will never be ultimately solved. Many will want to store their bitcoins in an online vault, indeed I posit that in order for bitcoins to reach mainstream, insured bitcoin vaults will be required. One may offer interest...

Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

No, Hawker. You are incorrect. A single lender is required to support ten borrowers in most countries. Please read up on this subject before sharing your ignorance. An easy intro: http://en.wikipedia.org/wiki/Fractional-reserve_banking


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July 04, 2011, 07:36:28 AM
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OP, in the video you say that Bitcoins is the ultimate answer to fractional reserve banking. While I would like to agree with you, I can not. Bitcoins, like or more so than gold, are easily mishandled/stolen and must be properly secured which limits their use in common exchange. Hopefully this is a temporary problem, but it will never be ultimately solved. Many will want to store their bitcoins in an online vault, indeed I posit that in order for bitcoins to reach mainstream, insured bitcoin vaults will be required. One may offer interest...

Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

No, Hawker. You are incorrect. A single lender is required to support ten borrowers in most countries. Please read up on this subject before sharing your ignorance. An easy intro: http://en.wikipedia.org/wiki/Fractional-reserve_banking



Is there some rule that says everyone who replies will never watch the OP's video?  Seriously, its a short video and we would at least be talking about the same thing.  The stuff around 3.49 is the part where he worries about the value of gold being halved.






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July 04, 2011, 07:58:01 AM
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reminds me of the AMERICAN DREAM movie : http://www.youtube.com/watch?v=ZPWH5TlbloU

amusingly i found this video somewhere on these forums lol

Smiley ;/)
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July 04, 2011, 05:56:51 PM
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OP, in the video you say that Bitcoins is the ultimate answer to fractional reserve banking. While I would like to agree with you, I can not. Bitcoins, like or more so than gold, are easily mishandled/stolen and must be properly secured which limits their use in common exchange. Hopefully this is a temporary problem, but it will never be ultimately solved. Many will want to store their bitcoins in an online vault, indeed I posit that in order for bitcoins to reach mainstream, insured bitcoin vaults will be required. One may offer interest...

Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

No, Hawker. You are incorrect. A single lender is required to support ten borrowers in most countries. Please read up on this subject before sharing your ignorance. An easy intro: http://en.wikipedia.org/wiki/Fractional-reserve_banking



Is there some rule that says everyone who replies will never watch the OP's video?  Seriously, its a short video and we would at least be talking about the same thing.  The stuff around 3.49 is the part where he worries about the value of gold being halved.


Yes troll, I watched the video, thought it was thoughtfully done, and posted a small rebuttal (to the assertion that bitcoin was immune to fractional reserve). Hawker, you on the other hand are replying on a changing point, referring to something in minute 3:49. I care not to watch the video again. I care not what new point you are trying to make. I challenge your first and only articulated point, namely that a bank acts as a middleman between borrower and lender, which implies a 1-1 messenger, which is certainly false. If you'd like to address that point (your point) or rephrase what you meant, you are welcome to do so. Otherwise, you're just making noise.

EDIT: Actually, perhaps I should take a different approach. I understand you think you are correct and you believe that others are saying absurdity and have simply misunderstood what is so obvious to you. "Fractional Reserve Banking can not possibly be as these guys say, we're really talking about the same thing" No in fact we are not talking about the same thing and yes we do understand what you are saying, and indeed you are still incorrect. Fractional Reserve Banking does in fact create money which is only vaguely related to the deposits.

In fact the potential money lent out is (in most countries) about ten times the amount backed by debtors. It is also backed by the interest, which when payed back, not before schedule, will typically more than double the initial amount lent, minus the risk of default, plus some profit.

The OP is correct. Suppose we traded in jelly beans. We (the market) don't need to count the total number of jelly beans, but if someone bakes a lot of jelly beans, making them very common, we'll realize there are a lot of jelly beans around and place less value on them. People will probably want to trade their jelly beans in for something with more value (unless they really like jelly beans).

If on the other hand, IOU's were issued, people may eventually want to exchange their IOU's for jelly beans so that they can sell them. If they find out that there are in fact no jelly beans (that there are more IOU's than jelly beans), they will be rightly pissed. Regardless of the bank-run and discovery of no jelly beans, the market previously believed there was an abundance of jelly beans and that belief alone devalued the IOUs.

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July 04, 2011, 06:05:35 PM
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OP, in the video you say that Bitcoins is the ultimate answer to fractional reserve banking. While I would like to agree with you, I can not. Bitcoins, like or more so than gold, are easily mishandled/stolen and must be properly secured which limits their use in common exchange. Hopefully this is a temporary problem, but it will never be ultimately solved. Many will want to store their bitcoins in an online vault, indeed I posit that in order for bitcoins to reach mainstream, insured bitcoin vaults will be required. One may offer interest...

Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

No, Hawker. You are incorrect. A single lender is required to support ten borrowers in most countries. Please read up on this subject before sharing your ignorance. An easy intro: http://en.wikipedia.org/wiki/Fractional-reserve_banking



Is there some rule that says everyone who replies will never watch the OP's video?  Seriously, its a short video and we would at least be talking about the same thing.  The stuff around 3.49 is the part where he worries about the value of gold being halved.


Yes troll, I watched the video, thought it was thoughtfully done, and posted a small rebuttal (to the assertion that bitcoin was immune to fractional reserve). Hawker, you on the other hand are replying on a changing point, referring to something in minute 3:49. I care not to watch the video again. I care not what new point you are trying to make. I challenge your first and only articulated point, namely that a bank acts as a middleman between borrower and lender, which implies a 1-1 messenger, which is certainly false. If you'd like to address that point (your point) or rephrase what you meant, you are welcome to do so. Otherwise, you're just making noise.

At 3:49 the video talks of 1 person with 10 gold depositing it in 1 bank and the bank lending that 10 gold to 1 other person.

At that point, the guy gets all upset that the gold has lost half of its value.  It hasn't.  And the rest of his argument falls apart because of that error of logic.

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July 04, 2011, 06:24:45 PM
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At 3:49 the video talks of 1 person with 10 gold depositing it in 1 bank and the bank lending that 10 gold to 1 other person.

At that point, the guy gets all upset that the gold has lost half of its value.  It hasn't.  And the rest of his argument falls apart because of that error of logic.

You might be arguing semantics here. He talked about an imaginary world with only 10 gold coins in existence. The IOU/deposit slips (backed by faith in the banks share of gold) have depreciated by 50%. Yes, as soon as the village kills the banker, those 10 gold pieces will still be worth 10 gold pieces, but now you'll have two very pissed off people both with equally valid claims on them (or one brute and another sucker). Perhaps they liquidate the bankers assets (house, etc) to make up the difference.

Whether the gold or the paper lost value is inconsequential to the OP. Value on each share was reduced 50%. It's like Schrodinger's cat. Until we open the vault, we do not know if there are 0, 10, 20, or infinite gold coins. We do know that there are 20 slips redeemable for gold. Our 'belief' in gold's value has been reduced. What happens after we open the vault is for quantum physicists and lynch mobs to settle.

(I edited my post above)

Please read about fractional reserve banking before commenting further.

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July 04, 2011, 07:20:12 PM
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netrin - you keep saying fractional reserve banking as if there is something wrong with it.  There isn't.  Ultimately, the saver has put the gold in the bank in order to get interest and the banker pays interest by lending it to others.  Far from losing half his gold, the saver has gained.


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July 04, 2011, 08:02:42 PM
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OP, in the video you say that Bitcoins is the ultimate answer to fractional reserve banking. While I would like to agree with you, I can not. Bitcoins, like or more so than gold, are easily mishandled/stolen and must be properly secured which limits their use in common exchange. Hopefully this is a temporary problem, but it will never be ultimately solved. Many will want to store their bitcoins in an online vault, indeed I posit that in order for bitcoins to reach mainstream, insured bitcoin vaults will be required. One may offer interest...

Thats not how banking works. The bank acts as a middleman between the borrower and the lender and the bank's profit is the spread between the two.

No, Hawker. You are incorrect. A single lender is required to support ten borrowers in most countries. Please read up on this subject before sharing your ignorance. An easy intro: http://en.wikipedia.org/wiki/Fractional-reserve_banking



Is there some rule that says everyone who replies will never watch the OP's video?  Seriously, its a short video and we would at least be talking about the same thing.  The stuff around 3.49 is the part where he worries about the value of gold being halved.


Yes troll, I watched the video, thought it was thoughtfully done, and posted a small rebuttal (to the assertion that bitcoin was immune to fractional reserve). Hawker, you on the other hand are replying on a changing point, referring to something in minute 3:49. I care not to watch the video again. I care not what new point you are trying to make. I challenge your first and only articulated point, namely that a bank acts as a middleman between borrower and lender, which implies a 1-1 messenger, which is certainly false. If you'd like to address that point (your point) or rephrase what you meant, you are welcome to do so. Otherwise, you're just making noise.

EDIT: Actually, perhaps I should take a different approach. I understand you think you are correct and you believe that others are saying absurdity and have simply misunderstood what is so obvious to you. "Fractional Reserve Banking can not possibly be as these guys say, we're really talking about the same thing" No in fact we are not talking about the same thing and yes we do understand what you are saying, and indeed you are still incorrect. Fractional Reserve Banking does in fact create money which is only vaguely related to the deposits.

In fact the potential money lent out is (in most countries) about ten times the amount backed by debtors. It is also backed by the interest, which when payed back, not before schedule, will typically more than double the initial amount lent, minus the risk of default, plus some profit.

The OP is correct. Suppose we traded in jelly beans. We (the market) don't need to count the total number of jelly beans, but if someone bakes a lot of jelly beans, making them very common, we'll realize there are a lot of jelly beans around and place less value on them. People will probably want to trade their jelly beans in for something with more value (unless they really like jelly beans).

If on the other hand, IOU's were issued, people may eventually want to exchange their IOU's for jelly beans so that they can sell them. If they find out that there are in fact no jelly beans (that there are more IOU's than jelly beans), they will be rightly pissed. Regardless of the bank-run and discovery of no jelly beans, the market previously believed there was an abundance of jelly beans and that belief alone devalued the IOUs.

Thats a hell of an edit.

In a free market, fractional reserve banking is always going to exist.  To complain about it is like complaining about the internal combustion engine, or the moving production line or penicillin.  The important thing is to make sure that the reserves are adequate and that the bank owners have a genuine risk if things go wrong.   

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