Is Fractional Reserve banking possible with Bitcoin?

[steelhouse]

Yes, but no debt means no money, no economy, no business: self-sufficiency!

Yes, there will always be 21,000,000 BTC as money with no debt.  The reality is M1, M2 is not money, it is checkbook money.  The people of Cyprus found out it is not money.  However, our banks are FDIC insured, thus the government will most likely print money if it has to.

You can have money without debt.
You can have an economy without debt.  
You can have businesses without debt.

I argue the economy and businesses will be better off without banking debt.  If you buy shares in asicminer, you are buying equity. However in reality you are giving your money to someone else.

Hope I understood the post.

The base money is the only true money, M0.  M1 is checkbook money that acts like money.
M0 is the money at the federal reserve held as reserves, printed dollars at banks, and currency and coins in circulation.  M0 use to be really small.

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[SPC_Bitcoin]

bitcoin requires no bank. having or using a bank for bitcoin would be stupid. put it in your wallet and leave it there, or spend it, or loan it. I don't recommend loaning it, unless you know and trust the person, get collateral.

without a bank there can be no fractional reserves.

the fractional reserve system is a scam against everyone but the bankers.

[Zarathustra]

Yes, but no debt means no money, no economy, no business: self-sufficiency!

Yes, there will always be 21,000,000 BTC as money with no debt.  

No, they won't have any value without debt around it. Self-sufficient people beyond the state do not trade any metals with strangers. They are self-sufficient, because beyond the state and the society, there is no debt, and therefore no traded metal. There you'll find the self-sufficient community.

You can have money without debt.
You can have an economy without debt.  
You can have businesses without debt.

No, never ever in the history of mankind. Business, economy and money is based on the state and on the debt to the state (Mafia).
Beyond that, humans never ever needed Business and Money. They were self-sufficient, and in some rainforests, they are self-sufficient until today, because they live beyond the state and beyond debt. And therefore beyond business. They are not busy.

[Miz4r]

I have no problems with debt. I can borrow my neighbor's car and promise to give it to him back later. The problem I have with debt is when my neighbor instead of lending me his car will lend someone else's car to me (the original owner has no idea what happened to his car) pretending it's his and then charge me extra money for it. The real situation with our paper fiat currency is even much much worse than this.

[smoothie]

Yes, if the system using such a system has enough people that have faith in their dealings not to scam them out of their deposits.

[johncarpe64]

Its possible, just that its very hard cause Bitcoin is uncontrollable (no charge back).

[qwk]

bitcoin requires no bank. having or using a bank for bitcoin would be stupid. put it in your wallet and leave it there, or spend it, or loan it. I don't recommend loaning it, unless you know and trust the person, get collateral.

If you loan it, you might as well loan to a bank. In fact, the likelihood of getting scammed in a loan is probably lower with banks.

Storing your bitcoins in your paper wallet and leaving them untouched may be safe, but it is certainly not the most profitable option.

Now, let's imagine a scenario. Say, in 5 years, you want to buy a house. All you got is bitcoins. Will you part from your coins in exchange for the house, or would you rather take a loan on the house and leave your coins as collateral? What if the bank even pays interest on said collateral?

I know, a lot of people will come up with the old (incorrect) argument that interest is not possible in a deflationary currency etc. pp. Well, making a false statement over and over again...
Just because something might not be sustainable over an infinite period of time does not make it impossible.

without a bank there can be no fractional reserves.

Banks are not needed. Many debtors can do some kind of "fractional reserve". If you regularly buy from different sources with a payment target of a few weeks, you can, too It is in fact illegal for most businesses, though, while it's perfectly legal for banks.

[shawshankinmate37927]

Hello,

My thought is this: since fractional reserve banking basically creates money out of nothing, wouldn't it be impossible to have such a system based on bitcoin? If so, how would this effect bitcoin's potential as a global reserve currency (if it indeed has any)?

(I've been a lurker here since April, and I've found these forums invaluable for understanding this great new mystery that is bitcoin. Some very smart people around here)

Theoretically, it's possible, but it would involve using bitcoin iou's as currency and not actual bitcoins on the blockchain.  I have a hard time believing there would be much interest in bitcoin iou's, but you never know.

[qwk]

My thought is this: since fractional reserve banking basically creates money out of nothing,

It does not create money "out of nothing". Repeating the same false statement over and over again does not make it true.
The money that's finally created during the process of lending is created out of the opportunity value of the lent money.

What's the opportunity value of a $300,000 mortgage? The house increasing in value I would guess would be your answer.

The opportunity value is precisely what you make of it.
It's derived from time preference, and roughly opposite to opportunity cost.
It's very difficult, if not impossible to calculate, that's why we rely on the market to determine said value.
http://en.wikipedia.org/wiki/Time_preference
http://en.wikipedia.org/wiki/Opportunity_cost
For your specific mortgage, well, how much interest do you pay? That's the opportunity value as determined by the market (with some regulation, risk-management, administration, marketing costs etc. factored in).

Okay, but do you think that can go on forever?

No.

So opportunity value is just an empty term you just made up and is still 'nothing'.

Google finds a few (tens of thousands) hits for the term "opportunity value", but admittedly, it's more a buzz today, whereas the term "opportunity cost", which describes (not exactly) the opposite, is much more common and well-defined.

So the money is still in essence being created out of nothing and then lent out,

I'll have to repeat myself here. Money is not created out of nothing.
Just because you don't understand how it comes into existence doesn't make it magic.
The process of money creation is well understood, there is not substantial controversy about it amongst economists.

it's an evil scheme especially if you consider the macroeconomic consequences and I'm sure you know that already. If not you should get your head out of the sand and look around.

You may find that "scheme" evil, but it made the rise of the middle classes possible at the end of the middle ages.
It powered the progress of modern society towards individual liberty and democracy.

I fail to see "evil" in that.

[bitlancr]

qwk, in response to your well-presented logical fallacies:

Something can have an opportunity cost, and still come from nothing. Example: a genie gives me three wishes, and with one of them I ask for £10k. Poof, wish granted. Where did that money come from? Did the genie earn it? I think not.

Likewise with a bank - you ask for a £10k loan, and poof, £10k appears in your account. Did they have that £10k to loan? Bullshit they did, they changed a number in a database. The only opportunity cost being some measly capital ratio they have to abide by.

Why is it that banks get to do this? Plenty of us have capital - I bet if we all could create money in this manner then the system would come down like a house of cards. Instead we have a slow decay, while the privileged money creators leech all the value they can.

[qwk]

Something can have an opportunity cost, and still come from nothing. Example: a genie gives me three wishes, and with one of them I ask for £10k. Poof, wish granted. Where did that money come from? Did the genie earn it? I think not.

Unfortunately, genies, unlike banks, don't exist.

Likewise with a bank - you ask for a £10k loan, and poof, £10k appears in your account. Did they have that £10k to loan? Bullshit they did, they changed a number in a database. The only opportunity cost being some measly capital ratio they have to abide by.

Okay, let's have a deeper look, if you wish (now I'm the genie granting wishes, here's number 1).
That measly capital ratio is not the opportunity cost, but you already know that.
The ability to "change a number in a database" in a precise, officially approved, widely accepted manner, is brought into existence by a huge apparatus of laws, regulations, technical implementations, a delicate balance of measures and countermeasures, huge networks, a gigantic organizational effort to get all theses things "just right" so that it's not easy to "change a number in a database".
That's a value in its own right, and even that's not the opportunity value.

The opportunity value comes from the fact that by granting that loan to you, you will be able to do something productive with the money. And that will be worth a lot more than the money just sitting in a bank vault, a database, a paper wallet or wherever.

Why is it that banks get to do this? Plenty of us have capital - I bet if we all could create money in this manner then the system would come down like a house of cards. Instead we have a slow decay, while the privileged money creators leech all the value they can.

You are absolutely able to do the same.
The money created while the lending is in effect can not be spent by a bank. It collapses on payback.
The only value the banks may "leech" from a loan is interest.
And so can you.

[theonewhowaskazu]

Yes, there will always be 21,000,000 BTC as money with no debt.  The reality is M1, M2 is not money, it is checkbook money.  The people of Cyprus found out it is not money.  However, our banks are FDIC insured, thus the government will most likely print money if it has to.

You can have money without debt.
You can have an economy without debt.  
You can have businesses without debt.

I argue the economy and businesses will be better off without banking debt.  If you buy shares in asicminer, you are buying equity. However in reality you are giving your money to someone else.

Hope I understood the post.

The base money is the only true money, M0.  M1 is checkbook money that acts like money.
M0 is the money at the federal reserve held as reserves, printed dollars at banks, and currency and coins in circulation.  M0 use to be really small.

There is no real M0, in USD.

The very first fiat USD (once the gold standard was removed) was lent to the US Gvernment by the Federal Reserve at interest rates. So, sure, you might assume that there is some M0, except all of that M0 and more must be owed back to the Federal Reserve at all times. Thus there is no real M0.

The backing for the US Dollar is the frantic search for people to repay fractions of an unpayable debt.

The economy and businesses would not be better off without banking debt because there are legitimate reasons to borrow, and a free market will sort that out. However the free market has limitations, actually, I should put that in the singular: The free market has a single limitation. And that limitation is knowledge. Given a perfectly informed populace the free market would be perfect in all regards. The only reason why fractional reserve banking can cause problems in a free market is because it is traditionally impossible to provably quantify the amount of currency in a reserve without destroying the point of the  reserve in the first place.

Bitcoin does away with this problem to some extent since the amount in reserves can be proved through signed messages originating form an address. The only problem is, of course, that there is no way of provably quantifying how much is owed. Still, its a major step forward into rationalizing the world of fractional reserve.

[bitlancr]

Wait, are we talking about opportunity cost, or value? Clearly loans have benefit to the consumer, I'm not disputing that. I have no problem with loans per se - it's when you're trying to loan something that doesn't actually exist, then I take issue. With fractional reserve, the money isn't sitting in a vault - that's the point.

Putting the morality aside, mathematically the whole thing just doesn't add up. Banks create some money, then expect interest to be paid on it. Where exactly does that interest come from? There's barely enough M0 to pay it. The whole thing has to come crashing down at some point.

Unfortunately, genies, unlike banks, don't exist.

Analogies do

[toddfletcher]

OP here.

Thanks everyone for all of your input. What a great forum.

For myself, I feel like I can answer the question now to my own satisfaction at least: the answer is YES it is possible.

My confusion was about the money multiplier. My sense initially was that this would require creation of new coins, and so would be impossible with BTC.

Now I see that where my confusion was. The coins don't need to be newly created Bitcoins to be "mulitplied" In EFFECT, because the coins only need to be used sequentially by different users. So the money isn't LITERALLY multiplied, but it's effect on spending is.

So person A deposits a coin, and the bank loans it to person B, who spends it on a car and gives to company C, who deposits in their bank, who loans it to person D. As far as the spending goes, it was AS THOUGH 4 coins existed, and so it's said to have been multiplied.  But as far as BTC is concerned, it's all the same coin, so there's no double spending problem.

So "multiplier" as used in the context of FRB is a metaphor only.

[theonewhowaskazu]

So person A deposits a coin, and the bank loans it to person B, who spends it on a car and gives to company C, who deposits in their bank, who loans it to person D. As far as the spending goes, it was AS THOUGH 4 coins existed, and so it's said to have been multiplied.  But as far as BTC is concerned, it's all the same coin, so there's no double spending problem.

So "multiplier" as used in the context of FRB is a metaphor only.

There is the promise of "multiplication" when the illusion of liquidity is given to such debt.

For example, there is absolutely 100% no problem with CDs. CDs are perfectly legit and transparent debt instruments. Same thing with bonds. These are perfectly OK and nobody is (or at least should be) complaining about them.

The problem happens when something like a CD is exchanged for something like a Money Market Fund instead. Debt instruments are inherently non-liquid, and by trying to cover up non-liquidity with liquidity you are essentially committing fraud.

Look, I have no problems with "spendable-IOUs". If someone really wants to accept a CD as a form of payment, then that's their choice. I also have no problem with a bank offering to buy back the CDs it issued itself so as to provide greater liquidity to its customers. I absolutely do have a problem with a bank issuing tons of CDs for 1BTC each, calling each of those 1BTC CDs "1BTC" rather than "1BTC CDs", and then "guaranteeing" to customers that it will pay back those CDs "whenever" with 1BTC + interest when clearly it doesn't have the funds to do so "whenever."

The first is, at the worst, potentially irresponsible borrowing/lending practices. The second (calling CDs liquid money) is actual fraud.

[al.matic]

It is not so simple, there are serious implications. After second deposit by company C the total balance in all of bank accounts is doubled! After the bank lends the money to D, there are now two persons with bank accounts with balance of 1 (BTC or USD, or whatever) and one person (D) with actual cash or coin. Now, suppose that person D burns the cash, dies and loan collateral is also destroyed or devalued. Then bank defaults and TWO persons are loosing their money from the bank (A and C). Thus, the economic effect is just as if the multiplication was real, not metaphorical, I.e. two persons are hurting because they lost a coin, even when there was only one real coin. This scenario on a large scale is the source of all economic problems today.
The core of the problem is lying to people on many levels. It starts by lying to average Joe that bank is just "keeping his money", not lending it again. There are lies for people who ask one question, then lies for people asking next question, then more lies. But if you ask too many questions, you eventually come to truth, and what was conspiracy theory a couple years ago today is known fact.

[toddfletcher]

It is not so simple, there are serious implications. After second deposit by company C the total balance in all of bank accounts is doubled! After the bank lends the money to D, there are now two persons with bank accounts with balance of 1 (BTC or USD, or whatever) and one person (D) with actual cash or coin. Now, suppose that person D burns the cash, dies and loan collateral is also destroyed or devalued. Then bank defaults and TWO persons are loosing their money from the bank (A and C). Thus, the economic effect is just as if the multiplication was real, not metaphorical, I.e. two persons are hurting because they lost a coin, even when there was only one real coin. This scenario on a large scale is the source of all economic problems today.
The core of the problem is lying to people on many levels. It starts by lying to average Joe that bank is just "keeping his money", not lending it again. There are lies for people who ask one question, then lies for people asking next question, then more lies. But if you ask too many questions, you eventually come to truth, and what was conspiracy theory a couple years ago today is known fact.

I'm a web developer by profession, and as I've been learning about the banking system lately, I've often been shocked at the depth of the dependencies in the system. It's a tangled mass of them, and that makes a system very fragile. That and as the post before yours points out, it's not transparent, nobody can really know what's going on.

But those are objections to the wisdom of FRB, objections I agree with. But I do now think FRB is possible with Bitcoin, if not wise.

[al.matic]

It's a tangled mass of them, and that makes a system very fragile. That and as the post before yours points out, it's not transparent

People untangled it, everything is transparent: banks have been fu**ing people all over the world. Just look at the LIBOR scandal - worlds largest banks addmited that they formed a cartel, somebody sued one of them, they managed somehow to convince the court that anti-monopoly laws don't apply to Banks!
BTW, system is not fragile due to its complexity.

[theonewhowaskazu]

It is suspected Gox is selling both Dollars and BTC it does not have. It would be interesting to see a bank run on Gox. I doubt everyone would get everything.

I don't get the purpose for Gox to sell BTC it doesn't have. If it sells BTC it doesn't have, its just getting back some of those USD it doesn't have. And since BTC is inherently more liquid than USD, the chance of a BTC bank run is significantly greater than a USD bank run. As such it would make much more sense to just continue to "print" as much USD as possible.

[theonewhowaskazu]

It is suspected Gox is selling both Dollars and BTC it does not have. It would be interesting to see a bank run on Gox. I doubt everyone would get everything.

I don't get the purpose for Gox to sell BTC it doesn't have. If it sells BTC it doesn't have, its just getting back some of those USD it doesn't have. And since BTC is inherently more liquid than USD, the chance of a BTC bank run is significantly greater than a USD bank run. As such it would make much more sense to just continue to "print" as much USD as possible.

Well, it depends on how much BTC people store on Gox. They can only "print" so much fiat until the delays are so massive. Might be best to sell some BTC to get the delays down a bit.

Well, they could stop allowing fiat withdraws at all (which some people seem to  be convinced they do) and continue to 'print' more fiat. The only case in which they could fail to do so is if there isn't enough BTC in their system to buy... which...



...Is actually surprisingly close to happening.