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Author Topic: Inflation, Fractional Reserve, and Bitcoins  (Read 14818 times)
NewLibertyStandard
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July 17, 2010, 07:52:59 AM
 #21

This isn't to say fractional reserve banking won't happen, but it will balance at the point where the supply & demand for money balance out. I fully expect that it will take the form of on-demand deposits which are 100% reserved and time deposits which can be fractionated.
How can you fraction something and still have 100% available at all times?
Because it's so very easy to obtain authentic bitcoins, many merchants and employees will prefer to accept real bitcoins as opposed to a balance of bitcoins within a bank account. Many people would keep their checking and savings accounts on their own computers, backed up and encrypted in two or more physical locations. If I could store and transfer authentic dollars as easily as I can store and transfer bitcoins, I would empty out my checking and savings account tomorrow. The only reason I keep my money in the bank, is because it's more secure than in my house and it's easier to transfer than physical dollars. The interest rate in my savings account is just a bonus and not really important. The interest rate is very low because the balance is very liquid. I could go to my bank and empty out my savings and checking accounts with no fee. Term deposits on the other hand offer an interest rate that's higher than inflation, but it comes at the cost of liquidity. If I want real interest, I have to surrender many of the benefits of liquidity, such as the option to empty out my account and hit the road at a moment's notice. Imagine a bank that had a bitcoin checking account that is backed 100% by bitcoins but also offers 5 year bitcoin term deposits at a nice high interest rate. To make the illustration simpler, let's increase the early withdrawal fee to 50% of the deposited amount. The bank then lends out only 50% of the loan and pays interest based on the income that the bank is making on the loan/investment that they have made. So long as the bank is collecting its interest every month, that loan is backed 100% until just before the end of the 5 years. At the end of the 5 years, the bank has to collect their loan/investment and if they're able to do it, then they're still backed 100%. But if they can't, they either have to lie, tell the customer that they lost his money, or as would probably happen, get the money by taking out a long term loan from another customer/bank or by taking the money from their profits.

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InterArmaEnimSil
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July 17, 2010, 11:27:01 AM
 #22

Because it's so very easy to obtain authentic bitcoins, many merchants and employees will prefer to accept real bitcoins as opposed to a balance of bitcoins within a bank account. Many people would keep their checking and savings accounts on their own computers, backed up and encrypted in two or more physical locations. If I could store and transfer authentic dollars as easily as I can store and transfer bitcoins, I would empty out my checking and savings account tomorrow. The only reason I keep my money in the bank, is because it's more secure than in my house and it's easier to transfer than physical dollars. The interest rate in my savings account is just a bonus and not really important. The interest rate is very low because the balance is very liquid. I could go to my bank and empty out my savings and checking accounts with no fee. Term deposits on the other hand offer an interest rate that's higher than inflation, but it comes at the cost of liquidity. If I want real interest, I have to surrender many of the benefits of liquidity, such as the option to empty out my account and hit the road at a moment's notice. Imagine a bank that had a bitcoin checking account that is backed 100% by bitcoins but also offers 5 year bitcoin term deposits at a nice high interest rate. To make the illustration simpler, let's increase the early withdrawal fee to 50% of the deposited amount. The bank then lends out only 50% of the loan and pays interest based on the income that the bank is making on the loan/investment that they have made. So long as the bank is collecting its interest every month, that loan is backed 100% until just before the end of the 5 years. At the end of the 5 years, the bank has to collect their loan/investment and if they're able to do it, then they're still backed 100%. But if they can't, they either have to lie, tell the customer that they lost his money, or as would probably happen, get the money by taking out a long term loan from another customer/bank or by taking the money from their profits.

I agree with your logic, with the exception of two small points.

1)You and I and all the other tech-savvy individuals would prefer bitcoins to bitcoin-balances in banks.  We know the difference. (By the way, natural deflation is a nice interest rate independent of a bank).  However, your average Americans (or Brits, or Czechs, or whomever), would not see the difference.  Their knowledgeable friends would say "use real bitcoins."  The banks would say "Use our balances!"  The banks, also, would have multi-million-dollar advertising budgets, and the ability to offer services (of what form, I don't know) to entice people to use their balances.  I think I underestimate people's intelligence, and you probably overestimate it.  Personally, I don't think the people of the world, as a collective, would know the difference.  If history is any indication, they'd be easily swayed by the banks' advertising.

2)My point is this.  If people use banks, and I think that they will for the above reason, it is presently legal for banks to back loans with nothing more than loans and thereby inflate the economy.  Either the entire population boycots banks (which I don't think will happen - see above), or we have to have a change in the law.  Therefore, using bitcoins as a currency is not inflation-proof without a change in the law or utter destruction of the banking industry.  My point with this entire thread was simply to dispel the false notion that printing presses are to blame for inflation.  Loans are the real culprit, with no need to waste paper, ink, and electricity on printing.  Taking today's economy lifting out dollars and dropping in bitcoins and continuing on would have the same loan rules, and thus would have the same inflation, minus only the very small percentage that is due to printing presses.

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July 17, 2010, 03:53:50 PM
 #23

InterArmaEnimSil , I believe our main point of contention is on how powerful the banking system in a free market will be vis a vis the customers. You appear to believe that the banks will be just as successful at practicing --in what we both agree is a fraudulent manner -- fractional reserve banking, without a lender of last resort (The federal reserve) and without a monopoly (taxation and legal tender laws). I don't agree with this, mainly because the current system would already be bankrupt without taxation and legal tender laws,and would also have collapsed long ago without a central lender of last resort with the power to manipulate the money supply at will.

Sure, there is a small statistical chance that everyone becomes fools, but do you really believe it? You are not fooled, are you? Do you think everyone is less intelligent than you or less able to see, particularly those people who have amassed a large sum of wealth and therefore have a lot to lose? Part of this is related to education; if people are ignorant, educate them. Part of this is also related to a sense of loss; the more you have to lose, the more you will educate yourself, guaranteed. Some people might not have a sense of self-survival, but most people do.

I'll go over a few points below:

Except with Bitcoins, there is no force to keep people captive to a system that they know is ripping them off and no monetary pumping to paper over losses. No taxes, no legal tender laws. Anything operating in the Bitcoin economy survives (and fails) on its own merits alone.
Why not?  ... Also, as US law stands, taxes must be paid on *dollar equivalent wealth.*  Get some stock benefits as part of your paycheck?  If they are theoretically convertible to dollar value, then you must pay taxes on them.  Generate bitcoins?  If you fail to report the income of the exchange-rate dollar amount of these coins, you *are committing tax evasion in the United States.*  There are tax laws.  The government might not track you down, might not prosecute you, might not even know, but the crime is being committed, whether you're caught or not.  Also, what's to prevent such "captive" laws as you mention from taking hold, as they surely will once (if) bitcoins take off?

This is a different problem altogether. Did you read my Agorism link? Smiley Such laws will only be effective to the degree they can have force in the digital world. This is not to say they will be without effect altogether; this is a real problem that the Bitcoin network will have to face should it become popular.

So we both agree that the laws suck. However, these laws are just arbitrary points that have nothing to do with market forces and the banking system only survives because there is a lender of last resort. Such a lender of last resort cannot exist in a hard money system such as Bitcoin.

Its true that banks are a lender of last resort.  But my guess is, in a bitcoin economy, if someone wants to buy say, a house, they're going to have to go to a lender of last resort.  ...

I think we're using different definitions of the term "lender of last resort". To me, a "lender of last resort" implies a sort of bank with basically unlimited pockets that can always lend to any other bank on request. Such a feat is possible with fiat currency, and perhaps possible with Bitcoin credit, but impossible with actual Bitcoins.

There is an implication within your posts that the banks are somehow a "collective" and form a homogeneous whole. I don't think we should treat the system in this way. Every bank will be a customer of another bank for some amount, and out of their own interest of survival they will scrutinize the other bank's operations a lot more closely than the "average joe" might. The worst case of your scenario can only happen should one bank somehow gain a monopoly in the Bitcoin world, but there is no artificial force preventing other banks from springing up, nor is there an artificial force people to accept this bank's rules and dictates.

Fraud should be illegal, yes. If a bank says "Hey, we only keep 10% of your money on hand, so it might not be there when you want it!", then it is no longer fraud, but good luck attracting depositors Wink
Again, if it were not for legal tender rules and taxation, fiat currency would have a value of 0 with the kind of system we have in place today.

Funny you should say that.  They attract *millions* of depositors.  Do you not have a single bank account?  I have several.  This 10% rule (close to that amount, at least) is how *all US banks* operate today.  They attract depositors - there's no way to deny it.  However, you're right that fiat has no value without the decree that it must.  We can wholeheartedly agree on that.

Decree = value Smiley No decree, it would be the end of days as far as the fiat banking system is concerned.


To summarize, I think we both agree on the mechanics of the banking system. Where we disagree is if everyone can be fooled under a Bitcoin banking system. I don't think they can. Even if 999 average joes with 50 BTCs each are fooled, all you need is ONE guy with a hundred thousand BTCs to keep the entire banking system in line.
Now, this is a nice thought.  If the banks got careless, and a consortium of people could accumulate 21,000,001 bitcoins total across all their bank accounts, then they could call the bluff of the entire system.  That's certainly possible under bitcoins, and impossible under the dollar system.  Of course, the public would probably believe those individuals to be "hackers" or frauds, rather than accept that their entire banking system was a joke.

This isn't to say fractional reserve banking won't happen, but it will balance at the point where the supply & demand for money balance out. I fully expect that it will take the form of on-demand deposits which are 100% reserved and time deposits which can be fractionated.

How can you fraction something and still have 100% available at all times?
[/quote]

The on-demand deposits would be available at all times. The time deposits would not be, by design.

By the way, I'm not sure if I screwed up the quote lines...I've been copying and pasting them to make my partial quotes, so my apologies if someone's name is mis-credited.

The issue is not that Bitcoins are or aren't more stable than dollars - They are.  Their creation is independent of the government, they have a fixed amount, etc.  My point is that inflation will occur in a bitcoin economy.  The website states that it wouldn't, but this is simply untrue unless you change the law.

I don't know that this is untrue. In an honest banking system, people must give up liquidity in other for others to gain it. There is inflation if you sum the amount of credits + real bitcoins and consider this the money supply, but what effect does this have on the general level of prices? I would argue it only affects prices to the degree that the banking system is dishonest, because the money in circulation should remain stable.


The *only* way to prevent inflation is to tell banks "You must back your loans in bitcoins.  You cannot loan out balances which are not backed by bitcoins that you have on file."  This, however, requires the government to step in and mandate that the banks used bitcoin-backing for their loans.  Not only will this not happen, because the government would then be unable to spend like there's no tomorrow, but it would make bitcoins a government-endorsed, and almost certainly government-regulated currency...and we all know what fun government-regulated currencies are.

In short, just because you cannot print additional bitcoins does not mean that the economy will not be inflated.  To prevent backless-bank-loan-inflation, the law would have to be changed.  The implication that a bitcoin economy would be free from inflation should be removed from the website.  If the lead programmer or whomever maintains the site chooses to replace it with "inflation free given a change in monetary policy law," that's fine, but bitcoins do not prevent inflation, because inflation comes, at least the great majority of it, from loans rather than actual printing of cash.

There is no need to change the law.

The banking system is not homogeneous, and we don't need anywhere near 21,000,000 bitcoins to attack the banking system.

All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.

Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.

Bank B can try to borrow money from other banks, but there is a limit to what they will be willing to lend.

You seem to be implying that the entire industry can cartelize to keep things going, but there are several arguments against that:

http://mises.org/LIBERAL/CH2SEC7.ASP
http://mises.org/media/3686

Sorry, I didn't have the time to write a more eloquent reply, but I think that is our remaining point of contention: How successful the banks will be at fooling the people. Please also read the threads about fractional reserve banking:

http://mises.org/Community/forums/t/6197.aspx

http://mises.org/Community/forums/p/17430/339679.aspx#339679
http://mises.org/Community/forums/p/8938/273181.aspx#273181

P.S. No worries about the misquoting! Quoting can be a pain in the ass in these types of forums. I just got a bit confused, cause I thought I had written those quotes and then I wasn't so sure anymore Wink

Want to thank me for this post? Donate here! Flip your coins over to: 13Cq8AmdrqewatRxEyU2xNuMvegbaLCvEe  Smiley
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July 17, 2010, 07:06:55 PM
 #24

InterArmaEnimSil , I believe our main point of contention is on how powerful the banking system in a free market will be vis a vis the customers.

Agreed.

You appear to believe that the banks will be just as successful at practicing --in what we both agree is a fraudulent manner -- fractional reserve banking, without a lender of last resort (The federal reserve) and without a monopoly (taxation and legal tender laws).
You mention three things - a)A lender of last resort, b)taxation, c)Legal tender laws.

Pulling out the use of dollars and dropping in the use of bitcoins - what we're doing on this site - does not solve *any* of these three problems.

Lender of Last Resort:  Debt based upon debt remains legal, since we're not changing the law.  So a lender of last resort exists.  No, it can't issue bitcoins, but it can "paper over" losses with very convincing, nearly-identical-seeming things.

B)Taxation - Are you claiming that using bitcoins eliminates taxation?  Taxation is by definition graft perpetrated by the government.  Its "You give us x% of your income in dollars, or we throw you in jail."  If bitcoins become a smashing success....they'll be taxed.  The government will say "Give us x% of your bitcoins, or enough dollars to make that much value at the exchange rate, or go to jail."  Bitcoins do not eliminate taxes.

C)As mentioned above, nothing we're doing here changes the law.  So legal tender laws still exist.

So, banks might not be as successful without those three things...but they still have them under a bitcoin economy without law changes.  Maybe it can be decently argued that there would be no lender of last resort, but only if debt-backed loans are made illegal.  As we're not doing that...all three points stand, and so the banking system stands.

...the current system would already be bankrupt without taxation and legal tender laws,and would also have collapsed long ago without a central lender of last resort with the power to manipulate the money supply at will.
I agree with you here.  However, as mentioned above, using bitcoins doesn't cut the US government's ability to tax you, their power to create legal tender laws, or their ability to make something which is close enough to a lender of last resort so that they can either fool people or throw in jail those who don't believe it is such a lender.

Sure, there is a small statistical chance that everyone becomes fools, but do you really believe it? You are not fooled, are you? Do you think everyone is less intelligent than you or less able to see, particularly those people who have amassed a large sum of wealth and therefore have a lot to lose? Part of this is related to education; if people are ignorant, educate them. Part of this is also related to a sense of loss; the more you have to lose, the more you will educate yourself, guaranteed. Some people might not have a sense of self-survival, but most people do.
Do I really believe everyone would be fooled by the bank system under a bitcoin economy?  Hell yes.  They're fooled now.  What was the initial reaction *on this forum* when I said that loans were not backed by paper dollars?  "No, that's not true.  If its an on-demand deposit, it is one hundred percent backed, one-hundred percent of the time.  Otherwise its fraud."  Not that people on this forum are fools - but if even the people here believe your bank balances are backed...what do your teachers, truck drivers, doctors....basically anyone who hasn't taken the time to study monetary policy, going to think?  They're fooled.  Not because they're less intelligent, but because they haven't invested the time and effort to figure out what a sham the system is.  Of course, some are less intelligent, and still others are simply unwilling to believe that a banker can create an unlimited amount of money with keystrokes and not even a printing press.  You should have seen the face of one member of my family who has devoted his life to building bank balances when I told him there was nothing - literally nothing - that backed his balance, and that a loan for five thousand dollars was literally five thousand dollars of new liquidity popped into existence without real dollars just by keying in "5000" on  a spreadsheet.  I might as well have said the Earth was flat.  Now, those who are particularly wealthy have a vested interest in figuring out how the system works.  You're right about that.  They can and will figure it out, as will those of us interested in the mechanics of the system for whatever reason.  However, other people just don't care as long as they can pay their bills, and bitcoins remove the only obvious difference between banks and cash to those who don't understand - the fact that cash is paper.  You also say that we should educate people - this is valid, and we should try, but the government has a near-monopoly on education, and there's a reason they teach civics and "economics" without a single breath about monetary liquidity policy and the nature of loans.

{Taxation and legal tender} laws will only be effective to the degree they can have force in the digital world. This is not to say they will be without effect altogether; this is a real problem that the Bitcoin network will have to face should it become popular.
Then we agree - bitcoins do not inherently remove the power of taxation and legal tender laws.  I agree that they make things more difficult for the government...but digital things that make things more difficult for a government all have a habit of skipping town or getting attacked - Napster, Pirate Bay, Wikileaks, all the rest.  No government will allow its tax base to atrophy by what is essentially the use of an untaxable resource.  That would be a threat to its control, and governments love their control.  However, my issue is not with whether we will be taxed.  I don't have a problem with (justly done) taxes.  Someone has to pay for the roads on which I drive to work and the men who ensure that the water in my tap isn't laced with lead.  (Now, whether the current administrations do well at these jobs is another story, but I'm not an anarchist in theory).  My issue is with the inflation that *will* exist in the bitcoin economy unless banks are either boycotted or made by force of law to back their loans.  We're not changing the law here.  If anything, we're a thorn in the government's eye, making the law *less* likely to change in our favor.

I think we're using different definitions of the term "lender of last resort". To me, a "lender of last resort" implies a sort of bank with basically unlimited pockets that can always lend to any other bank on request. Such a feat is possible with fiat currency, and perhaps possible with Bitcoin credit, but impossible with actual Bitcoins.
Agreed.  However, unless the law is changed, "bitcoin credit" is what the economy will use.  The only alternative is for everyone to refuse to honor it...which they won't do, because those who don't care to research the difference won't know the difference.  If you're right, and I'm being pessimistic, and everyone would get wise to the difference, then a legal tender law would just be passed forcing us to honor backless credit with BTC in front of it instead of $....we can thank the financial sector lobby for that.

There is an implication within your posts that the banks are somehow a "collective" and form a homogeneous whole. I don't think we should treat the system in this way. Every bank will be a customer of another bank for some amount, and out of their own interest of survival they will scrutinize the other bank's operations a lot more closely than the "average joe" might. The worst case of your scenario can only happen should one bank somehow gain a monopoly in the Bitcoin world, but there is no artificial force preventing other banks from springing up, nor is there an artificial force people to accept this bank's rules and dictates.
Honestly, I think that if it weren't for antitrust laws, we'd wake up tomorrow and Chase, HSBC, UBS, RBC, BoA, and WF would all have had a merger.  However, I don't mean to imply that these bank corporations do not compete with one another now.  What I mean is that un-backed credit from *any* bank forms the basis for additional un-backed credit from *whatever bank* gets the un-backed amount as deposit.  Its not that each bank doesn't want all the money for itself, and to keep competitors in check or subservient.  I mean that if Wells Fargo gives me a loan (fake magic spreadsheet money) and I pay you, and you go and deposit it with RBC, then RBC can make more loans fake loans, etc.  Its not that they're all cooperating, but merely that the system is a closed loop (Think "system" as used in physics) which constantly inflates the numbers.

Decree = value Smiley No decree, it would be the end of days as far as the fiat banking system is concerned.
Actually, faith=value.  Decree without faith gives you Greece right now.  So, with no decree, if people didn't understand, then they would still think the dollars had value.  The original bankers worked in gold.  They just hid from everyone the fact that not all the depositors' gold was available.  No decree existed then, but the system worked.  Then, when people began to *trust* the banks (faith comes in here) the banks wrote out checques (scrip) which *claimed* to give the bearer the right of ownership over gold in a vault.  However, the bankers soon got the idea that they could just write these scrips, in which people had faith, for gold that didn't even exist.  That was the root of the modern backless system.  Does it crash if people get wise?  Yes.  Do people necessarily figure out that they're being scammed?  Nope.  If they had figured it out here and now, we'd have riots on our hands.  Instead we have "loan modification programs" and everyone's happy.  Besides, even if people figure out what's happened, the scammers are either dead, having lived lives of luxury at others' expense, or they've taken up a private island in the Pacific and no one can get to them.

I don't know that this is untrue. In an honest banking system, people must give up liquidity in other for others to gain it. There is inflation if you sum the amount of credits + real bitcoins and consider this the money supply, but what effect does this have on the general level of prices? I would argue it only affects prices to the degree that the banking system is dishonest, because the money in circulation should remain stable.
You're right that in an honest banking system, your claims hold.  However, what is it about adoption of bitcions that makes the banks honest?  We still have the exact same laws...just with bitcoins...no change in what the banks *can* do, no change in the fact that legal tender laws *force* us to accept their credit as money....no change in the system.

As far as the amount of money in circulation - Can you buy things with a credit card?  Then its in circulation.  A debit card?  Then its in circulation.  Cash?  Then its in circulation.  Cash is backed.  (Only by paper, but in a bitcoin system, cash would be backed by bitcoins).   Debit cards might be *partially* backed.  Credit is not.  However, this un-backed credit has the power to move goods and services in the real world.  Therefore, it is in circulation, and part of the money supply, and because it is, the money supply is inflated.  Thus, if banks can issue bitcoin-credit loans, and people accept these loans, then these backless credit loans are in circulation, and the money is inflated.  The amount of cash is not inflated, but cash is only a portion of the money supply.

There is no need to change the law.

...

All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.

Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.
[/quote]

This scenario is valid.  The problem is that Bank B, in this case, is not only dishonest, but stupid.  They allowed one investor to accumulate more wealth than they kept on reserve.  No bank would do this - they have statisticians with Poisson distribution graphs that will tell them that if they do this, they will go bust.  Bank B, if they had one investor with 100,000BTC, would keep 100,000 on reserve (and then some).  Why?  The chance of that one person at some point (say once in a span of thirty years) finding a better bank and moving the money is very, very high.  However, they know the number of coins they have to keep onhand to have only a 1/1000 of 1% chance of having a run...all the others, they will lend out unless legally required to do so.  Is this a change from today's system?  Yes.  Does it eliminate inflation?  No.

You seem to be implying that the entire industry can cartelize to keep things going...

I don't mean that the banks are a cartel, but a closed system (see above).  In reality, though, lets say bitcoins became popular.  In fact, they become so popular that they replace dollars.  Essentially, take today's economy, swipe out the dollars, and replace them all with bitcoins.  One of the following threads will then occur without a forced change in the law, which the use of bitcoins does not necessitate.

1)  People remain fooled by the bank system.  They, as a whole, don't know the difference between bank balances and bitcoins, and they use a combination of both, relying mostly on bank balances, as with today, because of the promises of interest, the use of debit cards, and the advertising budgets of the financial sector, along with whatever other reasons.  Banks continue to give backless loans, inflating the money supply by typing numbers into their spreadsheets, and then these numbers, assumed to be bitcoins by the population, move goods.  Inflation happens.

2) People get wise to the backless fractional scheme, and refuse to accept bank credit because it causes inflation.  However, backless-bitcoin-bank-credit is legal tender, like backless-dollar-bank-credit is today.  So the people go "I know this bank credit is worth nothing, and I won't accept it, but I want to get rid of it.  Its legal tender, so I'll use it to pay my bills!"  They try to use it.  The people they owe for electricity or gas or food say, "That's worth nothing, and we know it."  The payer takes them to court, and the court decrees, "Bitcoin-Bank-Credit is legal tender.  Legal tender was offered and not accepted, so the debt is null and void."  People don't get paid, services shut down, anarchy.  Inflation?  No...but ISPs and electricity companies have their accounts being declared null and void, so they shut down...so bitcoins are at an end.

3)Say that people don't try to screw others over by paying their bills in useless credit.  The banks certainly will .  The end result is still a massive wave of businesses not getting paid and the end of organized services such as power and Internet access as we know them today, putting an end to bitcoins.

The root of this is the legal tender law.  Whether dollars or bitcoins are the legal tender, backless credit denominated in those amounts are still legal tender.  Meaning that it is literally impossible to reject these inflationary forms of payment and have the courts enforce that you receive what you are owed.  Thus, to end inflation, a repeal of legal tender laws or a repeal of the right of banks to issue backless credit is a necessity.  In all other circumstances, the result is inflation or anarchy.  Bitcoin use does not change these laws, therefore, either the current system, or no system, remains in force.

 

All of these are monetary policy issues.  My only complaint is that the website seems to imply that widespread use of bitcoins fixes them.  It doesn't.  Only abandonment of the current system, which requires abolition of legal tender laws, then either a boycott of the banks or abolition of the right to issue backless credit, solves them.  Bitcoins are better than dollars, yes, but they do not solve these problems.

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July 18, 2010, 04:40:01 AM
 #25

All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.

Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.

This scenario is valid.  The problem is that Bank B, in this case, is not only dishonest, but stupid.  They allowed one investor to accumulate more wealth than they kept on reserve.  No bank would do this - they have statisticians with Poisson distribution graphs that will tell them that if they do this, they will go bust.  Bank B, if they had one investor with 100,000BTC, would keep 100,000 on reserve (and then some).  Why?  The chance of that one person at some point (say once in a span of thirty years) finding a better bank and moving the money is very, very high.  However, they know the number of coins they have to keep onhand to have only a 1/1000 of 1% chance of having a run...all the others, they will lend out unless legally required to do so.  Is this a change from today's system?  Yes.  Does it eliminate inflation?  No.

You seem to be implying that the entire industry can cartelize to keep things going...

I don't mean that the banks are a cartel, but a closed system (see above).  In reality, though, lets say bitcoins became popular.  In fact, they become so popular that they replace dollars.  Essentially, take today's economy, swipe out the dollars, and replace them all with bitcoins.  One of the following threads will then occur without a forced change in the law, which the use of bitcoins does not necessitate.

1)  People remain fooled by the bank system.  They, as a whole, don't know the difference between bank balances and bitcoins, and they use a combination of both, relying mostly on bank balances, as with today, because of the promises of interest, the use of debit cards, and the advertising budgets of the financial sector, along with whatever other reasons.  Banks continue to give backless loans, inflating the money supply by typing numbers into their spreadsheets, and then these numbers, assumed to be bitcoins by the population, move goods.  Inflation happens.

I think we've advanced a bit further in our discussion. We've now come to the agreement that it is mainly government intervention into the market, in the form of legal tender laws and taxation (among other things) that keeps a dishonest currency stable and prevents it from collapsing. Am I right on our agreement on this so far?

Let's say that we don't have government intervention into the Bitcoin market. I know we can argue on if and when it is going to happen, and I don't see it as a very fruitful argument because there is no way to really be sure on how effective government intervention would be or what form it would take. For the sake of a free market analysis, let's look at the situation without intervention taking place.

I believe that you've made two main points as to how you see a dishonest banking system operate:

* Loans are compounded upon loans, therefore increasing the amount of money chasing goods and creating general inflation.
* The banks stay solvent by "not being stupid"; by ensuring that the ratio of deposits to reserves does not get so out of hand that it is possible for a single depositor to single-handedly bust the bank.

I don't deny that it may be possible for a bank to loan out some of their "on-demand" deposits and thereby create some inflation by creating more liquidity than was saved. I also don't deny that they might be able to keep up the charade for a long time by advanced management of their reserves. What I do deny is that such a system can possibly expand without limit, either in the aggregate or for individual banks.

I also think you made the same case yourself, in your answers above. Let's look at our "stupid" bank scenario again:

Our wealthy depositor deposits 100,000 BTCs at a bank which engages in aggressive fractional-reserve banking. They tell him that the funds are available anytime, but in reality they keep some in reserves. There are 500,000 deposits total. In order to avoid being busted out by a single reserve, they decide that they need to keep at least 150,000 BTCs in reserve.

Let's say that our banking system continues to give backless loans, which are used to make new deposits, which are then being used to create ever more loans.

Let's say that our wealthy depositor is one of these guys. He takes out a 100,000 BTC loan from another bank, and deposits them at his bank. We must also assume that his bank will accept credit from another bank in place of actual Bitcoins.

What happened then? The depositor now has 200,000 BTCs at the bank, but the bank still only has 150,000 BTCs in reserve. If they don't want to be "stupid", then they must somehow acquire additional BTCs. Since it turns out that the amount of real BTCs in the economy is fixed, this might lead to trouble for the bank.

The alternative is that we end up denominating the depositor's account in the form of two currencies: 100,000 in BTCs, and 100,000 in (private bank) quasi-BTC currency. They would not be the same currency, since the second one would not be redeemable for actual BTCs but would merely be "BTC-backed". We then end up with an exchange rate between the two, and it is possible that that bank's currency will go bust.

Without legal tender laws forcing people to accept private credit as equivalent to actual BTCs, or confiscation of actual BTCs in exchange for paper credit (much like what happened with gold in the 1930s), there is simply no way that such a system could perpetually inflate ad infinitum. As total credit increases, the ratio of credit to real BTCs increases. Therefore, the ratio of reserves to credit decreases. Even with statistics, a bank will eventually be caught since their deposits will be too large in relation to their reserves. We have also ignored the effects of interest until now, but interest also has a damping rate (on the demand side) on the expansion of credit since loan interest must cost more than deposit interest pays in order for the bank to make a profit.

The root of this is the legal tender law.  Whether dollars or bitcoins are the legal tender, backless credit denominated in those amounts are still legal tender.  Meaning that it is literally impossible to reject these inflationary forms of payment and have the courts enforce that you receive what you are owed.  Thus, to end inflation, a repeal of legal tender laws or a repeal of the right of banks to issue backless credit is a necessity.  In all other circumstances, the result is inflation or anarchy.  Bitcoin use does not change these laws, therefore, either the current system, or no system, remains in force.

All of these are monetary policy issues.  My only complaint is that the website seems to imply that widespread use of bitcoins fixes them.  It doesn't.  Only abandonment of the current system, which requires abolition of legal tender laws, then either a boycott of the banks or abolition of the right to issue backless credit, solves them.  Bitcoins are better than dollars, yes, but they do not solve these problems.

What I would like to know is how the government is going to force people to accept a quasi-BTC currency in place for the real thing. I have already shown how it is impossible for the banking system to expand BTC credit without hitting a wall somewhere. I don't think the government can go and confiscate BTCs and/or force people to accept quasi-BTCs in place of the real thing. A government would have to be totalitarian to have that kind of reach, especially in the digital sphere.

Where the trouble lies is at the Bitcoin boundary with fiat currency, the physical world, and government regulation. These are all separate issues, and we could probably start another thread to discuss those. Also, BTC's don't need to replace the entire system, they just need to be good enough to compete with it Smiley Currency monopoly is not desirable IMO.

No government will allow its tax base to atrophy by what is essentially the use of an untaxable resource.  That would be a threat to its control, and governments love their control.  However, my issue is not with whether we will be taxed.  I don't have a problem with (justly done) taxes.  Someone has to pay for the roads on which I drive to work and the men who ensure that the water in my tap isn't laced with lead.  (Now, whether the current administrations do well at these jobs is another story, but I'm not an anarchist in theory).

Agreed; however, I believe that the current world order is simply a stage on our continual evolutionary journey to the future. I have come to the belief over time that the only moral system of contract for humans is a voluntary contract, and the most efficient economic system is one that is based on such voluntary contracts and subjective value. All involuntary impositions are a form of servitude, to one degree or another. I don't think we're ready to live in a world without government and taxes, yet, but I believe now is a good time as any to increase the competitive pressure on government and to increase the choices out there.

More interesting reading:
http://blog.mises.org/12890/credit-expansion-vs-simple-inflation/
http://en.wikipedia.org/wiki/Anarcho-capitalism
http://athousandnations.com/

I've enjoyed this conversation with you; thanks for the good discussions so far!

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July 18, 2010, 06:18:53 AM
 #26

I just disagree that everyone would use credit bitcoins if bitcoins became widespread. People often think other people are not intelligent because the other people are not well versed in the specialty of the first people. People are quite capable of being well versed in what they need to be versed in. A very large portion of the population have a very thorough understanding of very complex topics, such as automobile repairs, amortizing loans, various retirement investments, home repairs, landscaping, gardening, child care, balancing financial accounts, cooking meals, varied types of cleaning, planning camping and road trips, social and civic skills and profession specific knowledge. Sure, everyone is not an expert at everything, but most adult humans are capable of understanding very complex systems. Bitcoin doesn't make sense to these people right now because bitcoin is on the fringe. But really, from a high level perspective, Bitcoin is much less complicated than many other things in people's lives. If bitcoin were to become the predominate currency, people would understand it just fine.

Banks are the specialists of transferring money electronically, but if people could transfer authentic dollars just as easily, if not more easily directly with their customers and clients rather than through a bank, then where is the incentive to use the bank? Banks loan out money and that loaned out money usually just goes straight to someone else's bank account, but that's only because it's not safe or economical to pull out $20,000 in cash and mail it overnight across the country or world. If people could securely pull out cash and securely and instantly transfer it to whomever they wanted, for free, they would. Dollar bills are easier to authenticate and trade than gold, but in comparison to bitcoins, they might as well be lead bars. It is very hard to transfer a large amount of real dollar bills long distances and that is the reason why banks stay in business. Turn the real dollar bills into electronic bills which can be securely and easily transfered between any two people for free and without the risk of double spending, and suddenly there's really very little reason to use a bank. Would you have opened a checking account when you were 14, 16 or 18 if you could move around authentic dollars as easily as bitcoins? If you were a professional accountant at a business, wouldn't you prefer for the business to be paid in authentic hard cash rather than a soft bank balance if it could be done securely, easily and for free?

Edit: Added the text below.

And as for all this talk about banks lying or otherwise deceiving people, sure they might not understand the intricacies of fractional reserve banking, but if you ask random Joe on the street how the bank can afford to pay interest on savings accounts, they'll be able to explain that the bank makes their money by loaning out borrowed money at a higher interest rate than they pay out to the people who deposit their money at the bank. This simple 5th grade explanation shows that people do understand that the bank doesn't keep 100% of their deposits on hand at all times. And if a bank run was rather a bank walk, everyone can pull out their money. The bank just has to slowly collect the loans they have given out.

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July 18, 2010, 06:37:12 AM
 #27

<snip>

It is very hard to transfer a large amount of real dollar bills long distances and that is the reason why banks stay in business.

<snip>
Last year,  read a great article about Burma's bank-free cash economy.  As I recall, buying a house entails delivering Mg-scale quantities of paper, which is counted by hand, and then rebailed.
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July 18, 2010, 06:48:59 AM
 #28

Why place a deposit in the bank in the first place? For me - it is simply convenient that I can have my money without physical form, and instantly pay for anything over the Internet. I could care less about 2%-5% income a year. Bitcoin replaces any reason to make deposits for me if it becomes widespread and shops will accept them.

Taking a Loan is a different thing though, because large amount of money is sometimes needed and needed right now. But where are they going to get that money if nobody have a reason to make deposits?
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July 18, 2010, 07:43:00 AM
 #29

Interest rates are just another price. They are the price of money now in terms of money at some point in the future. The market can determine the price of money just like it determines the price of onions. If no one is interested in 2-5% then it will be 10-12% or 30-35% if no one wants to lend for less than that and no one wants to pay more to borrow then there won't be such a thing as lending (I think that's about as likely as everyone deciding the production costs of onions are more than they are willing to pay, but what do I know?). 

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July 18, 2010, 10:05:10 AM
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I think we've advanced a bit further in our discussion. We've now come to the agreement that it is mainly government intervention into the market, in the form of legal tender laws and taxation (among other things) that keeps a dishonest currency stable and prevents it from collapsing. Am I right on our agreement on this so far?
Agreed.  The culprit is a combination of three things:
1)Banks can do BS things legally, like backless loans.
2)The whole "sheeple" complex, where people don't know that this is going on.  This is not because they're stupid, its because between studying for their MDs (using smart people as an example here...)and getting kids to soccer practice and paying their bills they don't have time to study monetary theory.
3)For those who do wake up, the fact that fake-money is legal tender means that there's nothing they can do about it.  By law, they have to accept the garbage.

Let's say that we don't have government intervention into the Bitcoin market. I know we can argue on if and when it is going to happen, and I don't see it as a very fruitful argument because there is no way to really be sure on how effective government intervention would be or what form it would take. For the sake of a free market analysis, let's look at the situation without intervention taking place.
Without government intervention, and provided people aren't blind, then all you've been saying is right.  However, if the economy is in bitcoins, and we want roads and schools and troops to prevent China from waltzing over us, there will be government intervention.  *This* is where I primarily differ from you.  The laws which screw up the ideal analysis of Bitcoin's inflation-proof nature are in place because the government exists.  As long as it exists (provided that it doesn't suddenly grow a conscience), the legal tender law, which is the ultimate stopgap against responsible people demanding real money, remains in place.  My contention is that we shouldn't claim...
Quote
# Be safe from the instability caused by fractional reserve banking and bad policies of central banks. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized by the banks.
For now, this is true.  Banks are not issuing bitcoin loans, and so bitcoins are inflation-proof.  However, nothing prevents banks engaging in fractional reserve policies and creating backless bitcoin-credit (since its all still legal) if they wanted to, and thus, to imply that using bitcoins in the context of the present, law-bound economy is proof against these inflationary actions is untrue.  Maybe Satoshi wasn't meaning to imply this, but as someone who's very concerned about these matters, that's what I took from the statement, until I further analyzed it later on.

I believe that you've made two main points as to how you see a dishonest banking system operate:

* Loans are compounded upon loans, therefore increasing the amount of money chasing goods and creating general inflation.
* The banks stay solvent by "not being stupid"; by ensuring that the ratio of deposits to reserves does not get so out of hand that it is possible for a single depositor to single-handedly bust the bank.
Agreed.

I don't deny that it may be possible for a bank to loan out some of their "on-demand" deposits and thereby create some inflation by creating more liquidity than was saved. I also don't deny that they might be able to keep up the charade for a long time by advanced management of their reserves. What I do deny is that such a system can possibly expand without limit, either in the aggregate or for individual banks.

The central issue is not the loaning out of deposited money, but the keystroke-creation of money that doesn't exist.  However, I suppose that this does make it "on-demand," as you can theoretically go "You just loaned me $500,000.  I'd like that in twenties."

However, most likely, a bank would say "Sir, I just loaned you one million bitcoins.  That's 1/21 of the entire world economy.  You don't want it on a flash drive - what if you lost the drive?  To protect the economy and you, its our policy that you must use our super-secure, ultra-safe servers.  What? Is it real bitcoins?  Um...I'll have to check with my manager....but I"m going to go with....yes?" Thus, the bank can prevent a run by a matter of policy - essentially admitting that people cannot take out all of their money at once, but its not because the bank doesn't have it (which they don't).  Instead, its because the bank wants to protect you....

Thus, the banks eliminate even the *possibility* that people demand large sums in cash.  I'm not sure if this is the present policy with dollars - I'm tempted to drive to the bank tomorrow and ask someone.  I know that its the current policy with ATMs - most accounts have a $500 or $1000/day limit, to prevent this scenario at the ATM).  However, as this eliminates the possibility of a run on the bank, the only option left is that people don't trust the banks.  As mentioned before, legal tender laws force people to use the bank credit, whether they trust it or not, protecting the entire system and leaving the only alternative as anarchy.

As you say, this system cannot, and does not, perpetuate eternally.  Not even today.  Today, banks continued to give backless loans, and they ran analyses to guarantee that if people continued to make their mortgage payments or houses were reposed at current house prices, then they'd be fine.  Of course they couldn't provide enough dollar bills, but they could cover their debts.People did not pay their mortgages, because markets crashed, companies lost money, and laid off employees.  "Fine," say the banks.  "Repo."  Because with a repossession at the current market price of the house, they could cover their debts.  But there were so many repossessions that supply and demand drove down the cost of a house, and the banks couldn't cover their debts.

Cue the Fed.

The problem with bitcoins resolving this situation (which otherwise, they would), is that you can easily have a Bitcoin-Fed which issues fake, backless bitcon loans.  Even if people figure out that its a sham, the legal tender laws prevent them from doing anything about it.  As bitcoin does not address these laws, it is not inflation-proof.

I also think you made the same case yourself, in your answers above. Let's look at our "stupid" bank scenario again:

Our wealthy depositor deposits 100,000 BTCs at a bank which engages in aggressive fractional-reserve banking. They tell him that the funds are available anytime, but in reality they keep some in reserves. There are 500,000 deposits total. In order to avoid being busted out by a single reserve, they decide that they need to keep at least 150,000 BTCs in reserve.

Let's say that our banking system continues to give backless loans, which are used to make new deposits, which are then being used to create ever more loans.

Let's say that our wealthy depositor is one of these guys. He takes out a 100,000 BTC loan from another bank, and deposits them at his bank. We must also assume that his bank will accept credit from another bank in place of actual Bitcoins.

What happened then? The depositor now has 200,000 BTCs at the bank, but the bank still only has 150,000 BTCs in reserve. If they don't want to be "stupid", then they must somehow acquire additional BTCs. Since it turns out that the amount of real BTCs in the economy is fixed, this might lead to trouble for the bank.
You're assuming the investor would be able to get a second loan.  In fact he wouldn't - Experian, TransUnion, and Equifax take care of that.  You're right, though, that if there were no cartel elements and banks could not determine how much the man had outstanding, this would crash them.  Unfortunately, they can and do see all outstanding obligations.  If somehow they were prevented from doing so, they would probably cease giving loans entirely - and while I don't like fractional-reserve banking or backless loans, its undeniable that an economy with no loaning institutions would stagnate at best.

The alternative is that we end up denominating the depositor's account in the form of two currencies: 100,000 in BTCs, and 100,000 in (private bank) quasi-BTC currency. They would not be the same currency, since the second one would not be redeemable for actual BTCs but would merely be "BTC-backed". We then end up with an exchange rate between the two, and it is possible that that bank's currency will go bust.
This is true, provided that legal-tender laws to not require that the two be equated.  My central point of contention now is that they would, as they do today.  Therefore, to make users "safe" from banking practices the use of bitcoins must somehow abolish these laws, which it does not.

Without legal tender laws forcing people to accept private credit as equivalent to actual BTCs, or confiscation of actual BTCs in exchange for paper credit (much like what happened with gold in the 1930s), there is simply no way that such a system could perpetually inflate ad infinitum.
Agreed, at least provided that people realize that bitcoin-credit is not bitcoins.  However, legal tender laws will not be abolished, so the theoretical situation varies from the practicality, in which the only way to resolve inflation is honest politicians (heh) or drastic measures which would destroy the economy anyway.

What I would like to know is how the government is going to force people to accept a quasi-BTC currency in place for the real thing.
They force people to accept quasi-bitcoins by the following manner.  Assuming that fake bitcoins are legal tender...
1)A bank issues fake-bitcoin credit.  No one wants it, so the bank issues it to its CEO.  He'll still take it.
2)The CEO owes his power bill, grocery bill, etc.  He offers legal-tender bitcoin-certificates (digital, I'm assuming), which he got in exchange for the bank loan.  These, like the loan, are not backed by anything.
3)The power company and grocer politely tell him that they will not accept it, as it is not bitcoins.
4)He takes them to court.  The law invalidates his debt to them, since he offered legal tender and it was not accepted.
5)His friends see that they can pay their bills in worthless credit, not sacrificing any bitcoins.  After all, Mr. CEO did!
6)The businesses are left with three options - 1)Accept credit, 2)Go bankrupt because all of their accounts are declared null and void when people try to pay with credit and they reject, and 3)Rebel, which leads to jail or getting shot.
7)One of the three options happens.  Number 2 leads to massive depression or anarchy as businesses close en-masse.  Number 1 puts the banks back in power like today.  Number 3 scares all the other business owners (they don't want to go to jail), and thus leads to number 1.

I have already shown how it is impossible for the banking system to expand BTC credit without hitting a wall somewhere.
Agreed, wthout legal tender laws.

I don't think the government can go and confiscate BTCs and/or force people to accept quasi-BTCs in place of the real thing.
They did it once.  Wilson said "We're off the gold standard, guys," and suddenly everyone had to accept quasi-valuable paper.  Not that gold is inherently valuable, but neither are bitcoins.  Through legal tender laws, they could force us to accept whatever they wanted.  As far as confiscating bitcoins, they wouldn't have to.  As soon as quasi-btc were legal tender, then 1BTC=1Q-BTC, and as the number of Q-BTC increases, a real BTC becomes less valuable, and thus is subject to all the problems of Q-BTC.


A government would have to be totalitarian to have that kind of reach, especially in the digital sphere.  Where the trouble lies is at the Bitcoin boundary with fiat currency, the physical world, and government regulation.
Yes and yes.

BTC's don't need to replace the entire system, they just need to be good enough to compete with it Smiley Currency monopoly is not desirable IMO.
Honestly, I would like the entire system to be replaced with something that is inflation-proof, but again, the whole issue there is legal tender laws.  However, I agree that this is the best solution.  Hopefully, bitcoins will become a big deal while still remaining "under the radar."  Most likely, this will be the case, as the USD isn't going anywhere any time soon.  That way, legal tender laws for BTC will not exist, and if anyone is stupid enough at some point to accept a backless Q-BTC (if anyone would ever issue those...), we can just reject it.

I have come to the belief over time that the only moral system of contract for humans is a voluntary contract, and the most efficient economic system is one that is based on such voluntary contracts and subjective value. All involuntary impositions are a form of servitude, to one degree or another. I don't think we're ready to live in a world without government and taxes, yet, but I believe now is a good time as any to increase the competitive pressure on government and to increase the choices out there.
Agreed.  Bitcoins are, for the time being, a nice way to enable a contribution to a future voluntary order.  The issue arises, of course, when those with the current control (who of course don't want to give it up), realize that this uninflatable, very difficult to tax currency is a thorn in their side, and they employ their mastery (through legal tender laws) to screw up the ideal.

I've enjoyed this conversation with you; thanks for the good discussions so far!

And I.  Its good to know that there are people who both understand and are willing to hash out the details of our current...predicament.

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July 18, 2010, 10:16:47 AM
 #31

People often think other people are not intelligent because the other people are not well versed in the specialty of the first people. People are quite capable of being well versed in what they need to be versed in. ...If bitcoin were to become the predominate currency, people would understand it just fine.
I agree with the first portion of your statement, and disagree with the last.  I'm not saying that people are too stupid to understand bitcoins.  I'm saying that many, many very intelligent people today don't understand monetary creation policy because they don't find it worth their time to study.  If they don't find it worth their time in dollars today, they won't find it worth their time in bitcoins tomorrow, and thus will accept credit.  Per my last post, however, even if they do understand and won't accept credit, they can be legally forced to do so.

...Would you have opened a checking account when you were 14, 16 or 18 if you could move around authentic dollars as easily as bitcoins? If you were a professional accountant at a business, wouldn't you prefer for the business to be paid in authentic hard cash rather than a soft bank balance if it could be done securely, easily and for free?
With all of your comment up to where I cut, I agree.  However, no, I wouldn't have opened a checking account at 18 if I could have moved the money as easily.  However, I opened a savings account at 6 or 7, and not to move money, but because the bank promised me free money in interest if I let my cash sit in their vault (or so I understood at the time).  Free money is very tempting, and thus, people would continue to use banks.  As for the accountant, yes I would prefer my balances be paid in real BTC-cash.  I run a computer programming business today, and I'd prefer that everyone paid me in gold chips.  However, legal tender laws don't give me a choice, nor would they give a choice to the accountant in the BTC scenario.

And as for all this talk about banks lying or otherwise deceiving people, sure they might not understand the intricacies of fractional reserve banking, but if you ask random Joe on the street how the bank can afford to pay interest on savings accounts, they'll be able to explain that the bank makes their money by loaning out borrowed money at a higher interest rate than they pay out to the people who deposit their money at the bank. This simple 5th grade explanation shows that people do understand that the bank doesn't keep 100% of their deposits on hand at all times.

I agree.  What people don't understand is that a mortgage for one million dollars is created by typing in "1,000,000" and by nothing else.  They think the bank is taking deposited money, loaning some of it out, making money, and paying interest.  In reality, the bank is *inventing fake money,* loaning *that* out, and making money.  Only a tiny, tiny actual deposit s needed (if any - I'm not sure of the current status of the law).

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July 18, 2010, 10:22:57 AM
 #32

Why place a deposit in the bank in the first place? For me - it is simply convenient that I can have my money without physical form, and instantly pay for anything over the Internet. I could care less about 2%-5% income a year. Bitcoin replaces any reason to make deposits for me if it becomes widespread and shops will accept them.
I wish everyone would be so nonchalant about interest.  In reality, though, a million dollars in the bank can net *four thousand dollars a month* in interest.  That's enough to live, and well, without spending any of your initial investment.  Of course, the natural deflation of bitcoins can provide a sort of interest, as well.

But where are they going to get that money if nobody have a reason to make deposits?

Please see the above posts.  In the US, any company with an "NA" after its name has the legal authority to create liquidity just by claiming it exists.  Then, they can take that loan and request dollar bills from the Fed.  Even if the Board of Directors of the bank were the only ones to deposit any "real" money, the scheme would still take off.  Thus, in a bitcoin economy, someone takes out a loan, the bank issues Quasi-BTC credit, and the person uses this to buy their house.  As a seller - don't want to accept Q-BTCs?  Tough - legal tender laws say you have to, or you don't get anything and still have to turn over the house to the buyer.

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July 18, 2010, 11:15:06 AM
 #33

I'd keep almost all cash and no bank balances if I could get paid in cash and didn't have to cash checks and if I didn't need to fly in order to move; I can't expect TSA and other Feds to leave me and my stuff alone in an airport.

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July 18, 2010, 08:07:27 PM
 #34

You guys keep talking about legal tender laws.  However I know there are businesses that do not accept Credit.  They aren't obligated to accept checks, and if they don't have credit card machines they aren't going to be accepting credit or debit either.  Now obviously limiting payment options limits your potential customers, but inability to accept a certain type of payment doesn't mean the customer is not obligated to pay.

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July 18, 2010, 09:14:25 PM
 #35

You guys keep talking about legal tender laws.  However I know there are businesses that do not accept Credit.  They aren't obligated to accept checks, and if they don't have credit card machines they aren't going to be accepting credit or debit either.  Now obviously limiting payment options limits your potential customers, but inability to accept a certain type of payment doesn't mean the customer is not obligated to pay.

Babylon,
Credit Cards are not the same thing as Credit, not by a long shot.  Credit cards are a particular credit that is issued in a particular way by a company, and can be rejected.  However, it can only be rejected for other forms of the same backless credit. "Credit," in our discussion refers to any liquidity (purchasing power) that is not backed by items of real value.  Say, taking out a mortgage and getting "Federal Reserve Certificates" for it.  The value of the mortgage is the credit - the unit of payment is still dollars, not Visa or MasterCard.  If I take out a mortgage, a banker keys a number into a spreadsheet, and suddenly that much more money (not backed by dollars) is put into flow in the economy.  If people didn't accept credit, that's not akin rejecting Visa, its akin to rejecting Federal Reserve Notes, which we call dollars colloquially.  I can pick up dollars for a portion of this spreadsheet-mortgage, and go and spend those dollars.  Those dollars are still credit.  Even though they have nothing to do with a credit card or debit card, they're representation of value issued by a bank (the Federal Reserve) with no real value. 

Now, this does raise Bitcoiner's (and others') point that with no Federal Reserve the backless credit system would be very limited.  They advocate that it would be difficult to create such a "lender of last resort" with bitcoins.  I disagree.  It used to be (Google pictures of these) that the US Treasury printed bills that were Gold-Certificates or Silver-Certificates.  You could go to any bank, at any time, hand them a twenty and demand an ounce of gold.  (Which now costs $1,200, or 600x what it did when we were on the gold standard.  Inflation.)  This was not credit, it was commodity-backed by something with rarity, just as bitcoins have rarity.  However, now, your dollars are "Federal Reserve Note, Legal Tender" and are not redeemable for anything of value.  However, if someone offers you these Notes and you do not accept (because they're not backed, and thus worthless), the transaction is null and void.  Why did we switch to these notes?  Because the government couldn't keep enough gold on hand to back the economy.

Fast forward ten years.  The government pulls out dollars and puts in bitcoins because bitcoins are so darn neat.  (or whatever reason).  Because Congressmen don't read laws, they never read Satoshi's specification for the system, and they assume they can mint all they want.  For those who don't have computers in their places of business, they issue Bitcoin-Redeemable-Certificates.  You can walk into any bank, give them 1BTC, and get 1 of these Certificates, or, you can give them 1 of these certificates and get 1BTC.

The above scenario would be called the "Bitcoin Standard."  It is identical to the Gold Standard scenario above.  Dollars (bitcoin certificates) are backed by gold (bitcoins) held by the government.  You can hand over a twenty (certificate) and get an ounce of gold (bitcoin).

However, April 15th rolls around, and facing a new fiscal year the Congress issues an order to print more Gold Certificates so that they can have a deficit for this year's budget.  At some point, they realize they don't have enough gold to back all the dollars for the budget.  So, immediately, they invoke legal tender laws.  A bank, the Federal Reserve, is given the authority to issue a loan to the government.  This loan is paid out in "Federal Reserve Notes," because its not backed by any gold, so they can't call it a "Gold Certificate."  These notes are "credit," as they are based on a loan and nothing else.  Obviously, they're worthless.  However, a law is passed - known as a legal tender law - which states, essentially - "I know, American People, that you guys are all using Gold Certificates.  However, if someone offers you a $1 Federal Reserve Note, you MUST treat it as if it were a $1 Gold Certificate.  You can't go get gold for it, so you essentially lose $1 in gold, but you either accept the Federal Reserve Note or you get nothing at all.  To make sure people treat these identically, Gold Certificates can no longer be traded with us for gold."   People resist and refuse to accept Federal Reserve Notes, because they're worthless.  They don't get what they're owed at all, and so eventually everyone caves.  Federal Reserve Notes are treated identically to Gold Certificates, and no one is able to get their gold. Anyone who has gold sits on it and makes a mint because people like shiny metal.

Identically with bitcoins, Congress realizes that they can't print more Bitcoins, and so they can't spend whatever they want.  They create a bank that issues "Quasi-Bitcoin" loans for which no real bitcoins exist.  These loans are issued by any organization that gets a charter to type them into existence.  A law is passed: "Anyone who has our Bitcoin Certificates can no longer get Bitcoins from the government in exchange.  Also, if someone offers you a Quasi-Bitcoin, you must accept it, or you get nothing."  Now, the government can get all the Q-BTC it wants to spend whatever it dreams.  People with real Bitcoin Certificates are screwed, and everyone must accept *credit*.  People with real bitcoins?  Well, humanity has this fetish for shiny yellow metal - it doesn't have the same fetish for cryptographically-signed kilobytes - so bitcoins go the way of the dodo, or at best become pretty much what they are right now - a novelty for those who understand them.

Notice, there were not credit cards or checks involved in the above scenario.  The credit is the Federal Reserve Note, which you must accept, not Federal Reserve Notes managed by a particular company (Visa) which you can reject.  Even if you reject the Visa-managed notes, though, you have no option but to accept Notes from another source, all of which are equally backless.

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July 18, 2010, 09:22:56 PM
 #36

You guys keep talking about legal tender laws.  However I know there are businesses that do not accept Credit.  They aren't obligated to accept checks, and if they don't have credit card machines they aren't going to be accepting credit or debit either.  Now obviously limiting payment options limits your potential customers, but inability to accept a certain type of payment doesn't mean the customer is not obligated to pay.

Babylon,
Credit Cards are not the same thing as Credit, not by a long shot.  Credit cards are a particular credit that is issued in a particular way by a company, and can be rejected.  However, it can only be rejected for other forms of the same backless credit. "Credit," in our discussion refers to any liquidity (purchasing power) that is not backed by items of real value.  Say, taking out a mortgage and getting "Federal Reserve Certificates" for it.  The value of the mortgage is the credit - the unit of payment is still dollars, not Visa or MasterCard.  If I take out a mortgage, a banker keys a number into a spreadsheet, and suddenly that much more money (not backed by dollars) is put into flow in the economy.  If people didn't accept credit, that's not akin rejecting Visa, its akin to rejecting Federal Reserve Notes, which we call dollars colloquially.  I can pick up dollars for a portion of this spreadsheet-mortgage, and go and spend those dollars.  Those dollars are still credit.  Even though they have nothing to do with a credit card or debit card, they're representation of value issued by a bank (the Federal Reserve) with no real value. 

Now, this does raise Bitcoiner's (and others') point that with no Federal Reserve the backless credit system would be very limited.  They advocate that it would be difficult to create such a "lender of last resort" with bitcoins.  I disagree.  It used to be (Google pictures of these) that the US Treasury printed bills that were Gold-Certificates or Silver-Certificates.  You could go to any bank, at any time, hand them a twenty and demand an ounce of gold.  (Which now costs $1,200, or 600x what it did when we were on the gold standard.  Inflation.)  This was not credit, it was commodity-backed by something with rarity, just as bitcoins have rarity.  However, now, your dollars are "Federal Reserve Note, Legal Tender" and are not redeemable for anything of value.  However, if someone offers you these Notes and you do not accept (because they're not backed, and thus worthless), the transaction is null and void.  Why did we switch to these notes?  Because the government couldn't keep enough gold on hand to back the economy.

Fast forward ten years.  The government pulls out dollars and puts in bitcoins because bitcoins are so darn neat.  (or whatever reason).  Because Congressmen don't read laws, they never read Satoshi's specification for the system, and they assume they can mint all they want.  For those who don't have computers in their places of business, they issue Bitcoin-Redeemable-Certificates.  You can walk into any bank, give them 1BTC, and get 1 of these Certificates, or, you can give them 1 of these certificates and get 1BTC.

The above scenario would be called the "Bitcoin Standard."  It is identical to the Gold Standard scenario above.  Dollars (bitcoin certificates) are backed by gold (bitcoins) held by the government.  You can hand over a twenty (certificate) and get an ounce of gold (bitcoin).

However, April 15th rolls around, and facing a new fiscal year the Congress issues an order to print more Gold Certificates so that they can have a deficit for this year's budget.  At some point, they realize they don't have enough gold to back all the dollars for the budget.  So, immediately, they invoke legal tender laws.  A bank, the Federal Reserve, is given the authority to issue a loan to the government.  This loan is paid out in "Federal Reserve Notes," because its not backed by any gold, so they can't call it a "Gold Certificate."  These notes are "credit," as they are based on a loan and nothing else.  Obviously, they're worthless.  However, a law is passed - known as a legal tender law - which states, essentially - "I know, American People, that you guys are all using Gold Certificates.  However, if someone offers you a $1 Federal Reserve Note, you MUST treat it as if it were a $1 Gold Certificate.  You can't go get gold for it, so you essentially lose $1 in gold, but you either accept the Federal Reserve Note or you get nothing at all.  To make sure people treat these identically, Gold Certificates can no longer be traded with us for gold."   People resist and refuse to accept Federal Reserve Notes, because they're worthless.  They don't get what they're owed at all, and so eventually everyone caves.  Federal Reserve Notes are treated identically to Gold Certificates, and no one is able to get their gold. Anyone who has gold sits on it and makes a mint because people like shiny metal.

Identically with bitcoins, Congress realizes that they can't print more Bitcoins, and so they can't spend whatever they want.  They create a bank that issues "Quasi-Bitcoin" loans for which no real bitcoins exist.  These loans are issued by any organization that gets a charter to type them into existence.  A law is passed: "Anyone who has our Bitcoin Certificates can no longer get Bitcoins from the government in exchange.  Also, if someone offers you a Quasi-Bitcoin, you must accept it, or you get nothing."  Now, the government can get all the Q-BTC it wants to spend whatever it dreams.  People with real Bitcoin Certificates are screwed, and everyone must accept *credit*.  People with real bitcoins?  Well, humanity has this fetish for shiny yellow metal - it doesn't have the same fetish for cryptographically-signed kilobytes - so bitcoins go the way of the dodo, or at best become pretty much what they are right now - a novelty for those who understand them.

Notice, there were not credit cards or checks involved in the above scenario.  The credit is the Federal Reserve Note, which you must accept, not Federal Reserve Notes managed by a particular company (Visa) which you can reject.  Even if you reject the Visa-managed notes, though, you have no option but to accept Notes from another source, all of which are equally backless.

You are changing the terms from the previous debate now.  Previously you were talking about bank balances, now you are talking about federal reserve notes.  Nobody has to accept bank balances.  Yes, the government can print money, but that is a different process from magicking money into existence by changing the ledger lines in a bank.

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July 18, 2010, 09:23:04 PM
 #37

Please see the above posts.  In the US, any company with an "NA" after its name has the legal authority to create liquidity just by claiming it exists.  Then, they can take that loan and request dollar bills from the Fed.  Even if the Board of Directors of the bank were the only ones to deposit any "real" money, the scheme would still take off.  Thus, in a bitcoin economy, someone takes out a loan, the bank issues Quasi-BTC credit, and the person uses this to buy their house.  As a seller - don't want to accept Q-BTCs?  Tough - legal tender laws say you have to, or you don't get anything and still have to turn over the house to the buyer.
Your argument is based on government force, not on a free market. The same can happen with banks if government forces it's citizen not to use bank payments. In free market BC can dominate bank system. In your example I would simply try to form it as a gift, well, for some BC of-course, but who can prove that I received them and received them for the house?
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July 18, 2010, 10:23:22 PM
 #38

You are changing the terms from the previous debate now.  Previously you were talking about bank balances, now you are talking about federal reserve notes.  Nobody has to accept bank balances.  Yes, the government can print money, but that is a different process from magicking money into existence by changing the ledger lines in a bank.

I am not changing terms.  Federal Reserve Notes == Balance with Federal Reserve Bank of the US.  Equally worthless, because each is backed by nothing. 

Also, Federal Reserve Notes == Dollars, whether those dollars are printed, or not.  The granting of Federal Reserve Loans (and thus the inflation of the value of Federal Reserve Notes) by "magicking" loans is no different in its effect on the economy from printing money.  Do you think that with the Fed gives Fannie and Freddie one trillion dollars, they actually print these dollars?  No.  The dollars may or may not be printed later on, if there becomes a need for them to be stuffed in someone's pocket.  Until someone demands them as wallet-filler, though, they exist only in the form of balances in accounts.  Most dollars are *never* requested as cash, and therefore, never printed.  They're circulated by means of checks, credit and debit cards, Automated Clearing House transfers, wires, Paypal payments, etc.  As they can move goods in this "unprinted" form, they "exist," but are backed by nothing other than a loan by the Fed or another bank.  Thus, they are bank balances and nothing more, whether printed or not.

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July 18, 2010, 10:32:26 PM
 #39

Your argument is based on government force, not on a free market. The same can happen with banks if government forces it's citizen not to use bank payments. In free market BC can dominate bank system.

My argument is based on government force, yes, in the form of legal tender laws.  This is because although bitcoins are a free market now, if they become anywhere near popular enough to make a dent in the dollar, there will be government force in play.  My initial claim was that plucking out dollars from the economy and dropping in bitcoins would be just as inflation-riddled as today.  This is because the government force which causes dollars to be inflationary is still in play under a bitcoin system - I.e. nothing about using bitcoins eliminates the government's ability to make legal tender laws for fake-bitcoin notes (digital or otherwise).  To claim that bitcoins, if widely used, would remain a free market is naive - the government, any government, will not give up its power without a fight.

In your example I would simply try to form it as a gift, well, for some BC of-course, but who can prove that I received them and received them for the house?

I did not say that you would not be able to take BTC for the house.  I said that if Q-BTC (Fake backless Bitcoin-denominated loans) were legal tender, then if the buyer offered you Q-BTC and you refused, the courts would give him the house anyway.  If he chose to give you BTC, then that's fine - take them and be happy he's not ripping you off with backless currency.  However, if he offered you Q-BTC, you couldn't reject it because its not real BTC.

As as "who could prove...," I can only assume that you're talking about taxation.  That very "proving" is what IRS Auditors are for....that's another discussion altogether.

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July 18, 2010, 11:36:17 PM
 #40

My point with this entire thread was simply to dispel the false notion that printing presses are to blame for inflation.  Loans are the real culprit, with no need to waste paper, ink, and electricity on printing.  Taking today's economy lifting out dollars and dropping in bitcoins and continuing on would have the same loan rules, and thus would have the same inflation, minus only the very small percentage that is due to printing presses.

This is wrong. Loans multiply the printed money by a fixed factor but the root of inflation is the printing. Printed fiat money has inflation problems; the more money printed the greater the inflation. Gold does not, despite being lent and banked just like other kinds of money. This is simply because mining gold is hard while printing paper money is easy.

The Zimbabwean dollar is a very clear example. Was the huge inflation caused by people being really enthusiastic about lending and borrowing Z$? Or was it caused by the government printing 100 000 000 000 000-dollar bills?

Yes, most of the money in circulation is created through loans. No, that is not the cause of ongoing inflation.
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