If you have 100 bitcoins in your computer wallet and 100 in your MtGox account,

[Atheros]

If you have 100 bitcoins in your computer wallet and 100 in your MtGox account, how many bitcoins do you have?

This is not a trick question!

I have been having the longest of arguments with a user about what the Wiki should say about Fractional Reserve Banking. Ultimately, our disagreement centers around the definition of money supply. I would say that you own 200 Bitcoins. The money supply is therefore definitely at least 200 bitcoins. He disagrees. He's been editing the Wiki page to say that "Practicing fractional reserve banking without issuing money substitutes is not logically possible. "

Originally the wiki said this.
PeterSurda changed it to this and this.

I very much want the wiki to be as accurate as possible. Please help!

[1714065621]

1714065621

[1714065621]

1714065621

[BurtW]

This is probably totally naive but I see no difference beteen having my dollars at a bank and having my BTC at Mt. Gox.  I go to my account page at Mt. Gox and they promise they have 100 BTC reserved for me somewhere in their accounts.  If I ask for it they give it to me.  However since not everyone will ask for all the BTC at the same time they could find it "safe" to loan out some of the BTC on account.  As long as they keep enough in their accounts to cover any requests for BTC from their depositors they are good to go.  Isn't that the definition of fractional reserve?

The other way I look at it is that the second that Mt. Gox loans money to someone and puts the loan into an account for them they have increased the number of people claiming ownership of the same BTC.  This is an increase in the "money".

I have 100 BTC on deposit - I can ask for it to be sent to me at any time so I can spend it
Keeping 10% in reserve the borrower would have 90 BTC on deposit - and they can ask that it be sent to THEM at any time so they can spend it

But in fact there are only 100 BTC to cover both claims.

As far as I know this is the definition of fractional reserve and it would operate the same as the dollar.

EDIT:  I would add that there is one big difference between dollars and BTC in the event of a bank run.  With dollars each bank that runs low on dollars during a run can simply go back to the central bank and borrow more.  The central bank can just loan them newly created dollars - hence the term fiat. With BTC if everyone want their BTC from the fractional reserve bank or banking system at once they are totally screwed - there may not even be enough BTC in existence to cover all the deposits.

[DeathAndTaxes]

It is 200 BTC BUT the money supply didn't grow because no fractional lending occured.

Simplistic universe.  The entire bitcoin economy consists of you w/ 200 BTC and MtGox with nothing.  Money supply is 200 BTC.

You deposit 100 BTC @ Mt. Gox.

You now have 100 BTC deposited, 100 BTC in your wallet.  Money supply is still 200 BTC.  

Someone robs Mt. Gox.
You have 100 BTC, Mt Gox is bankrupt and thief has 100 BTC.  Money supply is still 200 BTC.

So the wiki isn't wrong.  It isn't saying deposited funds somehow vanish from money supply it is saying without fractional lending there is no multiplier, the money supply doesn't INCREASE.

[Atheros]

Ok, So suppose MtGox lends out 10% of their Bitcoins. They have then increased the money supply, right? Assuming people agree, what do I do about someone who is editing the wiki and talking about 'substitutes' and other nonsense instead of leaving it the way it was?

 

[BurtW]

D and T are you saying you agree with the original version of the wiki or the modified version.  I am not sure.

[DeathAndTaxes]

More the first one however the first one doesn't clearly indicate the power central banks have in fractional reserves and that Bitcoin lacks a central bank thus the monetary base (not to be confused with money supply) can never grow beyond the 21M BTC.


However the 2nd & 3rd texts are just pure nonsense.

Say I owed the D&T savings bank.

You deposit 100 BTC.  I lend out 50 BTC. 

What is the money supply ... 150 BTC.  You have 100 BTC deposited and the borrower has 50 BTC.  I just created 50 BTC out of thin air.  The money supply expanded.  If that 50 BTC was then deposited into another bank and he lent out 50% another 25 BTC would be created.  Money supply is now 175 BTC. 

The 3rd linked text seems to be confused into thinking some alternate currency, or note, or script would need to be issued.  That is simply false.  As my example above shows there is no need for a D&T Savings bank note.  You have 100 BTC on deposit and the bank has one borrower which has been lent 50 BTC.  All transactions are done solely in BTC. 

The only difference between BTC banking and USD banking (other than regulation, FDIC, etc) is the lack of a central bank.  Central bank has the ability to mint money out of nothing.   So BTC banks can acts as multipliers on the monetary based on 21M BTC but can't expand that.  If a central bank of BTC existed it could also expand the monetary base by minting >21M BTC.

[Steve]

How many bitcoins do you have?

This is not a trick question!

I have been having the longest of arguments with a user about what the Wiki should say about Fractional Reserve Banking. Ultimately, our disagreement centers around the definition of money supply. I would say that you own 200 Bitcoins. The money supply is therefore definitely at least 200 bitcoins. He disagrees. He's been editing the Wiki page to say that "Practicing fractional reserve banking without issuing money substitutes is not logically possible. "

Originally the wiki said this.
PeterSurda changed it to this and this.

I very much want the wiki to be as accurate as possible. Please help!

You own 100 bitcoins and you own a demand deposit of 100 bitcoins at mtgox.  Mtgox has a liability to make those 100 bitcoins available to you on demand.  Mtgox may or may not hold 100% reserves (it just depends on the nature of your contract with them and whether they honor that contract).  One thing is certain…you do not have 200 bitcoins (just like you don't have dollars when they are deposited in a bank…the bank has custody of the dollars and you own a demand deposit for those dollars).

With bitcoin, this possession question is even clearer than with fiat currency because unless you have the private keys that enable you to send bitcoins to someone else, you do not have bitcoins.  Anything else is some form of contract for bitcoins that you've entered into with another party.  You can think of it like gold…if you don't have possession of the physical metal, you don't own gold.

[Steve]

On the question of fractional reserve banking, money supply and money substitutes, it is indeed possible for fractional reserve banking to exist with bitcoin.  While actual bitcoin money supply is limited to 21 million coins, if bitcoin substitutes become popular and widely accepted (ie. mtgox deposits), then you can effectively expand the money supply.  This could be through fractional reserve banking, or it could simply be of the form of a debt owed by one person to another that is widely recognized and which trades almost interchangeably with actual bitcoins (though actual bitcoins should always command a premium).  In the long run, the use of money substitutes based on bitcoin may serve to expand and contract the effective money supply in response to market forces rather than central planning…and this may have a stabilizing affect on the value of a bitcoin. 

What will be different about bitcoin is that it will always be clear whether you're dealing with actual bitcoins or a bitcoin substitute.  Actual bitcoins should always have a premium over bitcoin substitutes (when given a choice would you prefer to be sent actual bitcoins or a mtgox redeemable code for bitcoins?).  You will always know whether you're dealing with real bitcoins or a bitcoin substitute and, in that respect, it should be less deceptive than current fractional reserve banking practices.

[Atheros]

Would the substitutes be traded between parties?

[FreeMoney]

You have 100BTC and are owed 100BTC. MtGox has 100BTC and owes 100BTC.

MtGox debt right now trades at face value, that's just incidental and hasn't always been the case.

[Atheros]

But if I can demand the depot back easily at any time, how is it functionally any different? Why would I not view myself as owning 200 bitcoins seeing as I can access 200 bitcoins easily?

[johnyj]

I have never believed those fractional reserve banking related money supply creation, you can not just add the same money multiple times (typical lacking of knowledge of accounting) and said money were created by loaning out savings

Banks can lend out the same money multiple times in a year, that will change the money flow speed, but the money supply will not change without someone creating new money

Simple but still useful formula:
MV=PY
M is money supply
V is money flow speed
P is price level
Y is real GDP

[realnowhereman]

I have never believed those fractional reserve banking related money supply creation, you can not just add the same money multiple times (typical lacking of knowledge of accounting) and said money were created by loaning out savings

It's up to you what you believe of course; but fractional reserve banking is perfectly possible and real.

Let's say that on average Mt.Gox are holding 1,000,000 BTC. All 1,000,000 are claimed by Mt.Gox's creditors; Mt.Gox (let's say) therefore has net assets of 0. Now let's say that at worst, 100,000 BTC flow out and 100,000 BTC flow in to Mt.Gox every day.   In that case Mt.Gox are holding 900,000 BTC that are doing nothing.  Nothing would change whether those BTC were literally in Mt.Gox's wallet or not.

If Mt.Gox decide to invest 900,000 BTC in Chocolate Teapots inc.; then at the moment they take that 900,000 real BTC and invest it, then the money supply has effectively increased.  900,000 BTC owed to the Mt.Gox depositors which is simultaneously invested in Chocolate Teapots.  Add up the total economy and it's 900,000 BTC more than it was.

Of course, bank runs become possible; which is why fiat currencies with FRB in place need a central bank to act as a lender of last resort -- the lender of last resort's role is to make bank runs blow themselves out.  Once everyone has their savings withdrawn during a run, what do they do with them?  They observe that the bank is still standing and deposit it again.  The bank can then return the money to the lender of last resort and everything is back to where it started.

[Steve]

Of course, bank runs become possible; which is why fiat currencies with FRB in place need a central bank to act as a lender of last resort -- the lender of last resort's role is to make bank runs blow themselves out.  Once everyone has their savings withdrawn during a run, what do they do with them?  They observe that the bank is still standing and deposit it again.  The bank can then return the money to the lender of last resort and everything is back to where it started.

Unless everyone decides to buy gold (or other tangible assets) with that money, in which case the money quickly becomes worthless. 

In the case of bitcoin, it's clear that the supply can never exceed 21 million, no matter how much lending or fractional reserve banking takes place.  However the *effective* money supply could expand with lending activity or fractional reserve banking so long as such obligations are nearly interchangeable with actual bitcoins (i.e. people view 100 BTC on deposit at some bank as nearly equivalent to actually possessing 100 BTC).  It's not necessary to debate whether the money supply is expanded or not…if you're talking about actual bitcoins, it clearly is not.  If you're talking about bitcoin substitutes (like bank deposits or other type of loans or contracts), you could call that credit expansion/contraction.  To the extent those credit instruments can be used like money, you are *effectively* expanding the money supply.

[DeathAndTaxes]

Of course, bank runs become possible; which is why fiat currencies with FRB in place need a central bank to act as a lender of last resort -- the lender of last resort's role is to make bank runs blow themselves out.  Once everyone has their savings withdrawn during a run, what do they do with them?  They observe that the bank is still standing and deposit it again.  The bank can then return the money to the lender of last resort and everything is back to where it started.

Unless everyone decides to buy gold (or other tangible assets) with that money, in which case the money quickly becomes worthless.  

In the case of bitcoin, it's clear that the supply monetary base can never exceed 21 million, no matter how much lending or fractional reserve banking takes place.  However the *effective* money supply could expand with lending activity or fractional reserve banking so long as such obligations are nearly interchangeable with actual bitcoins (i.e. people view 100 BTC on deposit at some bank as nearly equivalent to actually possessing 100 BTC).

Modifictions by me.

It's not necessary to debate whether the money supply is expanded or not…if you're talking about actual bitcoins, it clearly is not.  If you're talking about bitcoin substitutes (like bank deposits or other type of loans or contracts), you could call that credit expansion/contraction.  To the extent those credit instruments can be used like money, you are *effectively* expanding the money supply.

No the money supply IS expanding.  There isn't anything different between you depositing 100 BTC into a BTC bank and you depositing 100 USD into your local fiat bank.  In both cases the monetary supply is expanded via fractional reserves.  Does your local bank say $100 USD deposited or do they give you a statement saying 100 LocalBankScripts (not expanding money supply)?


It isn't "effectively" expanding the money supply.  IT IS EXPANDING THE MONEY SUPPLY.

The 21M is the MONETARY BASE. The difference between BTC and USD isn't monetary supply expansion via fractional reserves (which works exactly the same) it is the monetary base can never expand.  In USD the central bank directly expands the monetary base and then individual banks using fractional reserves acts as a multiplier on that base to create the money supply

I think what confuses people is that modern fiat currencies work on two principals.
1) Central bank issues currency (at the whims of central bank)
2) Deposit banks acts as a multiplier effect on that monetary base

BTC:
Fixed monetary base (21M)
Multiplier is possible via fractional reserves.
Money supply  = (21M) * (Money Multiplier)

USD:
Infinite monetary base (can be expanded or contracted at will be federal reserve)
Multipler is possible via fraction reserves.
Money Supply = (variable base) * (Money Multiplier)



An important thing to note is the asymptotically relationship in the curves.  Fractional reserves can only expands the money supply so much.  With 10% reserve requirement at most you can expand the money supply 10 fold.  With 50% reserve requirement you can only expand the money supply 5 fold.

Since BTC monetary base is fixed at 21M then the money supply is also capped at
BTC Money supply = (21M - losses) * (Sustainable Multiplier)

There is no requirement for a particular reserve.  A fractional Bitcoin bank could maintain 1% (or less) reserves but those banks likely would go bankrupt.  The "community" will set the max reserve requirements by free market (only banking w/ trusted banks who set conservative reserve requirements).

So for example if the BTC economy achieved a 2x money multiplier then BTC money supply would be 42M BTC.  The actual money multiplier will demand not only on average bank reserve requirement but also in the % of monetary base held in banks.  Given the ability to secure BTC outside of banks many users may adopt to never put their money in banks.

[BurtW]

As a noob to this discussion it appears to me that everyone here is pretty much in violent agreement.  It appears that everyone agrees that:

A BTC bank could be formed, right?  There are no regulations preventing anyone from doing that.

However you do not need a bank, an "evil" central bank, or even a banking system at all in order to "increase the money supply" without "increasing the money base" all you need is for people to lend BTC to each other.

The number of BTC that exists is finite and known - something everyone must agree on or we will get nowhere

Take the case of three people:  A, B and C

Person A has 100 BTC, person B has zero, person C has zero.
Person A lends their 100 BTC to person B
Person B buys a product from or the labor of person C for the 100 BTC he borrowed from person A

At this point:

Person A rightfully claims a 100 BTC asset/contract in that person B owes him 100 BTC.
Person C rightfully claims the ownership (and possession) of the same 100 BTC since he sold a product or his labor for them.
Now person C can loan his BTC to person D, etc.  Loan, rinse, repeat!

Therefore the number of BTC that exists is finite but the number of legitimate claims of ownership to this finite pool of BTC is unlimited as long as you allow lending - and how can you stop the act of lending and the practice of loan contract creation?  The answer is that you cannot.  If I posses BTC I have every right to create a contract and lend them out.

Now we all agree that the original 100 BTC currently possessed by person C are in fact BTC and to the degree we agree BTC is money they are money.  Person C possesses them, they own them, and they can spend them or lend them out.
 
But what about the contract held by person A? What is it worth?  Well assuming he can find someone willing to give him 100 BTC worth of goods and/or services for the contract then it is also worth 100 BTC!  Since all these contracts created by the lending process can be used to purchase goods and services then everyone must agree that to some extent and under at least some definition of money the contracts themselves are money.  There is also no way you can stop people from selling debt contracts once they are created.

So there you have it, once people start lending BTC the BTC denominated money supply will inevitably be larger than the number of BTC that exist even without the creation of a BTC banking system.

[BurtW]

OK, so Steve and others do not like everyone else's definition of the phrase "money supply" so they make up their own.  There are already several definitions of money and money supply so I guess a few more will not hurt anything.  However, I have done my best and I personally am done arguing over the definition of a phrase that was ambiguous to begin with.

[finway]

It is 200 BTC BUT the money supply didn't grow because no fractional lending occured.

Simplistic universe.  The entire bitcoin economy consists of you w/ 200 BTC and MtGox with nothing.  Money supply is 200 BTC.

You deposit 100 BTC @ Mt. Gox.

You now have 100 BTC deposited, 100 BTC in your wallet.  Money supply is still 200 BTC.  

Someone robs Mt. Gox.
You have 100 BTC, Mt Gox is bankrupt and thief has 100 BTC.  Money supply is still 200 BTC.

So the wiki isn't wrong.  It isn't saying deposited funds somehow vanish from money supply it is saying without fractional lending there is no multiplier, the money supply doesn't INCREASE.

No, MtGox can lend these coins to himself, for free, the supply goes up.

I'm holding my BTCs, but MtGox can still sell it, so i'm not holding it at all.

[DeathAndTaxes]

Not sure what you are saying.  They CAN lend it doesn't make money supply go up.  If they DO lend then the money supply increases.

[lonelyminer (Peter Šurda)]

Hello,

I'm the author of the "pure nonsense" edits. While I admit that my original posts were not very intelligible, I maintain that my position is correct.

Kindly review the bottom of the wiki talk page that quotes examples by mainstream as well as Austrian authors, that claim:

• Money supply is the sum nominal value of instruments that are used as media of exchange, not the sum of the nominal value of zero-maturity instruments.
• The reason why demand deposits usually appear in the money supply is that they are used in exchange instead of the reserves. If they are not used in exchange, they are not a part of the money supply.

Merely by depositing Bitcoins into Mt. Gox, and Mt. Gox lending out a proportion of them to someone else, the money supply is not affected. It only would be affected it someone accepted the Bitcoin deposit as a method of payment. At the moment, this is only even possible though the redeemable "Mt.Gox code" and the acceptance thereof is limited.

The difference between FRB with gold/fiat and Bitcoin is that the derivative media of exchange (hypothetical Bitcoin-substitutes) do not provide general advantages over Bitcoin itself, and therefore there is little demand for them. People might use bank notes because gold coins are too heavy, or EFT because they are not at the same location. This creates a demand for exchanging these claims instead of the original gold (for example). With Bitcoin, these problems do not exist, because the Bitcoin value of a storage medium does not affect the weight of it, and you can transfer Bitcoin electronically without an intermediary. So there is little demand for the features which normally require banks.

And even if the claims evolve into substitutes at some stage, as Steve pointed out, it is trivial to distinguish between a Bitcoin and a Bitcoin substitute - they are incompatible. This makes it much easier to accept these substitutes below par, thus at least partially compensating for the case where there is an overissuance of substitutes due to FRB.

A brief summary of my argument:

• money supply measures the nominal value of media of exchange available
• Bitcoin demand deposits are, in general, not a media of exchange (unlike fiat/gold)
• Bitcoin demand deposits (or any other claims) would only become a generally accepted media of exchange if the issuers thereof find some generally demanded service which Bitcoin itself does not have
• This would only affect the money supply if the people accepting these substitutes would do so at a rate different than the reserve ratio of the issuer