Probably not. I suspect the Austrian school of economics will be proven right about money and credit eventually.
I find Austrian ideas very interesting. Yet the usefulness of an economic theory can be demonstrated in two ways:
1. How well the implemented ideas/policies work in practice. This is usually difficult to evaluate, as it involves counterfactuals (we never know what would have happened if other policies had been followed). Sometimes one may be able to draw a comparison between two similar economies/time periods that followed different paths, however.
2. How well the economic theory predicts the effect of certain policies / what is going to happen. The track record of the Austrian school is poor on this one; the most recent example being the prediction of the consequences of Fed's response to the "great recession" of 2009. As far as I know, both Austrian academics and practitioners (Robert Murphy, Peter Schiff) predicted that the Fed's actions would result in high price inflation, weak dollar, and would generally not be effective in promoting economic growth. Both have been wrong so far, and investors that have listened would have lost money.
Of course, you can say that the economic growth has been "malinvestment" that will need to be corrected, but without a time horizon such predictions are useless. It's been a decade now since 2009. Has the US economy been malinvesting since the abandonment of the gold standard in the 70s? At what point can we say that the Fed did a reasonably good job at stabilizing the economy and promoting economic growth?
If you give your money to a bank it won't be sitting in an account you have the key to, it'll be the bank's to control and they'll be free to lend it to other people.
This might even be a desirable state of affairs: money which you don't give to a bank collects 0% interest.
If anything some of the larger blockchains “naturally” move towards a “central bank” like model.
Say you have a blockchain that requires you to sync 100’s of terabytes if not petabytes of information to setup a new node and 100’s of gigabytes a day to keep it upto date.
It’s not going to be feasible for individuals to talk to it directly.
Now you already have exchanges that keep ledgers other than the blockchain and that already do most of their transactions off the blockchain these are your banks.
In this model the blockchain essentially offers only value store for the exchanges and keeps only the exchanges honest this is essentially your central reserve.
The blockchain offers also a consensus protocol where either the miners if it’s PoW or the exchanges if it’s PoS hold the important seats, that’s your board of directors.
So yes I don’t think that current crypto is incapable of mimicking the model of banking we currently use some already do it unintentionally to some extent.
But currently there isn’t a single crypto that offers a built in fractional reserve and credit system as part of its blockchain its off possible to implement it.
> supported by current mainstream cryptos
There's nothing that needs to be supported. Bitcoin already "supports" it, in the same way that cash does. All you have to do is find a counterparty and draw up a contract.
> it’s not practiced
That part's mostly true because with this kind of volatility who would risk owing you a bunch of bitcoin, but loans involving Bitcoin are starting to appear: https://saltlending.com/
I wouldn't necessarily trust https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox.
Okay, I think maybe what we're arguing about is definitions. I'm trying to say, "off the books accounting" is perfectly legitimate fractional reserve. It is not possible to create more on-chain Bitcoin, but something which looks exactly like fractional reserve is possible today and would end up creating "off-chain" Bitcoins, increasing the Bitcoin money supply without increasing the number of on-chain Bitcoin beyond 21 million.
Maybe you don't think that such a system should be called Fractional Reserve, I guess that's where we disagree.
> you can’t loan more bitcoins than you have
Fractional reserve isn't about loaning more than you have. In fact, kind of the the entire point is that you must loan less than you have: you loan out at most some fraction of your deposits and reserve the rest.
> if you are using two units of account that’s not a fractional reserve
The system I described only has one unit of account, Bitcoin. It doesn't matter whether they're on-chain or "virtual", they're both Bitcoin, and are worth the exact same amount.
> If you loan less than your total then again it’s not fractional lending it’s simply lending.
You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia:
> Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities.
Say the reserve ratio is 10%. Then, given $100, the bank is allowed to give out $90 and must keep $10 on hand.
Ofc it matters because those bitcoins cannot be used as part of the bitcoin network they aren't bitcoins at point at best they are some weirdly defined bitcoin option. As long as I won't be able to spend those bitcoins as bitcoins and as long as it's not enforced by the network itself this won't really be fractional reserve banking, or at least not what people consider FRB since CAR is an important part of it.
>You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia:
I think you misunderstood my point I should've been perhaps more clear about how money generation through fractional reserves works currently and how multipliers on deposits work: https://en.wikipedia.org/wiki/Money_creation I assumed based on the topic we've discussed so far "creating new bitcoins" it was a given state.
However, I am unsure to how the latter will be solved without a central, trusted party. What is the digital analogue of a passport or driver's license, a piece of identification that is hard to forge?
To add on to why fractional reserve will be hard to implement with cryptocurrencies, another unexplained problem is the issue of collateral backed by a volatile asset.
If that underlying asset rises in value, then the effective interest rate would be equal to the original interest rate + % increase in value; if the opposite occurs, a decrease in value, the 'bank' in this scenario might lose money on that lend.
You might argue that a digital stable-coin is a possible solution. But a digital asset backed by a physical object is probably bound to encounter regulations; and the performance of a stable-coin backed by algorithms is currently unknown to work.
These are two hard problems that have to be solve before fractional reserve is viable on a blockchain.
I'm imagining a contract with a bank. As in, you literally go and talk to Chase bank and draw up a contract and give them Bitcoin and they promise to give it back to you later plus interest.
Such a system is very possible today, and in that sense Bitcoin _does_ support fractional reserve. Fractional reserve is not a feature you explicitly add, it's an emergent property of a banking system, you really don't need to do very much to "support" it.
It's true that today you would probably find it difficult to find someone who will take your Bitcoin and pay you Bitcoin-denominated interest with it. However, there's no fundamental reason why it couldn't happen.
The process is: You give your Bitcoin to a bank. It is put into a UTXO which they control, and you don't control. In exchange, you have a balance in the bank which you can withdraw when you choose. Your balance is "virtual bitcoin", but is still real money, because it represents your ability to ask the bank to pay people for things. (By swiping your debit card)
At the same time, the bank has the original on-chain Bitcoin, and is free to use it however it wants, probably by lending it out to somebody else.
In this way, there is now more Bitcoin than there were previously. Fiat currency is not involved in any way. I'm not an economist, but I'm pretty sure it's exactly the same as the difference between M0 and M1.
I'm not versed in economics, and generally find it overwhelming to look into, because of deeply-set political opinions and implications buried in all of it. Is "economic school" a political choice (differing goals) or a choice of tooling/methodology?
Re: my previous comment, that, in short, money and credit are like any other markets.
If you're interested in a gentle introduction to the Austrian school of thought I recommend the book Man, Economy, and State. Skip the final section of the book entitled Power and Market. [1]
[0] https://mises.org/library/economic-science-and-austrian-meth...
[1] https://mises.org/library/man-economy-and-state-power-and-ma...
Empiricism is a philosophical approach; Austrian economics isn't any closer to “philosophy” than empirical economics is, it just is closer to the particular (and widely rejected in most of modern Western philosophy though it survives in a form within some schools of Christian theology as well as Austrian economics) philosophical belief that claims about material facts can be justified a priori by deduction from axioms alone without reference to a posteriori knowledge.
That...depends on the “school”, and exactly the bounds of the “political”. The choice between the Austrian school and most of the rest of economics is between an interpretive framework that eschews empirical science as inappropriate for the field of economics (Austrian school) vs. various approaches that at least outwardly aspire to the norms of empirical science (most of the rest of economics.)
Among the schools espousing empiricism, confirmation bias (and thus political preconceptions) still plays a role between, say, neoclassical schools like Chicago and Keynesianism and it's offshoots, but that's at least in part because economics is hard due to confounding variables, and actually avoiding influence of confirmation bias in such circumstances is difficult even when intelligent people are acting in the best of faith.
I ask because I've seen this claim made about Austrian economics lots and lots, but haven't seen anything telling a consistent story -- just a lot of "it's coming, keep waiting".
Seriously interested in seeing these claims either supported by a real world narrative.
Edit: I changed "proved" to "demonstrated" ;-)
Continually proven wrong again and again and again but sure to be right eventually.
Damn those irrational actors. Why can't everyone be as rational as an Austrian.