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Comment by jpmattia | Hacker News Reader

> This is accentuated by the fact that bitcoin can't be used in fractional-reserve-banking.

I don't know what you mean to say here, but you can absolutely use bitcoin for fractional-reserve banking, just as gold was used through history. Pretty much since the dawn of banking, a bank collects reserves from its depositors, and then loans outs a designated fraction of those reserves. It's not like that process was somehow invented with the Federal Reserve.

What you cannot do is have a lender of last resort with the ability to print money out of thin air, who can then flood the economy with cheap money; But that has nothing to do with fractional-reserve banking.

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No, you can't, you need to create a new "currency" to do so. You can't do fractional reserve banking with gold. What banks did was create "gold bonds" that were just a promise to pay.

And then you're just creating a bitcoin-back currency, which at some point will inevitably see the same fate as all currencies did, and being de-linked from bitcoin just as other currencies were de-linked from gold.

People can and did do fractional reserve banking with gold. Notes for deposits was a much later innovation. Nothing stops you from lending out physical specie from your vault as long as you can give depositors their money with high probability when they demand it.

No, they didn't.

They did fractional reserve with gold-denominated currencies.

Sure, you could create a bitcoin-denominated currency (a terrible idea, but let's entertain it) and perform fractional-reserve banking on it. But at that point, bitcoins become irrelevant.

Well, we could go back and forth with "no they didn't" and "yes they did". Let's throw in some citations. You're in a hard place, because proving a negative is tricky. So I think it's incumbent on me to provide some examples.

Let me start by throwing out a little bit of terminology just to make it clear if we're on the same page. Loans have existed since money existed. The only difference between a private loan and fractional reserve banking is that the lender is a) lending someone else's money and b) allowing depositors to withdraw money despite the fact that the sum of all depositor's money is not physically possessed by the bank.

Wikipedia's page [1] is a reasonable place to start. The Babylonians were issuing loans in gold. The Greek and Egyptians were issuing loans in gold. The Romans were issuing loans in gold. None of these (except the Egyptians, with their seed grain short-term currencies) were issuing any sort of derivative currency or notes.

Throughout medieval times, letters of credit were frequently used as a form of correspondence banking [2] for travelers. The lack of high-speed communication meant that the settlement and clearing of loans could take months or years, but the depositors (correspondent banks in foreign countries) were unlikely to make any immediate claims on their deposits except through such letters. The letters could be redeemed, usually, directly for gold. You can argue whether this constitutes fractional reserve banking; it's in some ways closer to what we would now call "corporate paper"; very short-term credit extended to very high trust individuals or institutions.

[1] https://en.wikipedia.org/wiki/History_of_banking#Earliest_fo...

[2] https://en.wikipedia.org/wiki/Merchant_bank

Loaning gold isn't performing FRB on gold.

> Loaning gold isn't performing FRB on gold.

It is, in fact, exactly what fractional-reserve banking means: Loaning a fraction of your reserves.

BTW: The exchanges are creating money by allowing margin: There is already a difference between M0 and M1 in the bitcoin economy.

I think the point they're making is that you cannot literally do fractional reserve banking with gold or bitcoins, because there is a physically or technically limited amount of them.

In your example, they can fractional reserve with letters of credit and trust. At no point can a bank actually loan out more physical gold then it had in its possession.

Exactly.

FRB is essentially a form of "double spending", but under certain conditions to maintain stability.

Bitcoin doesn't allow double spending. Neither does gold.

> FRB is essentially a form of "double spending"

This is nonsense. Loaning money that you own is not "double spending".

I'm not sure what "literally [doing] fractional reserve banking" means. Can you give me an alternative definition to the one I gave above?

Fractional reserve banking means you accept deposits, and you make loans from those deposits, and the difference between the amount you've lent out and the amount you have in deposit is called the "reserve". If you try to maintain your reserve as a "fraction" of your deposits, you're doing "fractional" "reserve" banking. What's the "literal" aspect?

You can't spend dollars that you have in the bank, not in the sense of handing someone cash. You can do money transfers to other accounts or other banks, but when you get down to how a money transfer happens (i.e. deposits with a central bank or correspondence accounts between institutions) there's no reason that you can't do that with any substance or commodity.

There's no double spend involved, because you don't have specific Bitcoins on deposit. The Bitcoins you've deposited are long gone; munged into some central wallet and lent out to depositors, with only a fraction held by the bank. When you ask to withdraw, they take that fraction and give you the amount of your withdrawal out of it, and reduce the paper balance of your account.

I'm living in a community where gold is the currency of choice, and I convince a bunch of people in my community to deposit gold pieces with me. I have a huge pile of gold.

Whenever somebody asks me to give them back their gold, I reach into the pile and hand them pieces equal to the amount they deposited, but not necessarily the same pieces.

But this happens infrequently enough that most of the time, the pile just sits there. So I decide to only keep half the pile sitting there -- more than enough to cover the rate at which my customers make withdrawals -- and loan out the rest to borrowers I deem credible. I charge interest to make up for the losses I take on bad borrowers and actually make enough profit on this interest to keep some and pay some out to account-holders.

I would say I am 1. conducting fractional reserve banking, with a 50% reserve ratio, and 2. not creating a new currency (everybody still transacts in gold pieces).

Are you saying that this is NOT fractional reserve banking, or that it IS creating a new currency?

The loan is the currency. People accept the loan as a medium of exchange. Everybody transacts in loans (paper with promises of value), which then becomes identical to money. The loan is only loosely coupled to the gold backing, because of everybody cashed in the loan (a bank run), you could not pay it out because the gold does not exist for everybody. That very fact demonstrates that the loan is not identical by reference to gold. So yes you have created new currency.

> No, you can't, you need to create a new "currency" to do so.

You are confusing "fraction-reserve banking" with something else, probably "quantitative easing".

There is no requirement to create currency with fractional-reserve banking: A bank simply loans out a fraction of its reserves, which has the effect of creating money, but only in the sense of increasing M1. M0 remains constant.

In different perspectives, you are both correct. Particularly, there is a sense in which bank account balances are a separate currency redeemable in the currency in which they are denominated, so that, yes, you have to create a separate currency to do fractional reserve banking, but it's the kind of currency that various entities are going to be creating as soon as you want to support any kind of useful ecosystem around a cryptocurrency, including exchanges.

Exactly, and the difference of trying to do FRB with bitcoin or gold is that the new currency being created isn't the original currency.

In the case of USD, for example, a USD created by a bank is indistinguishable from one you deposited on the bank.

You could say that being able to double spend in certain conditions is a feature of modern currencies, and largely necessary for a stable economy, which is impossible under bitcoin.

> "Particularly, there is a sense in which bank account balances are a separate currency"

You can define "credits" and "debits" in a currency to be a separate currency, but since that has been in the lexicon for millenia, you'd have a very long road ahead for acceptance of terminology like that.

There is a reason why we define M1 as different from M0. Trying to say that bitcoin is some newfangled currency that demands M0 and M1 be equal? Good luck with that.

Doesn't it depend on whether you deposit your bitcoin into a bank? If everyone's always only keeps their money in personal wallets then you'd be correct, even if banks were just "a wallet but we maintain it" then you'd still be correct.

But if banks continued to work like they do now, where you deposit your money into the bank, and then they show a number when you login, but it's just what they "owe" you. In that case they could continue to do fractional reserve banking just as they do now.

So basically this debate is not whether fractional reserve banking is possible with bitcoin, but whether banking with bitcoin would continue to resemble banking now.

> Doesn't it depend on whether you deposit your bitcoin into a bank?

Why would you? You can get better returns by simply holding it (since it is deflationary) than by lending it out or investing in productive assets.

And even if you deposited, you can't "double spend" the bitcoin, so you can't do FRB with it.

> So basically this debate is not whether fractional reserve banking is possible with bitcoin, but whether banking with bitcoin would continue to resemble banking now.

It is both. You need FRB to dynamically adjust the supply of money and keep a balance with demand.

And the fact that nobody will invest, which kills economic growth.

No new startups, no new factories, no new bridges, no new houses, etc...

> Why would you? You can get better returns by simply holding it (since it is deflationary) than by lending it out or investing in productive assets.

There's obviously a balance in this scenario, as slower investment pace, makes for slower expectation of BTC value increase.

Only "investments" of very low expected return are being prevented by lack of monetary inflation.

If BTC-based monetary system produces relatively slow .5% global growth, that means only investments with expected return lower than .5% are not going to happen. Which is a feature, not a bug. It makes growth cycle much more stable and self-balancing. Too high growth slows down investing cycle, low growth speeds it up. No need for central bankers.

And it's not that much different than current monetary system anyway, where people just throw they currency into speculative, unproductive assets to escape inflation. Nowadays things like housing serves the role of Bitcoin.

Sure there is a balance.

Just like in emerging markets with high interest rates: if your government pays 10% per year (real terms) interest on its bonds, would you invest in a business that would only return 9%?

No, nobody would ever invest in it. But there's a reason the government is paying 10%: to reward the risk of lending money to it.

In the case of bitcoin, the only reason there is this deflationary "tax" is because someone arbitrarily decided that the supply of bitcoins should remain constant.

So you're voluntarily fucking up your economy.

Sure, "we could relax that and make the supply increase over time", but that doesn't address fluctuations on the demand for money, resulting in harder oscillations.

And then "but then we could have the supply adjust dynamically based on some guidance from economists plus the balance of supply and demand for money".

Well, congrats, you just recreated the modern monetary system.

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