Quote from: relative on June 28, 2011, 08:50:50 AM

Quote from: Funkypala on June 27, 2011, 10:14:13 PM

At the moment the banks can create digits out of nothing if you lend money from them.

that's a myth, perpetrated by youtube videos and conspiracy theorists.

they don't just add digits, what is referred to as money creation by commercial bank is that money they lend out usually ends up as deposits at the same or another bank.
bank account balances are considered money, so if you depoit 100$ and they lend out 100$ to someone who puts it in his bank account, there are 200$.

the same thing could happen with bitcoins. bank account balances of a fractional reserve banking are nothing else than claims you have against the bank. but they are considered "money" by most definitions, so the base money supply is multiplied.

How could a "Bitcoin" bank run a fractional scheme? Person A deposits 100 Btc in Bank X; Bank X loans 95 Btc (5 Btc held as a reserve) to person B, person B buys computer hardware for 50 Btc who puts the proceeds in bank Y, and places the remaining 45 Btc in bank Z. Banks Y and Z can only circulate 95 Btc. As a Btc cannot be used several times simualtaneously the amount of Btc is still 100.

Whereas in a fractional reserve system a bank that recieves 100 USD can loan 950 USD to person B (50 USD held as a reserve), by issuing a check/digital loan, person B buys computer hardware for 500 USD and who put the proceeds in bank Y (either by "checking" or "digitally" - it is only a bookkeeping excersice, no banknotes are transferred) and places the remaining 450 USD in bank Z (maybe he will use the USD to pay wages a his IT firm) By these actions the money supply has increased despite the money base remaining at 100 USD. Fractional reserve cannot exist if the banknotes are transferred with each transaction.

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.