Quote from: InterArmaEnimSil on July 15, 2010, 02:12:16 PM

I've seen a few claims, on these forums and elsewhere, that bitcoins, because they are limited in supply, are free from inflation, and once or twice I've seen claims that this set supply would eliminate fractional reserve bank policies. Would anyone care to explain this to me?

The way I see it, the supply of bitcoins is limited, yes, but its akin to the supply of, in the US, physical one-dollar bills. The majority of the US economy, however, is not cash - it is credit, or dollars on account, both of which are backed essentially by loan collateral. This collateral forms the basis for more loans than it is actually worth, and thus we have fractional reserve banking. The limited supply of bitcoins will stand at 21,000,000 maximum. However, this in no way prevents people from establishing accounts with bitcoin-equivalent units in them that do not actually exist - exactly as credit and savings accounts are done today. These pseudo-BTC would be traded, just as loan-based pseudo-dollars are traded today, and there is no limit to their number, nor any protection against fractional reserve policies. Am I going wrong here somewhere? I certainly hope so, because if not....then I really don't see the advantage of BTC at all.

Fractional reserve banking is unstable without a monopoly over the ability to print currency, due to the >0 possibility that a bank runs out of reserves. The way banking in BTC will likely work is that you will have On-demand deposits, and time-deposits.

On-demand deposits will be stored at the bank, and will not be lent out. You will likely pay a small fee for this service.

Time deposits will be lent out, but cannot be withdrawn at anytime. You will also have to accept the possibility of loss.

The Mises Forums offers a lot of info about fractional reserve banking; I would recommend reading there for more info on how it would work in a free market without a central authority (like Bitcoin).