All we need is a few players with some degree of wealth, and with some intelligence. Take for example, a wealthy Bitcoiner who has 100,000 BTCs in Bank A and 100,000 BTCs in Bank B.
Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.
Bank A has total deposits of 500,000 BTCs. So does Bank B.
Bank A is honest and keeps 100% of on-demand as reserves. Bank B only keeps 10%.
Our wealthy Bitcoiner gets suspicious of both of these banks for some reason and withdraws.
Bank A's capital is down to 400,000, nothing bad happens.
Bank B busts because it only has 50,000 BTCs to give him.
This scenario is valid. The problem is that Bank B, in this case, is not only dishonest, but stupid. They allowed one investor to accumulate more wealth than they kept on reserve. No bank would do this - they have statisticians with Poisson distribution graphs that will tell them that if they do this, they will go bust. Bank B, if they had one investor with 100,000BTC, would keep 100,000 on reserve (and then some). Why? The chance of that one person at some point (say once in a span of thirty years) finding a better bank and moving the money is very, very high. However, they know the number of coins they have to keep onhand to have only a 1/1000 of 1% chance of having a run...all the others, they will lend out unless legally required to do so. Is this a change from today's system? Yes. Does it eliminate inflation? No.
You seem to be implying that the entire industry can cartelize to keep things going...
I don't mean that the banks are a cartel, but a closed system (see above). In reality, though, lets say bitcoins became popular. In fact, they become so popular that they replace dollars. Essentially, take today's economy, swipe out the dollars, and replace them all with bitcoins. One of the following threads will then occur without a forced change in the law, which the use of bitcoins does not necessitate.
1) People remain fooled by the bank system. They, as a whole, don't know the difference between bank balances and bitcoins, and they use a combination of both, relying mostly on bank balances, as with today, because of the promises of interest, the use of debit cards, and the advertising budgets of the financial sector, along with whatever other reasons. Banks continue to give backless loans, inflating the money supply by typing numbers into their spreadsheets, and then these numbers, assumed to be bitcoins by the population, move goods. Inflation happens.
I think we've advanced a bit further in our discussion. We've now come to the agreement that it is mainly government intervention into the market, in the form of legal tender laws and taxation (among other things) that keeps a dishonest currency stable and prevents it from collapsing. Am I right on our agreement on this so far?
Let's say that we don't have government intervention into the Bitcoin market. I know we can argue on if and when it is going to happen, and I don't see it as a very fruitful argument because there is no way to really be sure on how effective government intervention would be or what form it would take. For the sake of a free market analysis, let's look at the situation without intervention taking place.
I believe that you've made two main points as to how you see a dishonest banking system operate:
* Loans are compounded upon loans, therefore increasing the amount of money chasing goods and creating general inflation.
* The banks stay solvent by "not being stupid"; by ensuring that the ratio of deposits to reserves does not get so out of hand that it is possible for a single depositor to single-handedly bust the bank.
I don't deny that it may be possible for a bank to loan out some of their "on-demand" deposits and thereby create some inflation by creating more liquidity than was saved. I also don't deny that they might be able to keep up the charade for a long time by advanced management of their reserves. What I do deny is that such a system can possibly expand without limit, either in the aggregate or for individual banks.
I also think you made the same case yourself, in your answers above. Let's look at our "stupid" bank scenario again:
Our wealthy depositor deposits 100,000 BTCs at a bank which engages in aggressive fractional-reserve banking. They tell him that the funds are available anytime, but in reality they keep some in reserves. There are 500,000 deposits total. In order to avoid being busted out by a single reserve, they decide that they need to keep at least 150,000 BTCs in reserve.
Let's say that our banking system continues to give backless loans, which are used to make new deposits, which are then being used to create ever more loans.
Let's say that our wealthy depositor is one of these guys. He takes out a 100,000 BTC loan from another bank, and deposits them at his bank. We must also assume that his bank will accept credit from another bank in place of actual Bitcoins.
What happened then? The depositor now has 200,000 BTCs at the bank, but the bank still only has 150,000 BTCs in reserve. If they don't want to be "stupid", then they must somehow acquire additional BTCs. Since it turns out that the amount of real BTCs in the economy is fixed, this might lead to trouble for the bank.
The alternative is that we end up denominating the depositor's account in the form of two currencies: 100,000 in BTCs, and 100,000 in (private bank) quasi-BTC currency. They would not be the same currency, since the second one would not be redeemable for actual BTCs but would merely be "BTC-backed". We then end up with an exchange rate between the two, and it is possible that that bank's currency will go bust.
Without legal tender laws forcing people to accept private credit as equivalent to actual BTCs, or confiscation of actual BTCs in exchange for paper credit (much like what happened with gold in the 1930s), there is simply no way that such a system could perpetually inflate ad infinitum. As total credit increases, the ratio of credit to real BTCs increases. Therefore, the ratio of reserves to credit decreases. Even with statistics, a bank will eventually be caught since their deposits will be too large in relation to their reserves. We have also ignored the effects of interest until now, but interest also has a damping rate (on the demand side) on the expansion of credit since loan interest must cost more than deposit interest pays in order for the bank to make a profit.
The root of this is the legal tender law. Whether dollars or bitcoins are the legal tender, backless credit denominated in those amounts are still legal tender. Meaning that it is literally impossible to reject these inflationary forms of payment and have the courts enforce that you receive what you are owed. Thus, to end inflation, a repeal of legal tender laws or a repeal of the right of banks to issue backless credit is a necessity. In all other circumstances, the result is inflation or anarchy. Bitcoin use does not change these laws, therefore, either the current system, or no system, remains in force.
All of these are monetary policy issues. My only complaint is that the website seems to imply that widespread use of bitcoins fixes them. It doesn't. Only abandonment of the current system, which requires abolition of legal tender laws, then either a boycott of the banks or abolition of the right to issue backless credit, solves them. Bitcoins are better than dollars, yes, but they do not solve these problems.
All of these are monetary policy issues. My only complaint is that the website seems to imply that widespread use of bitcoins fixes them. It doesn't. Only abandonment of the current system, which requires abolition of legal tender laws, then either a boycott of the banks or abolition of the right to issue backless credit, solves them. Bitcoins are better than dollars, yes, but they do not solve these problems.
What I would like to know is how the government is going to force people to accept a quasi-BTC currency in place for the real thing. I have already shown how it is impossible for the banking system to expand BTC credit without hitting a wall somewhere. I don't think the government can go and confiscate BTCs and/or force people to accept quasi-BTCs in place of the real thing. A government would have to be totalitarian to have that kind of reach, especially in the digital sphere.
Where the trouble lies is at the Bitcoin boundary with fiat currency, the physical world, and government regulation. These are all separate issues, and we could probably start another thread to discuss those. Also, BTC's don't need to replace the entire system, they just need to be good enough to compete with it
Currency monopoly is not desirable IMO.No government will allow its tax base to atrophy by what is essentially the use of an untaxable resource. That would be a threat to its control, and governments love their control. However, my issue is not with whether we will be taxed. I don't have a problem with (justly done) taxes. Someone has to pay for the roads on which I drive to work and the men who ensure that the water in my tap isn't laced with lead. (Now, whether the current administrations do well at these jobs is another story, but I'm not an anarchist in theory).
Agreed; however, I believe that the current world order is simply a stage on our continual evolutionary journey to the future. I have come to the belief over time that the only moral system of contract for humans is a voluntary contract, and the most efficient economic system is one that is based on such voluntary contracts and subjective value. All involuntary impositions are a form of servitude, to one degree or another. I don't think we're ready to live in a world without government and taxes, yet, but I believe now is a good time as any to increase the competitive pressure on government and to increase the choices out there.
More interesting reading:
http://blog.mises.org/12890/credit-expansion-vs-simple-inflation/
http://en.wikipedia.org/wiki/Anarcho-capitalism
http://athousandnations.com/
I've enjoyed this conversation with you; thanks for the good discussions so far!