Given that I actually agree with you up to that point, how is my line of reasoning bunk? My point still stands. The supply if Bitcoins is limited: The banking system in aggregate cannot find enough Bitcoins if it loans its on demand deposits out! Why should the depositor accept quasi-bitcoins in the form of banking credit instead of the actual thing? On demand deposits simply cannot be loaned out if a banking system is to ultimately remain stable. Sure, some banks can try to do it, but then they better not call them "on demand deposits". Some might get away with it, but sooner or later, someone will find themselves between a rock and a hard place. Deposits can be loaned out, but not with a guarantee of redemption. That is simply impossible as Bitcoins cannot be created out of thin air.
So supposing that there exist bankers that take on-demand deposits of BTC and make sound-loans of BTC that pay interest in BTC. What I'm saying is no fraud or scamming by bankers. And no hedging on my part, these are fractional reserve banks. They lend out any 90% of depositor's BTC and keep 10% on hand as easy "cache".
What you are proposing (and I hear proposed by others as if it were a common case) is a run on all banks at the same time of all "on-demand" BTC deposits.
Now, one unacknowledged possibility is the "on-demand" deposits are paid with BTC from term deposits like CDs. But perhaps you considered those "on-demand" with penalty and the run includes those.
Now if "good banking" is going on and there is no BTC in-house, then all the BTC is out on BTC interest producing loan and is backed by collateral. That makes these loans nice low risk "BTC income producing properties". So at that point the banks can sell these nice low risk BTC income producing properties to other investors willing to pay BTC now in exchange for more BTC later. If there is a default the investor claims and sells the collateral.
If you unwound every loan this way, all the BTC would be returned to the depositors, and outside investors that used to have cash, would now hold sound low risk BTC income producing properties. In effect, they would be the new banks, but they would also be their only depositor. If they wanted their BTC back, they would have to sell their investment property to someone else.
If I've explained this coherently, can I consider the BTC fractional reserve banking myth "de-bunked". :-)
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One of the best things about BTC is that it is a high velocity currency. We don't talk about that much. But because it is, it would be much faster to unwind this situation than with the lending of gold or paper. That is why banks deal with electronic currencies so much.
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However, I still maintain that with planned monotonic deflation, BTC banking will not evolve. Deflation simply causes too much risk. (see the thread on negative interest) There will likely be speculative high-risk/high-reward investments, but they will be done by "the bitcoin rich" rather than by average individuals pooling their money in on-demand banking.