Lots of the time on here I see people complaining about the existence of FRB while at the same time preaching the free market and real money. I think its important to understand what the so called "real money" is, and why FRB is not only unavoidable but the only way for an economy to succeed assuming a free market. In short, in the current system, money is backed by debt issued by a central authority and there's a theoretically unlimited supply of it. In what many people here seem to think is a "real" system, money is backed by something in limited supply, and not debt, and is decentralized. In reality, in order for an economy to truly be stable, there must both be a decentralized limited supply of money AND it must be backed (at least somewhat) by debt.
Scenario: Money in a limited supply without debt.
First, money is in a limited supply, so people hoard it, as its going up. Then, something happens, and some big holders stop holding it. This is usually triggered by a period of huge expenditures, such as war, a bubble in another commodity, or when a great new invention is created that everyone wants. People decide that owning that new product, or spending on war, is preferable and will produce a greater return over the economy in general than hoarding actual currency. This means that contractors/producers of the new product either start hoarding the new product, or they run out of supply. This drives the price of the product up, reducing the economy-wide deflationary effect. What follows is an economic boom where everybody is spending their currency, and since nobody has any real reason to hoard it now that its decreasing in price anyway, it money velocity increases and eventually the currency goes to 0 and is forgotten, unless some people hoard it again, beginning the cycle anew. Result: Hugely unstable boom-bust economy. Eventually, one of these people that buys up the currency decides to lend it out, leading to the ideal "debt/limited supply" hybrid economy.
Now for the debt-only backed system.
In the debt backed system, all money is backed by debt meaning that the entire money supply is ultimately owed to a central issuer (there could never be multiple issuers under this system, because each issuer would be afraid that the other would print more money - to clarify, each currency can only have one central issuer, although there can be multiple different currencies, each of which has their own issuer). The central issuer, since its lending out the entire money supply, collects what is effectively rent on the entire money supply. This system can have one of two possible outcomes: Either hyperinflation to zero, or the accumulation of almost all goods and services by the issuers of the currency. The reason is this: The money must be paid to the issuer with interest. So, either the issuer spends that interest, putting it back into the economy, which gives him some hard good or service, moving that good/service into his own hands from the hands of the masses; or, the issuer hoards that interest, forcing defaults, moving the collateral to the hands of the issuer, again taking it from the masses; or, the issuer issues more debt to those already in debt so they can pay back the interest, constantly increasing the money supply, leading to hyperinflation.
Finally, for the hybrid system:
There is a currency of limited supply which people are spending on products. Some holder(s) of a larger amount of this currency lend currency out to individuals, to collect interest. This creates a fractional reserve banking phenomenon, as those holder(s) realize that they can profit from a spread between the interest they pay smaller holders or holders requiring more liquidity, and the interest they collect themselves. Unless the currency is already too centralized (in which the interest causes almost all the currency to be collected by one individual who then deflates it to magnify its worth, and then engages in what is effectively a debt-only backed system) there will be multiple of such lenders. These lenders will be motivated to lend for collateral worth less and less more than the underlying currency. This will cause a period of slight inflation, but it can never inflate too much, because each lender has a limited supply to lend. If the effective reserve ratio ever becomes too low (i.e, there's too many "layers" on the fractional reserve pyramid), then money will be easy to come by, and some individual will hoard it, which will cause others to default, which will move the property used as collateral into the hands of the original lenders, causing, once again, one person to have property and another to have the money, causing the system to repeat once again. Since, of course, the collateral on the loans last issued would be valued the most vs. the currency, and the currency would deflate during the period of defaults, the lenders would lose money each time this occurs, rewarding reasonable reserve requirements. As such, through normal free market "selection of the fittest", the best lenders survive while the rest fail/give up, meaning that the currency stabilizes over time. Of course there will always be some fluctuation in the value of the currency. But hopefully you can see that the currency can never deflate more than the excess collateral %, and can never inflate to the point where a new group of banker(s) can afford to buy up a significant portion of the money supply. This probably has some correlation to the Gini Coefficient, but I'm not going to calculate it because that is too hard
Tl;Dr: Debt-backed system doesn't work. Limited supply system doesn't work unless there's also a lot of lending going on. Currency (and whole economy for that matter) will be most stable when there's a wide distribution of wealth among both non-bankers and bankers. The bigger the difference between the wealth of bankers, and the wealth of non-bankers (taking into account both currency and assets used as collateral), the more potential the currency has to inflate.
