Of course, bank runs become possible; which is why fiat currencies with FRB in place need a central bank to act as a lender of last resort -- the lender of last resort's role is to make bank runs blow themselves out. Once everyone has their savings withdrawn during a run, what do they do with them? They observe that the bank is still standing and deposit it again. The bank can then return the money to the lender of last resort and everything is back to where it started.
Unless everyone decides to buy gold (or other tangible assets) with that money, in which case the money quickly becomes worthless.
In the case of bitcoin, it's clear that the
supply monetary base can never exceed 21 million, no matter how much lending or fractional reserve banking takes place. However the
*effective* money supply could expand with lending activity or fractional reserve banking so long as such obligations are nearly interchangeable with actual bitcoins (i.e. people view 100 BTC on deposit at some bank as nearly equivalent to actually possessing 100 BTC).
Modifictions by me.
It's not necessary to debate whether the money supply is expanded or not…if you're talking about actual bitcoins, it clearly is not. If you're talking about bitcoin substitutes (like bank deposits or other type of loans or contracts), you could call that credit expansion/contraction. To the extent those credit instruments can be used like money, you are *effectively* expanding the money supply.
No the money supply IS expanding. There isn't anything different between you depositing 100 BTC into a BTC bank and you depositing 100 USD into your local fiat bank. In both cases the monetary supply is expanded via fractional reserves. Does your local bank say $100 USD deposited or do they give you a statement saying 100 LocalBankScripts (not expanding money supply)?
It isn't "effectively" expanding the money supply. IT IS EXPANDING THE MONEY SUPPLY.
The 21M is the MONETARY BASE. The difference between BTC and USD isn't monetary supply expansion via fractional reserves (which works exactly the same
) it is the monetary base can never expand. In USD the central bank directly expands the monetary base and then individual banks using fractional reserves acts as a multiplier on that base to create the money supply
I think what confuses people is that modern fiat currencies work on two principals.
1) Central bank issues currency (at the whims of central bank)
2) Deposit banks acts as a multiplier effect on that monetary base
BTC:
Fixed monetary base (21M)
Multiplier is possible via fractional reserves.
Money supply = (21M) * (Money Multiplier)
USD:
Infinite monetary base (can be expanded or contracted at will be federal reserve)
Multipler is possible via fraction reserves.
Money Supply = (variable base) * (Money Multiplier)
An important thing to note is the asymptotically relationship in the curves. Fractional reserves can only expands the money supply so much. With 10% reserve requirement at most you can expand the money supply 10 fold. With 50% reserve requirement you can only expand the money supply 5 fold.
Since BTC monetary base is fixed at 21M then the money supply is also capped at
BTC Money supply = (21M - losses) * (Sustainable Multiplier)
There is no requirement for a particular reserve. A fractional Bitcoin bank could maintain 1% (or less) reserves but those banks likely would go bankrupt. The "community" will set the max reserve requirements by free market (only banking w/ trusted banks who set conservative reserve requirements).
So for example if the BTC economy achieved a 2x money multiplier then BTC money supply would be 42M BTC. The actual money multiplier will demand not only on average bank reserve requirement but also in the % of monetary base held in banks. Given the ability to secure BTC outside of banks many users may adopt to never put their money in banks.