Topic: Private banking and fractional reserve - page 2. (Read 3039 times)

I agree... the ratio should be chosen by the bank and it should be well publicized.  Let the market decide.

I'm fine with fractional reserve banking, as long as there is no central bank. If people understand the drawbacks of fractional reserves, I think most will naturally gravitate toward banks with high reserve ratios, and only those that understand the risks will keep their money with a lower reserve bank. The threat of runs will serve as a market regulator of the reserve ratio.

Would such a clearing house actually be fractional reserve?

Anyway. From what I've read in ye olde times there was savings banks and investment banks.
You actually paid the bank to keep your gold safe back then. They didn't use it for loans etc.
Then you had the investment banks where people with cash to burn got together with a pool of money and invested in some business.
Today all types banking are blurred together in one big mess.

I'm not an expert but I'll now attempt to trace how fractional reserve banking works.
For simplicity I'll omit the interest which will just make everything worse anyway.

100 BTC gets deposited into Bank A.  Let's say they run a 10% fractional reserve system.

Bank A loans out 90 BTC and keeps 10 BTC as reserve.

Most of these 90 BTC will end up in a bank somewhere, lets call it Bank B.

Bank B loans out 81 BTC and keeps 9 BTC as reserve.

Again those 81 BTC end up in another bank, Bank C

Bank C loans out 72,9 BTC and keeps 8,1 BTC as reserve.

....etc etc etc 

Worst case this would mean that all the banks A+B+C+D+E+F+..etc  accumulated have outstanding debt of 10 times the original amount of 100 BTC = 1000BTC.

This is now counted as banks assets? and used to set price for it's stock, which gets bought with BTC.
Debt is also packaged together and sold as "products" to others who pay BTC for them.
This gives the banks more BTC, to lend out at fractional rate as before and the loop can go on and on for a while.

Then suddenly people realise the stocks and "products" aren't worth what they first thought it was.. Banks folds,  people lose their savings... major crash, rich bastards at the top with super salaries sell out just before it all goes to hell and laugh like crazy.

So what got inflated here?
As far as I can see it was not BTC, but rather the stock and the perceived value of the banks and their products.
The trade going on here kinda makes both debt and stocks into money, and they can be generated at will causing wild inflation.

Is this assessment correct? If not please educate me/us.


How can the buyer/investor know the real assets backing the banks in a free market system?
Is there some way to use bitcoin system to make banks transparent? or is trust the only thing we have..

I notice that there is a huge intersection between Bitcoin advocacy and total reserve advocacy, and I'm sort of curious how big that intersection is.

It sort of rubs me the wrong way that people who consider themselves free-market advocates are opposed to fractional reserve banking even when it's a publicly stated policy of a free, privately operated bank. If this opposition takes the form of simply saying "I don't want to put my money there," there's no argument in principle---you are free to take your business wherever you choose. But saying that fractional reserve is a fraud seems extreme to me. It's only a fraud if it's advertised otherwise.

I also ask because it seems to me there are some forms of fractional reserve that are perfectly safe and non-inflationary. For example, consider the clearing houses that used to operate at medieval city fairs, with merchants coming from afar to trade goods. Rather than bring all their precious silver along and open themselves up to the threat of highwaymen, merchants would register the sale price of their wares, and be issued paper scrip to trade with. At the end of the fair, traders would bring their remaining scrip back to the clearing house to settle up. If you had a surplus, it was payable in coin; if you had a deficit, presumably you had some unsold (or purchased) products you could use to pay off the debt. Everything was nominally done in metal coin, and debts were payable in coin, yet very little reserve was needed. If this was an act of fraud, who was defrauded?

We're so far removed from a commodity-based currency system now that people don't actually have a good idea of how one works in practice. Tools like the above were in use for centuries without any damage to the value of money. I'm not even going to say they're the right thing, but they're at least reasonable enough that I would like the option to be available.