User talk:PeterSurda

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Revision as of 00:08, 11 November 2011 by Atheros (talk | contribs) (my response to the text on my discussion page.)
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Bitcoin Substitutes are not required for Bitcoin Fractional Reserve Banking any more than dollar substitutes are required for Fractional Reserve Banking with dollars. Even Fractional Reserve Banking with gold currency is possible- no gold substitutes are needed.

--Atheros 05:14, 7 November 2011 (GMT)

Bitcoin Substitutes are required. Please explain how otherwise you can expand the supply without using magic.

--PeterSurda 10:00, 7 November 2011 (GMT)

I've just read your response. Can you please provide another link to the PDF? I'm having trouble finding another one on Google based on the file name.

You said: "With fiat dollars, the base money are the reserves the commercial banks have with the central bank"

Why must the reserves be held at a central bank? I see no reason that this is necessary.

You said: "Only the central bank can create the reserves. "

What does this mean? If a commercial bank holds money in an account from which they do not lend out any money, then that money is held in reserve.

You said: "With gold, banks take in gold bullion or coins, and provide either bank notes, account balances or cheques as substitutes. The banks in case of gold money cannot create more gold any more than in case of fiat money commercial banks cannot create more reserves."

Ok, suppose they did not provide cheques or bank notes. Suppose that they only provided an account balance. I suppose you could call this account balance a substitute, but I've never heard it called such a thing. No one calls their bank account balance their "substitute dollars". For all intents and purposes, they consider their balance to be as good as dollars- indeed they can demand dollars at any time which is why the deposits made with the bank are called demand deposits.

In response to the rest of your post, you seem to be saying that because Bitcoin has no substitutes, then there cannot be FRB. My response is to say, first of all, that I'm just barely going along with your idea of a substitute anyway. I still don't see why having or not having substitutes has anything to do with FRB. But I will respond to your paragraph anyway because it contains a contradiction which makes winning this argument easy. You have previously defined that account balances are substitutes, correct? And Bitcoins can be put in accounts, right? So then the user would be presented with an account balance, for example their MtGox balance, right? So there is your substitute! You have said that "The only way to do FRB is to present an alternative, a substitute, which of course is incompatible with Bitcoin". Thus we have a clear contradiction in your logic.

I will now respond to your sentence above: "Bitcoin Substitutes are required. Please explain how otherwise you can expand the supply without using magic."

It is important to recognize the difference between Currency Supply and Money Supply. The currency supply of bitcoins is limited to 21 million. Money supply is higher because it includes demand deposits. Let us take an example: Suppose that there are only 100 Bitcoins on Earth all owned by Satoshi. He puts all 100 in Bank Alpha. Bank Alpha puts 20 of the bitcoins (20%) in a special account and leaves them there. They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. The total money supply of Bitcoins at this point is 180. You can see that there is no magic required. Now, Gavin buys some LolCat comics from Cameron for 80 bitcoins. Cameron puts his 80 bitcoins in his bank, Bank Beta. Bank Beta puts 20% in reserve (16 bitcoins) and has 64 to lend out. They lend those 64 bitcoins to someone else. Cameron's account page on Bank Beta's website says he has 64 bitcoins in his account. The money supply of bitcoin is now 100+80+64 = 244 bitcoins. Supposing all banks put 20% in reserves for safe keeping, and suppose everyone uses banks (as opposed to keeping them in a wallet on their computer) then the money supply of bitcoin will max out at 500 bitcoins. Obviously because some people will hold their own bitcoins and because they will be used out in the world for transactions, the money supply wouldn't reach 500 bitcoins, but it can easily exceed 100.

An obvious response is 'Well what happens when Gavin takes his bitcoins out of the bank!?' The answer is that that is what the reserves are for. Although not reflected in this example, the actual reserves held by a bank would be vastly greater than the amount held by any one person.

And that is how Fractional Reserve Banking works.

--Atheros 00:08, 11 November 2011 (GMT)