[admiralg]

(please don't hesitate to correct me if I'm wrong) Say there are 3 customers at a single bank.

Customer 1 = Investor, has 100 cash and deposits it into a bank account

Customer 2 = Borrower, borrows 100 from the bank

Customer 3 = Restaurant, provides a service for Borrower. Borrower pays a 100, and Restaurant deposits it to it's bank account.

This is how the "sovereign money" travels: Investor -> Borrower -> Restaurant

But the customers see the following account balances

Investor : 100

Borrower : -100 (owes the bank 100)

Restaurant : 100

If now Investor and Restaurant both want to withdraw their money the Bank would be in trouble. The bank only has 100 "sovereign money" on their books. Investor and Restaurant won't care who owes the bank, they want their money.

But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm.

[teilo]

Sort of, except that the bank can only lend out 90 of the 100 with, for example, a 10% reserve.

But in the end, that doesn't matter. The process is multiplicative, with a diminishing return.

Presuming that 10% reserve, when the restaurant deposits that 90, it can then serve as a reserve for the restaurant's own bank to lend out 81 which will then be deposited in someone else's bank. Now there is: the original 100, the 90, and the 81 all deposited as funds. 100 magically becomes 271, with the corresponding debt offsetting it. Rinse and repeat.

The reserve requirement is the only real brake on runaway inflation. With a 10% reserve, the theoretical maximum amount of money that could be created is 9X the original deposited amount. The formula for the multiplier is: 1 - (1 / reserve%). Of course, that's the theoretical maximum. It never goes quite that far.

But of course, then there's the interest that must somehow be paid. Interest is the only reason we have banks in the first place. It is why people deposit their money in banks, and it is how banks make their money. No interest, no banks, and (consequently) no loans. Since most money is actually created through loans, there is not enough money in the system to pay off the loans and the interest. The only way to pay back that interest is if loans continue to be made and the money supply perpetually expands. This is why we have central banks and government monetary policies.

Keep in mind, that this is all a simplification of the process. There are many layers to it, especially when the central banks get involved. Witness the Fed system in the US with the lending windows, T-bills, the role of government debt, etc. But it all boils down to the same thing when you strip the layers away.

If the sovereign currency referendum passes, the Swiss will inevitably have to deal with this problem. Their central bank will be forced to expand the money supply electronically in the form of loans made to banks, with an ever shrinking reserve. I just don't see this referendum making any difference whatsoever, except to centralize all debt.

[nickik]

> But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm.

That is totally wrong. That solution has existed for 100s of years and you can have 100% reserve accounts now if you like.

The reason its not used now is the same it was not used in 1800 Amsterdam. People want interest.

We don't need a 'solution' its a perfectly fine system IF you actually allow banks to be real companies and not part of the government protected services. The problem is the government saving banks.

Note, I have nothing against monetary policy during a crisis, but that should focus on the avg. bank, not at saving bad actors.

[0x4f3759df]

You left out the reserve requirements, wiki has a nice chart on how reserves affect expansion. https://en.wikipedia.org/wiki/File:Fractional-reserve_bankin...

I've heard people say that the fractional reserve system causes the boom and bust cycle, because when banks lend money, the create the principal not the interest which leads to a shortfall at some point. Not sure if this is right tho.

[mkstowegnv]

Money has a very long history and discussions about money are deeply entangled in bitter and fanatical battles between political/ religious/ philosophical viewpoints. Many of those viewpoints ignore the counterintuitive ways that money and banking actually work. For the most part, bankers and economists have a vested interest in keeping as many outsiders as possible from understanding how it really works.

For all its flaws and strange history, the first Money as Debt video [1] still makes the most sense to me and I have yet to find an economist at a dinner party who refutes the disturbing conclusion that modern monetary policy is inherently unstable and depends on continuous economic growth. I welcome any links to any counterarguments that are not a confusing morass of obfuscating terminology. Show me a crystal clear model, or a common sense presentation like this video, that argues that the current monetary system is not a Ponzi scheme.

1 https://www.youtube.com/watch?v=4AC6RSau7r8

[nickik]

> I've heard people say that the fractional reserve system causes the boom and bust cycle

That is only with Austrian Economics and even there its not the majority position. Its actually only the position of a subgroup called 'Rothbardians'.

In a real market for banks the reserve ratio was determined by relative demand to hold money. Meaning if demand to hold money was high (low monetary velocity) banks could reduce their reserves. The elegance is that the profit motive makes banks automatically conduct policy like that and it leads to overall stability (at least most of the time).

The western world has spent a lot of time destroying these mechanism and replacing them with layers of regulation that are impossible to understand and get influenced by what the banks want.