Try this one with your friends. Tell them that if there were no debt, there would be no dollars, because debt and dollars are the same thing.<p>You can quote the former chairman of the Federal Reserve Board, Marriner Eccles[0]: "That is what our money system is. If there were no debts in our money system, there wouldn't be any money."<p>This is a simplification, but it's an accurate one, and is widely understood by anyone paying attention[1].<p>Without even getting into a debate about the merits of our central banking system (or cryptocurrencies), most people are surprised by this fact. Most folks I have spoken to think that the dollar is still backed by gold.<p>[0] <a href="https://mises.org/library/our-money-based-debt" rel="nofollow">https://mises.org/library/our-money-based-debt</a><p>[1] <a href="http://www.npr.org/sections/money/2011/10/21/141510617/what-if-we-paid-off-the-debt-the-secret-government-report" rel="nofollow">http://www.npr.org/sections/money/2011/10/21/141510617/what-...</a>
> After all, banks remained basically insolvent in this fractional reserve scheme.<p>This is incorrect. Bank solvency has to do with the assets of the bank, even in markets with commodity (e.g., gold) or representative money (e.g., gold-backed paper). The assets of a bank include loans, the liabilities are the money the bank owes to depositors. There is no reason a bank can't take a gold deposit and loan it out (thereby, "creating" gold).<p>The purpose of a central bank, at least in orthodox economics, is to loan to solvent banks that are nonetheless cash-poor. Imagine a mismanaged bank, that has loaned too much, and cannot meet the demands of depositors. If the loans + cash are more valuable than the deposits, the central bank will loan to the bank to meet their temporary cash shortage. [0]<p>This is essentially what happened in the case of AIG. The Fed believed that the value of AIGs assets were greater than its liabilities, and loaned them the money at a penalty rate. The Fed believed that AIG was _solvent_. There were a number of extenuating factors here that I'm glossing over, but that is the underlying point. The reason that Lehman was not saved was that the Fed had substantial reason to believe that the assets (primarily the sub-prime loans) were not worth more than the liabilities, and the Fed will not lend into hole. Lehman was _insolvent_.<p>Fractional reserve banking, by itself, does not suggest solvency or insolvency. Without fractional reserve banking, there cannot be credit. Sharia banking is an example of full-reserve banking, because interest is prohibited, so there is no incentive to loan. (There are ways Islamic banks get around these prohibitions).<p>[0] I would suggest looking at Bagehot (1873) for a full description of this idea.
This is full of misunderstandings about monetary policy and money creation.<p>Currencies that are not designed to lose value over time can not be stable.
Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity.<p>This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens.<p>Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics.<p>The 1920s and 1930s suffered from this type of cycle but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular.<p>When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).<p>It's true that crypto currencies are currently not sufficiently widely held to significantly affect the macroeconomy but speculation already keeps them rather volatile and the knowledge that as they get more popular you get additional volatility pressures, will keep the speculation wild and the deflationary cryptocoins unstable.
This post is a repost of: <a href="https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quick_reminder_why_bitcoin_was_invented_in/" rel="nofollow">https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quic...</a>
Similar to that Paul Graham article earlier. Could we get a relink?
The part about the Liberty Dollar is fearmongering. It was shut down because it looked and sounded too much like the US Dollar.<p>Toronto Dollars existed. Bristol Pounds exist now and are thriving. Oakland just opened their own bank. Nebraska had its own banks. There are time banks, Berkshares, and so on.<p>I used to think local currencies are illegal but as long as they are Complementary Currencies and fiat is still legal tender for all debts, that's not true.<p>Look it up on wikipedia (virtual currencies, complementary currencies). Congress retains the power to mint coins, that's it. There has never been a court case that tested whether Congress can crack down on complementary currencies. And the USA never did, except in the Liberty Dollar case for sounding too similar.<p>So the article is wrong about that. You can actually make a centralized currency as a city or even as a community. What do you think payment networks like VISA, PayPal, Patreon etc. do? Sure some need to register as money transmitters. But others are just marketplaces like AirBNB. They do payouts via Stripe etc.
Dumb question, because I'm still trying to grasp bitcoin... Doesn't the recent "split" show that bitcoin still isn't addressing the common need? It still appears that a few central players are controlling how it is created, backed and exchanged.
> People used to pay each other in gold and silver. Difficult to transport. Difficult to divide.<p>It would be interesting to hear some of the history behind why gold and silver were decided to have value. What are the steps leading up to the first point in this post?
If you ever did econ 101, you might be shocked to read this:<p>R.A. WERNER,
A lost century in economics: Three theories of banking and the conclusive evidence<p><a href="http://www.sciencedirect.com/science/article/pii/S1057521915001477" rel="nofollow">http://www.sciencedirect.com/science/article/pii/S1057521915...</a>
The fundamental purpose of a currency is to pay taxes and debts.<p>Which means that bitcoin isn't really a currency, it's just a particularly transportable bottle of wine. Nothing more than an intangible asset.<p>You still have to swap it for some actual currency at some point - or go to jail for tax evasion.