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That's not a fact. Money can and will be created out of thin air regardless if your monetary system is built on central bank money, gold or even bitcoin. A nai

That's not a fact. Money can and will be created out of thin air regardless if your monetary system is built on central bank money, gold or even bitcoin. A naive example: Alice has a gold coin. she walks to a bank and makes a deposit. Now she has one gold coin in her bank account and bank is holding her coin. Now Bob walks into the bank and says that he needs a loan of one gold coin to buy things. Bank happily lends the coin received from Alice to Bob. Bob walks to Alice and buys things from Alice and gives the coin to Alice. Now Alice has one gold coin and another gold coin at her bank account. Total amount of money she has is now two gold coins, even if only one gold coin exists in the whole universe! And yes, that money at her bank account is as real money as money nowadays gets. And yes, the truth is even more weird, you do not even need to circulate the money as in the naive example, banks can and will just create money out of thin air to people's accounts. After all, the money at the account is literally, literally nothing more or less than a way for bank to say that it will pay you money some later date if you so wish. To make that promise, you do not need any money to exist anywhere. Even I can do that promise on any imaginable currency (what that promise is worth is another discussion). And as said, this has absolutely nothing to do with what "base money" the monetary system is built on. And of course, this is the reason why financial system is so heavily regulated.

throwaway13337 6y ago
That promise is based in trust that when someone wants their gold back out, they can get it. If there is little confidence in that, people wouldn't store their gold there. There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money. I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.
- pessimizer 6y ago
  > There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed. edit: it's certainly physically easier to have no reserves than to print infinite paper.
- beefield 6y ago
  That natural limit is way, way, beyond levels that cause catatrophic disturbances in economy[1], thus the distinction is irrelevant. [1] See your favourite mania, or even crisis of 2008 that can be argued to be because of failure of regulation to limit leverage of financial institutions.
throwawayboise 6y ago
But Bob has -1 gold coin in his bank account, so there is still only 1 gold coin. If Alice deposits her "new" gold coin into her account, the bank still has only one coin. If Alice demands to withdraw her 2 coins, the gold bank won't be able to comply, whereas the fiat bank would just print another coin.
- beefield 6y ago
  That's not how amount of money is calculated. If you did, you would end up with a funny result that there is no money at all. As all modern money is debt from someone to someone else.

throwaway13337 6y ago

That promise is based in trust that when someone wants their gold back out, they can get it. If there is little confidence in that, people wouldn't store their gold there. There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money. I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.

pessimizer 6y ago
> There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term. The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed. edit: it's certainly physically easier to have no reserves than to print infinite paper.
beefield 6y ago
That natural limit is way, way, beyond levels that cause catatrophic disturbances in economy[1], thus the distinction is irrelevant. [1] See your favourite mania, or even crisis of 2008 that can be argued to be because of failure of regulation to limit leverage of financial institutions.

throwawayboise 6y ago

But Bob has -1 gold coin in his bank account, so there is still only 1 gold coin. If Alice deposits her "new" gold coin into her account, the bank still has only one coin. If Alice demands to withdraw her 2 coins, the gold bank won't be able to comply, whereas the fiat bank would just print another coin.

beefield 6y ago
That's not how amount of money is calculated. If you did, you would end up with a funny result that there is no money at all. As all modern money is debt from someone to someone else.