In practical terms I don't see how this is necessarily a huge issue in the one case and not in the other.
In the case of fiat currency, the supply of money is based primarily on 1) Increases/Decreases in the loans provided by banks and to a lessor extent 2) a central banks balance sheet.
I don't believe it's possible to add to the supply of bitcoins simply by loaning them into existence vs. fiat currency. That is, there isn't a closed-loop system similar to the banking system that allows for this elasticity of bitcoin units.
I'm not advocating that this is a requirement or even desirable, it's just a limitation that I don't see often discussed.
Of course you can. People deposit BTC in your bank, and you then loan that out to others while telling the depositor that they can withdraw at any time.
cash, on the other hand, doesn't suffer from this predicament, since it's legally must be accepted. so Bitcoin lending via credits can't work, if at all.
My only point was that this wouldn't equate to more btc in circulation, just more credit.
Just adding that the system above, rightly or wrongly was not sufficient for the expanding credit requirements of the world.
> so it definitely can work. Depends upon what your definition of work :)
> My only point was that this wouldn't equate to more btc in circulation, just more credit.
Exactly. And be subject to the problems with bank runs because of the inelastic nature of gold.
First, without a change in bank legislation and/or rules, I'm not sure a bank could take bitcoins as a deposit. Second, even if they could, if a bank loaned out more bitcoins than it possessed it would be subject to the possibility of a run on depositor's bitcoins. Finally, unlike fiat currency, the central bank in order to end the run could not produce "temporary" new bitcoins to make depositors "whole". I use quotation marks because sometimes new fiat is not temporary and all depositors in the system are not necessarily made whole.
The FDIC is involved if the bank fails, the central bank is involved to prevent the bank from failing. So the central bank is very much involved in the prevention of bank runs.
> That's the job of the FDIC, which doesn't print new money, it keeps a reserve from funds levied upon private banks.
That reserve is a small fraction +/- 1% of deposits.
> All of which could certainly exists in a Bitcoin world. An FDIC-like institution could exist in the Bitcoin world, however, the central bank powers as well as bank's power to increase the bitcoin supply at will could not. For better or worse, this would put us back in pre-fed banking world prior to 1913.