> [Banks] are a place to store money securely* and make sure it's easily available and exchangeable.
Not at all--what you're thinking of are "wallets." :)
Banks are places we put money to prevent it from losing value. Money kept in a wallet (or under a mattress) steadily loses value because of inflation. A bank counteracts this by loaning out the money we give it (earning it money on interest), and then paying us another, smaller interest rate for our deposits in turn, which will offset inflation to whatever degree. Other entities also do this--mutual funds, for example--but banks do it while also making our money still somewhat convenient to re-liquidate and transfer; others may require, for example, 30 days' notice to facilitate withdrawal.
One thing that's very interesting about Bitcoin is that, once it's all mined out, there won't be any inflation (or deflation) of its supply--the amount of Bitcoin out in the world will become effectively fixed. This means that, by and large, "banks" (in the "savings bank" sense; investment banks are a separate beast) are pretty irrelevant to a Bitcoin-based economy: there's no need to protect the value of your money; it's stable just sitting in a wallet.
This property of Bitcoin might do strange things to the global economy if Bitcoin becomes more widely adopted. In effect, it would be a global version of what some Eurozone countries have experienced, where they have control over their fiscal policy (taxes and spending), but no control over their monetary policy (ability to print money.) It's common wisdom in Economics that at least a little bit of inflation is good--otherwise people tend to hoard money instead of investing it ventures that improve GDP. In a wholly-Bitcoin economy, there's no particular fear-based incentive to invest over just sitting on your money. (There's still a greed-based incentive to invest with banks for increased risk = increased reward in good economic times, but in times of economic volatility, the "flight to quality" toward stable Bitcoins would be absolute, moreso than treasury bills or gold have ever been.)
This is simply spinning the story into the bitcoin manifesto if I ever saw such a thing.
Banks keep money secure. Wallets don't.
You seem to operate entirely in a world where inflation is the only thing that occurs. You ignore the fact deflation can and has occurred. Japan, for example, has experienced prolonged deflation and continues to face it today. So under your hypothesis, banks shouldn't exist in Japan because they are a place we put money to prevent it from losing value.
You also seem to be confused by monetary supply and its relationship to inflation and deflation. Just because a supply is fixed doesn't mean inflation and deflation don't happen. Look at price stability when we were under the gold standard[1]. Under your assumption we shouldn't worry about price volatility, except we experienced worse shocks while under the gold standard than without it. Inflation and deflation aren't inextricably linked to monetary supply. People play a large role, you can print infinite money but if people are afraid to spend it, you still won't experience inflation.
On a side note, it continues to amuse me to watch Bitcoin and the people who are passionate about them rediscover all the things banking discovered over the past few thousand of years. The ideas are hardly new and have been tried, yet the results are ignored.
I should say, I didn't realize Bitcoin even has a "manifesto." The only things I know about Bitcoin come from studying it as part of my job: I'm developing an MMO, so I'm interested in the economics of virtual currencies. MMOs by-and-large have fiat, non-scarce virtual currencies (money just gets "spawned" from the aether in response to certain things, with no matching debt on any balance sheet) which is a bit of a mess. Bitcoin is a scarce (eventually-fixed) "natural resource" virtual currency, which provides interesting contrasts.
Now, anyway:
I think we fundamentally agree here--we're just using different words. You're saying you put money in a bank to "secure" it--secure it from what? Losing value. Cash under your mattress loses value from inflation. Stocks lose value from investors losing confidence in them. Your wallet loses value when you get mugged and the dollars are taken out of it. (An encrypted digital wallet is somewhat resistant to this.)
And how do banks secure you from loss, compared to all those other things? Besides being big thick concrete buildings with guards, they mainly lend your money out to other "safe bets" to earn "enough" interest to offset your inflationary losses. Note, I didn't say they put you in the black; they just offset your loss compared to what it would be under your mattress, while not notably increasing your risk.
During the 2007 banking crisis, people were buying US treasury bills that offered negative interest. Why? Because a small known loss was considered to be less risky than the possible loss from anything the rest of the market was offering. People using Japanese banks are currently operating under the same principle: they would rather put their money in the place it will lose the least value.
Another way to say this is: savings investment is a minimax algorithm ("minimize maximum loss.") In a thriving economy, you can minimize maximum loss with a positive net return. In a bad economy, it will sometimes require a negative net return. Either way, integrating over the probability distribution will put you in a future where you end up with the most money, compared to all your other selves who made riskier bets with higher returns, or less risky bets with lower returns.
Now, in turn, the whole economic theory on the necessity of inflation is that it moves the minimax risk-optimum for perfectly-rational actors from "hoard" to "invest in very slightly risky ventures"; and the whole reason deflation is so scary is that it moves the minimax risk-optimum for perfectly-rational actors from "invest even when it's a sure thing" to "sit on it and let it appreciate."
Now, of course, humans on average aren't anywhere near "perfectly rational"--and in some cases we may create artificial situations where the risk-optimum is shifted this way or that. For example, corporations seek short-term (usually single-quarter) gains, to encourage stock growth. Short-term gains are more found in risky investments than stable ones; and being paid in bonuses rather than equity encourages "smart-looking-for-now" behavior that will let one earn their bonus and cash out, even as the company hits the risk head-on and sinks.
> People play a large role, you can print infinite money but if people are afraid to spend it, you still won't experience inflation.
Blah blah Keynes blah government stimulus blah blah. Not getting into that. :)
> Under your assumption we shouldn't worry about price volatility, except we experienced worse shocks while under the gold standard than without it.
No, quite the opposite--"much worse price volatility" is exactly the sort of thing I meant by "a global Bitcoin economy would be strange." No monetary policy means no quantitative easing, which is specifically deployed to decrease volatility.
Inflation and deflation, of course, would still occur--"money" is nothing more than the value of an liability on a balance sheet, measured in the unit of a particular currency; as we leverage the money we have as investments into other things, the economy has more IOUs and therefore more money, whether more physical currency is getting printed/minted or not. And when things get de-leveraged, that money goes away.
The thing that makes Bitcoin interesting is simply that, as a "natural resource" currency, the "base supply" of unleveraged money can't grow to meet demand. If everyone wanted to withdraw their leveraged BTC-united wealth at the same time into "actual Bitcoins", they simply wouldn't be able to.
If we still operated mostly with physical currency, this would indeed be similar to the horrors of the Gold-standard era, where if a country 'ran out of money', it couldn't just write down a deficit--it literally would have no tokens of currency to send abroad to receive goods in trade, and its people would starve simply for want of some gold in a drawer in a bank somewhere.
As far as I can tell, Bitcoin proponents just counter this by saying that we don't operate mostly in physical currency--so we could indeed transfer a trillion BTC to Cyprus, or so forth, even though a trillion BTC don't "exist." It would simply be a new asset on our balance sheet, and a new liability on theirs. The only thing that would change is that the unit was BTC instead of USD.
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Still, that's a bit silly. Every day, we have more people using more USD for more things (this is what a growing GDP means, basically.) Having a fixed supply of USD, even as we have a growing number of people wanting to use it as a token of trade, would be very annoying. There's nothing that would make BTC different in that regard. (The proponents will say that "well, you can subdivide BTC to eight decimal places"--but even then, if I have an IOU saying "1 trillion BTC", subdividing physical BTCs won't get me any closer to being able to "instantiate" that trillion BTC in the real world. And if I can't do that, I can't take the BTC IOU your government sent my government and actually spend it on anything. So we're back to the starving-for-want-of-gold-in-a-drawer problem.)
If you can't tell, I don't actually think running the global economy in BTC is a particularly good idea. In fact, I don't think using Bitcoin as a currency is a particularly good idea. Bitcoin's ideal place in the economy, in my view, would be as a permanent, synthetic "commodity" to be traded on the commodities market--basically, a replacement for what people currently use gold for, but with an absolutely fixed supply.
In that role, Bitcoin-the-traded-commodity would still be able to serve its current function--basically, something you turn money in one currency into, to give to someone else in complete anonymity, who then turns the BTC back into money in their preferred currency. (You can also do this with gold, obviously. Bitcoin, then, is just "a strange precious metal that weighs next to nothing, takes up next to no space, and is easy to send to someone by typing it into a computer through a keyboard.")
But commodity-traded Bitcoin could also serve as a good unit to normalize prices against, rather than just measuring them in USD as we do now. You could value currencies in BTC, value stocks, value stock markets--even value products at the supermarket. It would basically be a global version of the Brazilian Real concept--setting prices stable with respect to the inflation or deflation of any given currency. (The store shelf would say "3.00 BTC", and then they'd have a "current exchange rate of BTC to USD" posted--or it'd all be figured out by our ubiquitous smartphone gizmos. Admittedly, going this far is a bit of a hassle if your country isn't experiencing hyperinflation, but it does work everywhere, and that feels sort of elegant to me in the same way a nice, concise algorithm does.)
This "absolute measure" could also make people take notice of the competitive devaluation spiral that the USD and the RMB have gotten into recently. :)
I might try this in my MMO, actually. Set up a fiat "fixed-supply" commodity and then normalize prices in units of it, even though you're paying for things with non-fixed-supply currencies.
Sure, go ahead. Specifically, it's a "cloud collaboration environment" that happens to have a virtual-world component... which, since it's gamified, highly resembles an MMO. :)
"A bank counteracts this by loaning out the money we give it (earning it money on interest), and then paying us another, smaller interest rate for our deposits in turn, which will offset inflation to whatever degree."
That's only true if your money is an interest-bearing account. Most consumer accounts are not.
Chequing accounts (non-interest-bearing accounts, used primarily for their other conveniences) are an instance of a bank providing a (traditionally) not-bank service.
Basically, chequing accounts (and all their features: cheques, wire transfers, EFTs, cross-bank ATM withdrawal, etc.) are forms of remittance: a service where a group of people get together and agree to maintain an 'eventually-consistent' balance-sheet between them. Alice goes to one member branch of the remittance group and gives them $N (plus a transfer fee $F) to send to Bob, who may be anywhere else. Bob goes to a different member branch and gets his $N. $N is transferred from the pool to the branch Bob went to to cover their loss, and then $F is split between the group.
Remittance has never really been a function you would expect a "bank" to provide until quite modern times; banks tended to be single-branch, holding the deposits of the people who put them in that bank. You could get someone else's deposits from a bank if they had them turned into a bank note and gave that note to you, but to withdraw it, you'd have to go to that bank. (Greenbacks--federal bank-notes--were a clear innovation from this system. Imagine, a system so bad for holding and transferring value that "cash" is an improvement!)
When a bank temporarily ran out money to cover its outstanding liabilities (withdrawals), it didn't ask to be paid from some pool--it just took out a loan with a neighboring bank. (This still happens, and it's the basis of one of the very important numbers in Macroeconomics: LIBOR--the London Inter-Bank Exchange Rate, which measures the average interest banks will ask for when giving out those bank-to-bank loans, and which is built into the base of pretty much any other loan interest rate you might look at.)
Eventually, though, wire transfers plugged banks directly into one-another's balance sheets in a way they weren't before, and banks could suddenly outcompete all the traditional remittance providers because, unlike the remittance providers, they already had pretty much the whole population of each city/town they served as members. It's like Google suddenly realizing they could do ads when they already had so many eyeballs specifically looking for things to purchase online: it went from "fun idea" to "main money-maker" in the span of a few years.
But that still doesn't mean that that's what it means to be a bank, or that Bitcoin "banks" make any sense. Bitcoin remittance providers, sure--but nobody ever figured it was a good idea to keep their savings with a remittance provider ;)
It's also discounting fractional reserve banking. Banks loan out many times the money you give it. These days 10 time more loans than capital is considered good, 100 times is the practical maximum you see (except in problematic cases, Greece Spain and the like).
That's why most loans specify that you can't withdraw the money into cash. Even 1% of people doing that would be a "bank run" and bankrupt the bank.
"Fractional reserve banking" with a 10% reserve does not mean that if depositors deposit $1M, the bank then lends out $10M. It means that if depositors deposit $1M, the bank retains $90,910 as a reserve and lends out $909,090. That's how the bank "loans out ten times the money it has".
Note that where before we had $1M of "money", now we have $1.91M of "money": the actual money provided to the borrowers, plus the on-demand deposits of the depositors. But the borrowers will probably deposit the borrowed $909,090 in their own bank, which can then lend 90% of it out again. If this procedure is carried out to the limit, you do eventually have 11 times as much "money" floating around the system as the "original" deposit, so the banks in aggregate have loaned out ten times the money originally deposited.
What is this about "most loans"? Generally when I've taken out a loan, the loaned money has been spent in something equivalent to cash rather quickly — generally in the form of a transfer to another bank via cashier's check, but that's equivalent from the point of view of the bank!
Not at all--what you're thinking of are "wallets." :)
Banks are places we put money to prevent it from losing value. Money kept in a wallet (or under a mattress) steadily loses value because of inflation. A bank counteracts this by loaning out the money we give it (earning it money on interest), and then paying us another, smaller interest rate for our deposits in turn, which will offset inflation to whatever degree. Other entities also do this--mutual funds, for example--but banks do it while also making our money still somewhat convenient to re-liquidate and transfer; others may require, for example, 30 days' notice to facilitate withdrawal.
One thing that's very interesting about Bitcoin is that, once it's all mined out, there won't be any inflation (or deflation) of its supply--the amount of Bitcoin out in the world will become effectively fixed. This means that, by and large, "banks" (in the "savings bank" sense; investment banks are a separate beast) are pretty irrelevant to a Bitcoin-based economy: there's no need to protect the value of your money; it's stable just sitting in a wallet.
This property of Bitcoin might do strange things to the global economy if Bitcoin becomes more widely adopted. In effect, it would be a global version of what some Eurozone countries have experienced, where they have control over their fiscal policy (taxes and spending), but no control over their monetary policy (ability to print money.) It's common wisdom in Economics that at least a little bit of inflation is good--otherwise people tend to hoard money instead of investing it ventures that improve GDP. In a wholly-Bitcoin economy, there's no particular fear-based incentive to invest over just sitting on your money. (There's still a greed-based incentive to invest with banks for increased risk = increased reward in good economic times, but in times of economic volatility, the "flight to quality" toward stable Bitcoins would be absolute, moreso than treasury bills or gold have ever been.)