Nick Szabo  🔑

Pierre is right but I think Zavan is right here too. I don't agree Wells is extremely irresponsible. But they are incompetent. Possibly worse. TBD. Upside is some folks at the margin may start saving more & not live paycheck to paycheck.

The real problem with all this, IMHO, is having a central bank. You can't expect a company (banks in this case) to act responsibly if it knows it will be rescued every time it fails. (Central banks cause a bunch of other problems, of course, this is just one of them).

I don't think fractional reserve itself is unethical (if the customers are aware of it), but its ability to survive should be put to the test on a free market of banking, not a central banking system.

Maybe fractional reserve works to a certain point, maybe not, maybe it would work in some situations but not in others, the market would find out, but it can't, because there is no market right now, just a central bank backed oligopoly.

@NickSzabo4 writes a lot about free banking, tagging him if he wants to add anything.

Free banking history helped inspire my design of bit gold, but mostly as "what people really wanted at the end of the day was the gold, the bank note [today could be digital cash] was merely an IOU for gold. So how do I make the actual money, the gold, in digital form?

From that POV, the basic problem with free banking is that for various reasons banks convinced people to swap their trust-minimized silver and gold for trust-based gold IOUs. Fractional reserve and modern fiat are both consequences of that misplaced trust.