Selgin explains that “as early as the 1830s in Scotland, the gold reserve ratios were often less than 2% of the bank’s liabilities. So they were very slim, and yet we’re talking about some of the banks that were considered the most stable in the world. The banking system was very stable.”
Yo, now that's a fractional reserve.
In a competitive environment, banks aren’t forced to hold large reserves. Instead, they’re constantly tested by other banks via clearinghouses. Selgin states that “If one bank owes another more than it receives, that bank settles the difference in reserves.”Employing this format ensures that “this market discipline kept banks honest.”
I haven't studied free banking at all, but I'd be curious about what happens when those test fail across many banks.
“Bitcoin is not as cheap to move as people think. Banking systems can move money with near-zero friction,” Selgin says, especially in Europe where instant payments are the norm. “If you had Bitcoin banks issuing digital IOUs, stable, Bitcoin-backed units, it could work like Lightning, or even better.”
ehhh
Selgin explains that Bitcoin’s success as an investment medium may unintentionally slow its progress as money, explaining that “the greater the expected rate of return on Bitcoin, the less people want to spend it. And the less they want to spend it, the less useful it is as a medium of exchange.”
Selgin explained that “if Bitcoin is not used as a medium of exchange, that in turn feeds into the lowered prospects of Bitcoin banks being established because there’s not enough need.”