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0 pointsbrian_cloutier8y ago0 comments

This is mostly correct but you have one thing backwards. When you pay the coffee shop (with a debit card) you're not giving them an IOU, you're giving them the same kind of dollars which you originally deposited into the bank.

The system does include IOUs but those don't move around. When you give your hard cash to the bank it creates an IOU, that's what the balance you see when you login is. Your bank then lends out the hard cash to other people.

When you pay with your credit card the bank is still giving the merchant real money, the merchant would receive actual on-chain Bitcoin, but you're simultaneously creating a Bitcoin IOU which you promise to pay the bank.

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beefield8y ago· 2 in thread

I am quite confident I do not have this backwards. (I may be bad at communicating this, though...)

When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more. At that point there is nothing else happening. I am definitely not giving any "real" dollars because I do not have them left, but I have lent them to the bank so that I have only the IOU from the bank left.

What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars.

And because it is so convenient, most people are perfectly happy with moving around these IOUs, the coffee shop owner can then walk to the bank and request that the bank actually pays the dollars (or bitcoins) that the bank owes, but it is quite rare that happens - and that is the whole point of fractional reserve banking.

brian_cloutierOP8y ago

Okay, I'm not a banker so there's a good chance I'm the one who's wrong, and I bet the answer changes depending on the specific transaction.

> What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars

We completely agree on this part.

> When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more

I don't think this is true. Or, I don't think this is always true.

I can see it being true as a special case: If both you and the merchant use the same bank then sure, probably all that happens is two different IOU tallies are updated.

But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.

And maybe a temporary IOU is created between Chase and whatever Turkish bank the coffee shop is using, but I expect that IOU to be quickly resolved in a few days, when settlement happens. Real money is moved from your bank to the acquiring bank, and an associated IOU shows up in the bank account of the merchant.

beefield8y ago

> But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.

Admittably I made some shortcuts. Obviously chase does not likely have a relationship with that Turkish coffee shop, but it does have a relationship (which may be complex, involving visa, mastercard etc.) with the bank of that coffee shop.

So practically Chase says that now that you paid your coffee in turkey, we owe you a bit less, but at the same time we as a bank have agreed to owe that amount of dollars to the Turkish bank, who the on owes to the coffeeshop owner some turkish lira. (and someone makes also the currency conversion there). The banks have between themselves some credit/limit arrangement that they do not need to actually start moving "real" central bank money [1] every time I buy a coffee. At the end of the day, most of the time the customer payments should not have a systematic drift (if there were, it would be called bank run), so banks just work within these credit limits.

It may sound like turtles all the way down, but that is exactly what the modern financial system is. Credit all the way down. There is very little else than credit in the system.

[1 ]which the turkish bank does not even have access but that is one more complexity layer I ignore here...

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spiralx8y ago

If you want a good overview of how money works overall this PDF from the Bank of England is pretty approachable:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

There are a lot of misconceptions about money around, many based on older ideas of physical or commodity-backed currencies.

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