Huh? This isn't true. Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit. This is why fractional reserve banking increases the money supply. Banks are allowed to literally invent money out of thin air, so long as their invented money is within the multiple required by law for cash they have on hand.
Mt. Gox was doing (attempting) the same thing our traditional banks do in that sense. They were increasing the bitcoin supply using an analogous scheme.
> Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit.
Yes, I was avoiding that can of worms. Banks do unsecured lending, there is still an asset entry to offset it so that the books remain positive. Armies of regulators and accountants and volumes of laws in effect here.
But the salient point: A fractional reserve business consciously makes loans with an expectation of being paid back. To my knowledge, Gox was not trying run a fractional reserve business, and the term is being misapplied.
> This is why fractional reserve banking increases the money supply.
It increases a money supply, not the money supply. It does not increase M0 (and there was a time that banks were allowed to do just that.)
Note that in a secured loan, the security is rarely for the full amount of the loan (mortgages being a notable exception). Usually it covers only a fraction of it, but it's there to increase the borrower's "skin in the game". Rules also differ on whether or not the security itself is acceptable as discharging a loan's obligations (e.g., in Spanish real estate lending, if the property itself isn't sufficiently highly valued to pay off the loan balance, the borrower _remains_ on the hook for the balance, this is usually not the case in the US, where most mortgages are non-recourse loans.). See also "deficiency judgement".
In both secured and unsecured loans, the debt itself is the security, with a portion of the interest being attributable to the risk (default) component of the loan.
As for money supply, bank reserves are included in M2 which is used for inflation calculations, so I'd argue that yes, fractional reserve lending does increase money supply, as commonly used.
"Banks loan without collateral all the time, such as via credit cards or unsecured lines of credit."
It's true that there's no collateral, but there is a corresponding asset - the loan itself.
"This is why fractional reserve banking increases the money supply."
Fractional reserve banking would increase the money supply even if banks restricted themselves to fully secured lending. Bank deposit accounts act a lot more like money than does a mortgage.
i want to imagine uncollateralized load like this:
i'm a bank with 0 dollars in any asset, but 0 debt obligations. So my networth is 0 right now.
You come along to borrow off me $100. Now i have an asset of $100(the debt which you have to pay back + interest), but as soon as you spend your money, i also have a debt of $100.
Now isn't this a good way to make money from nothing?
If I have zero dollars, how did I have anything to loan you? I can put numbers on my ledger, but you won't be able to withdraw it - that's not fractional reserve, that's zero-reserve.
On the other hand, I've never objected to the notion that fractional reserve creates money - in fact, my comment above explicitly states it.
Mt. Gox was doing (attempting) the same thing our traditional banks do in that sense. They were increasing the bitcoin supply using an analogous scheme.
(Note: I'm not defending Mt. Gox here)