The natural pressures are the law of supply and demand. If the bank creates too much money relative to the collateral, it risks a run on the bank. Too little, and the bank goes out of business because it isn't making money.
> Is having no rules free market?
Yes (other than you cannot force people to do business with you nor can you defraud them).
> The amount of money in the system would stay fixed, right?
Nope. You don't actually loan out the coins. You loan out a receipt for the coins. As long as people don't redeem the receipts, you can loan out a multiple of the coins in the vault. This is called "fractional reserve banking". After a while, instead of trading coins, people trade the receipts. The receipts evolved into bank notes.
It's a fascinating history.
> So then the only 'natural' money supply is your ability to mine gold?
Lots of commodities would work. People in colonial America used tobacco leaves. Today people "mine" bitcoins.
'If the bank creates too much money relative to the collateral, it risks a run on the bank.... This is called "fractional reserve banking". '
I dont fully understand the system, and its clear neither do you, or most people commenting here
We have not been using fractional reserve banking for at least 60 years now, as you sibling comment and this paper by the bank of England Explains. The only thing limiting hiw much bank can loan are capital requirements in the rules passed by parliament.
The natural pressures are the law of supply and demand. If the bank creates too much money relative to the collateral, it risks a run on the bank. Too little, and the bank goes out of business because it isn't making money.
> Is having no rules free market?
Yes (other than you cannot force people to do business with you nor can you defraud them).
> The amount of money in the system would stay fixed, right?
Nope. You don't actually loan out the coins. You loan out a receipt for the coins. As long as people don't redeem the receipts, you can loan out a multiple of the coins in the vault. This is called "fractional reserve banking". After a while, instead of trading coins, people trade the receipts. The receipts evolved into bank notes.
It's a fascinating history.
> So then the only 'natural' money supply is your ability to mine gold?
Lots of commodities would work. People in colonial America used tobacco leaves. Today people "mine" bitcoins.