The stablecoins supported by cryptocurrencies are very similar to private bank notes from the era of free banking in the United States (1837-1862), which predates the National Banking Act of 1863-64 and the Federal Reserve Act of 1913. In the absence of federal regulation, states enact “free banking” laws allowing groups that meet minimum capital and collateral requirements (usually state bonds) to open banks. By 1860, over 8000 different banknotes were in circulation, each traded at a discount or premium based on the issuer’s creditworthiness, the cost of exchanging gold and silver, and local market conditions. Similar to today’s cryptocurrency supported stablecoin issuers, these free banks accept gold and silver coins and (in some states) short-term government securities as reserves, and then issue their own bills based on these reserves, while issuing loans under a partial reserve system.
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This currency creation mechanism still exists today, and its operation is as follows:
The customer deposits $1000 into the checking account and creates $1000 in assets (reserves) and $1000 in liabilities (deposits) on the bank’s balance sheet.
Regulatory agencies require, for example, a reserve ratio of 10%, so for a deposit of $1000, banks holding $100 in reserves can lend $900.
Every time a loan is issued and re deposited in another bank, the process repeats, doubling the original base currency to create a larger total deposit amount for the bank. In fact, most broad money (M2) is created in this way.