Currencies are replaced ALL THE TIME around the world. One winds down as another takes over. That's not crack pottery - that's HISTORY.
So no, the entire economy continues to run in this hypothetical - which was only designed to illustrate what you refuse to entertain anyway: Two currencies (pretend we adopted and are widely circulating Pesos, RMB, a new Uber-EURO, or whatever else makes you feel better). All banks and all other commerce use both currencies, so nobody's hurting in the process, and business continues as usual.
Remember, we're just winding down one currency, and just to see how, or if, it can be done. Stop evading, and simplistically explaining away - and do what you love most: get out that handy monopoly set:
$100 in FED reserves (and can print any new money, just show how it fits into the scenario)
$900 in demand deposits
$900 in outstanding loans (all 30 years, all at 7% fixed, compounded annually) which means
$1,207.02 in interest also payable over the next 30 years.
The bank (single banking system) is phasing out this type of money, so it won't re-lend any of that currency.
Everything proceeds normally in our scenario, nobody panics or makes any sudden moves.
Now show me how all that can be paid down. Wind down that wonderful, perfectly normal and working currency, to make room for one that's essentially the same, just more global, and not tied to this one.
Don't tell me. Show me.IF all the debts were unwound, there would the same $100 in money that the system started with (using my monopoly example) -which is, has been, and the only money running around our little economy example from the beginning.
By my reckoning, with the bank as the only one doing any lending, all bucks stop with the bank/banking system (closed loop anyway, so call it one bank). I'm trying to figure out a) Where does the $1,207.02 come from, and b) how does that transform back into the original $100? As I understand it, the bank - which as you said is just one more business - is fully expecting more than just its original $100 M0/$900 M1 in return. It also has $1,207.02 (Can the bank fully expect and demand, like any other business, nothing but M0?) coming to it after 30 years of patiently waiting (while surviving on lending out another currency simultaneously).
I have a better exercise, one that actually gives a meaningful workout, and doesn't go completely and evasively off point:Here, do this exercise:
Leave out the banks and fractional reserves and all of that.
You have $25, I have $25, rwpi has $25 and Roy has $25.
You have $25, I have $25, rwpi has $25 and Roy has $25. We each borrowed it from BANK, which has $100, the only $100 in existence, which loaned it out directly to each of us - no fractional reserve banking involved. The loan duration is irrelevant, make it whatever you want, but the interest on each loan amounts to $5 for each of us when all is said and done. Each of us borrowed $25, each of us owes the bank $30 dollars, for a grand total of $120 owed to the bank.
I know where we can each get the principle - in theory. I can see that with your monopoly money just fine. I even know where a couple of us might get the interest to satisfy our own debts to the bank - but not without shorting the money available for the principle one or more others of us owes, forget the interest. But let's just say we make equal payments, all on time.
Where do we get the principle plus the interest in the aggregate? There's only $100 in existence. The entire system appears to be $20 short.