Educate me about Fractional Reserve System

[eric_cartman]

i thought this was good

Is Our Money Based on Debt?
http://mises.org/daily/4631

that was a good article. though i think i disagree with one point he made. he said: "when the commercial bank extended a $900 business loan to Sally, it created that money out of thin air."

They didn't create any money out of thin air, they simply loaned Billy's money to Sally.

The problem is, Billy thinks he has money, when really, he holds an IOU from the bank, who holds an IOU from Sally + $100 reserve.

 

[hazek]

that was a good article. though i think i disagree with one point he made. he said: "when the commercial bank extended a $900 business loan to Sally, it created that money out of thin air."

They didn't create any money out of thin air, they simply loaned Billy's money to Sally.

The problem is, Billy thinks he has money, when really, he holds an IOU from the bank, who holds an IOU from Sally + $100 reserve.

Correct.

 

[J_White]

They can't loan out more than they have. If they attract more deposits, they can loan out more money but again, not more than their total deposits.

http://www.peakprosperity.com/forum/understanding-cc-chapter-7-fractional-reserve-banking/34372
From the 2nd comment on that page.

Banks do not lend their or their depositors money. The money they lend is created on the spot, for virtually free. They hold a monopoly to monetize promissory notes that are backed with adequate collateral. If all goes well, and the loan is repaid, they profit from interest payments on money that was never theirs to begin with. If payments are not made, they may seize the collateral, for free.

This explains what I believe is happening.
To lend out money the banks do not need to have have that many deposits - they create it.

another comment lower down in the thread.

Banks may issue (create) money for their own accounts for expenses and investment purposes. According to Ellen Brown, "thirty percent of the new money created by banks, with accounting entries, is invested for their accounts" (Federal Reserve Statistical Release - H.8).
The big investment banks create money for virtually free to use for investments, market manipulation, bribes, campaign contributions, sweet-heart deals, hookers, monopolies, CIA, etc.
The problem is not that banks may create money in some theoretical multiplier, the big problem is that the big banks may create all the money they want for free.

 

[Zippyjuan]

Note that those are comments- not documents. They are what somebody THINKS is happening.