It only appears as if there was money created. There is still only $1000 money after all the possible loans have been made under the mandated 10% reserve requirement. The only thing that increased are the balance sheets of FRB operators. Those are the facts.
Actually, there's something you're missing. Every step along the way goods and services are being paid for. In full.
Let's pretend there are two competing currencies - hard specie (bullion rounds - no coinage required) vs. FRB generated (multiplier processed) FRN's. Let's further stipulate that the bullion seller is also the mining company and mint selling the rounds - so whatever you are getting from them came straight from the ground and is now in a form that is considered an alternate form of currency.
Now let's start with $1,000 in FRN's in a single FRB bank, and call that "original money". $900 of it is loaned out, $100 kept in reserve - as we rinse and repeat with the multiplier until there's $1,000 in reserves and $9,000 in outstanding loans -- all to a single bank.
To further simplify, let's say we have one borrower with a $9,000 (unsecured) line of credit. To make things simpler still, he never borrows more than 100% of what the bank has available for lending without affecting its own reserve requirement.
The bullion seller, the same seller in all cases, accepts only cash. However, he also deposits whatever money he receives into the same bank from which the loans were made, and always on the same day that the money was withdrawn from the buyer's account. Each time the borrower borrows a fractional multiple of the original $1,000, he makes a full withdrawal, and uses this currency (cash each time) to buy bullion, straight from the mine/mint.
The bullion seller deposits this money before the close of each business day. Every time the bank receives a new cash deposit, it re-loans 90% of the increased deposit amount out the very next day.
Note that there is only one borrower, one seller, and only one bank for both parties.
Every transactional step along the multiplier way, the bank sees only a fresh supply of money that is presumably and entirely unencumbered. It has no way of knowing (or caring) that the increased deposits are from the money it already loaned out. It's only loaning out 90% of each new amount, while keeping 10% of it in reserve.
Likewise, the bullion seller has no way of knowing that he is accepting the SAME PHYSICAL CASH that was used before. All he knows is that everything he sold was paid for IN FULL, and that he has $9,000 in cash sitting in that bank (and every reason to believe it, given his RIGHT NOW right to demand it in full all at once).
By the time all is said and done, $1,000 in reserves has caused $9,000 in silver bullion to come into existence. The bullion seller did not "loan" ANY of his bullion into existence. He accepted cash only. That bullion was paid for, and he had free and clear title to that money prior to deposit.
So now we have one party with $9,000 in silver bullion -
all unencumbered - which means that the silver bullion currency is now inflated by that much. Furthermore, we have one party (the bullion seller/mine/mint) with $9,000 FRN's on account at a single bank. The bank has $1,000 in reserves and $9,000 in outstanding loans on a single line of credit.
It was a banner month for the mine, and the bullion seller is now finally ready to pay bills and make payroll. The bullion seller is now within his rights to withdraw 100% -- all $9,000, which is his RIGHT NOW - on demand - as a matter of right. That puts the bank into a liquidity crisis, as it must try to call in loans, because it only has the original $1,000 (as it continued to be redeposited). So who does the bank contact? It's only debtor - the borrower who owns all that unencumbered silver. And he doesn't have to play ball. He has just as much of a contractual right to that money as the bullion company with the demand deposit. The borrower refuses to pay his loans off early, or even at a discount, and opts to simply service his debts according to the terms of his contract. Sorry, Bank, you're bankrupt. The bank tells the bullion seller sorry, take a powder. A lawsuit ensues, and the miner is forced to take a haircut as he takes possession of whatever is left of the original $1,000 after the bank is liquidated. But he's bankrupt too, since he can't pay for his mining/minting operation. Meanwhile, the borrower with $9,000 in silver bullion goes on a mad spending spree with all that bullion. The bullion itself was "paid for" in cash, but not really, because the underlying debt that made that cash available was never paid for. Nevertheless, the miner is bankrupt and that silver is now permanently and freely in circulation, competing with other silver that really was paid for.
Now who are the victims? Were the only parties of interest the borrower, the seller and the bank? Hardly. The vendors and employees of the mine were not parties to any risks, but were part of the ripple effect. The bank established a logical impossibility (selling multiple RIGHT NOW claims on the same money to multiple parties). The bank's inability to fulfill its contract to the borrower was not due to contingent circumstances - it was due entirely to this logical impossibility. The fact that the bank might get away with this for a time by using multiple parties, and forever borrowing from Future Peters to pay Past Pauls does not detract from insolvency that was deliberately inherent in the system to begin with. And even in the absence of a central bank and government tolerance of the practice, it takes time for the logical impossibilities of fractional reserve lending to finally come to a head. It SEEMS to work for many, for a time, but apparent functionality and success in the present does not mean that the future victims were simply unlucky. This is because the very system is designed in such a way that it always comes to an inevitable, inescapable default head, with certain victims - because the exponential expansion required for the system to be sustained was logically impossible to begin with.
Now here's my problem: As a positive statement of fact, the law recognizes no wrong-doing in any of this, and I fully acknowledge that fact. FDR really did treat depositors as "bad banking investors" rather than victims when he allowed the banks to default, ripped their gold off and forced them all to take a massive haircut, and Congress and the courts stood fully behind this sorry excuse for excrement who was only defending the inevitable fallout of FRB in the first place.
My position is that the law SHOULD (my normative statement) never tolerate this kind of deliberate logical impossibility in the future. Viewed on the whole, if you know that failure is a mathematical certainty, it does not matter whether it takes one day or thirty years for this certainty to come to fruition. It is fraudulent in its inception because the very system as designed REQUIRES that someone eventually suffer systemically-caused losses which are absolutely unavoidable somewhere along the way.
