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Fractional Reserve Banking
http://www.primeronmoney.com/frb.html
(1) By Murray N. Rothbard -- at << http://www.lewrockwell.com/rothbard/frb.html >>
"... Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.) ...
Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. ..."
This above words are of course either being said (a) mockingly, (b) snidely or (c) jokingly. Mr. Rothbard's explanation starts with, "in the absence of a central bank ...". WE all know a private person can't lend out 19 times as much money as he or she has -- but under the laws of any country that understands fractional reserve banking (frb) that 10 to 1 ratio of loans to reserves is allowable. If you analyze the law and the system carefully, you will find that the system is logical and safe for everyone if it is managed properly.
Consider,
(1) the money that is lent is brand new money,
(2) it does not come out of any else's account,
(3) it should be covered by collateral,
(4) the bank manager's should have a great deal of experience lending money only to responsible borrower's who will use the money to create new wealth and
(5) the loan must be paid back, at which point it is extinguished.
(2) President Barack Obama / Remarks on the Economy at Georgetown University in a speech on April 14, 2009 / "From: #15 in the left column at <<http://www.primeronmoney.com/speech2atgeorgetown.html>> " ... the truth is that a dollar of capital in a bankcan actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. ... "