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You can't believe what you read about banking and money.

See the link from #1 on the table on our first page where we explain why I
have changed my mind about reserves in all contexts.

I offer the following as proof.

This article is from Wikipedia <<http://en.wikipedia.org/wiki/Fractional_reserve_banking>>

Almost everything that follows is a complete, absolute and pervasive
lie. It is copied from Wikipedia. Wikipedia was notified that the text
was erroneous and the source was biased and unrustworthy -- but
Wikipedia persists in spreading this mis-information.

Money creation

Modern central banking allows multiple banks to practice fractional reserve banking with inter-bank business transactions without risking bankruptcy. The process of fractional-reserve banking has a cumulative effect of money creation by banks, essentially expanding the money supply of the economy.

There are two types of money in a fractional-reserve banking system operating with a central bank:

1. central bank money (money created or adopted by the central bank regardless of its form (precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money)
2. commercial bank money (demand deposits in the commercial banking system) - sometimes referred to as chequebook money [12] (NOTE: 12 is a link to a Federal Reserve Publication)

When a deposit of central bank money is made at a commercial bank, the central bank money is removed for circulation, and an equal amount of new commercial bank money is created. When a loan is made using the central bank money from the commercial bank (which keeps only a fraction of the central bank money as reserves), the money supply expands by the size of the loan.

The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. Each bank involved in this process creates new commercial bank money on only a portion of the original deposit of central bank money, ensuring that it always has enough reserves on hand to meet the inter-bank business demands, and also ensuring that multiple banks participate in the inflation process so that all banks are inflating at the same rate.

The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A then takes 20 percent of it, or $20, and sets it aside as reserves and then loans out the remaining 80 percent, or $80. At this point there is actually a total of $180 in the system, not $100; because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve, and substituted a newly created $80 IOU claim for the depositor that acts equivalent to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, etc.). These checkbook IOUs are termed commercial bank money and are simply recorded in a bank's register as an asset (specifically, an IOU from the loan recipient) next to the reserves. From a depositor's perspective, commercial money is central bank money--it's impossible to tell the two forms of money apart until a bank run happens (at which time everyone wants central bank money). At this point Bank A still holds $100 of central bank money reserves on its books, but $80 of those reserves are soon going to be needed to satisfy the loan recipient. The loan recipient soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B demands $80 of central bank money be delivered from Bank A to Bank B in satisfaction of the loan recipient's check. Bank A now only has $20 of central bank money on its books.

Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, creating $64 of IOUs to its depositors. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so it then has more money to lend out.

Table Sources: [14][15] (NOTE: 14 and 15 are links to Federal Reserve Publications at the Wikipedia page)

Commercial Bank Money

The expansion of $100 of central bank money through fractional-reserve lending with a 20% reserve rate. $400 of commercial bank money is created virtually through loans.

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans. The 2 boxes marked in red show the location of the original $100 deposit throughout the entire process. The total reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. If a graph is made showing the accumulation of deposits, one can see that the graph (the graph is at the wikipedia link) is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum amount of commercial bank money that can be created is $400.

For an individual bank, the deposit is considered a liability whereas the loan it gives out and the reserves are considered assets. The deposit will always be equal to the loan plus the reserve, since the loan and reserve are created from the deposit. This is the basis for a bank's balance sheet.

The creation and destruction of commercial bank money occurs through this process. Whether it is created or destroyed depends on what direction the process moves. When loans are given out, the process moves from the top down and money is created. When loans are paid back, the process moves from the bottom to the top and commercial bank money is canceled out, effectively erasing it from existence.

This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money supply consists of commercial bank money. The value of commercial bank money comes from the fact that it can be exchanged at a bank for central bank money.

This is a general outline of how it works. The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some borrowers may choose to hold cash, and there may be delays or frictions in the process. It may also be higher if the reserve requirement is lower or if there are no reserve requirements. Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled. ...

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