below are some excerpts from the 'mystery of banking pdf at mises site.
"The amount of cash kept in the bank’s vaults ready for instant
redemption is called its reserves. Hence, this form of honest, noninflationary
deposit banking is called “100 percent reserve banking,”
because the bank keeps all of its receipts backed fully by
gold or cash…"
"the system offractional reserve banking, in which more than one warehouse
receipt is backed by the same amount of gold or other cash in the
bank’s vaults."
"It should be clear that modern fractional reserve banking is a
shell game, a Ponzi scheme, a fraud in which f_ake warehouse_
receipts are issued and circulate as equivalent to the cash supposedly
represented by the receipts."
"…fractional reserve banking, where total cash reserves are
lower, by some fraction, than the warehouse receipts outstanding."
"the Rothbard Bank has had $50,000 of gold coin or government paper deposited in it, and then proceeded to pyramid on top of that $50,000 by issuing $80,000 more of fake warehouse receipts and lending them out to Smith. The Rothbard Bank has thereby increased the money supply in its own bailiwick from $50,000 to $130,000, and its fractional reserve has fallen from 100 percent to 5/13."
__"__Bank is practicing fractional reserve banking. It has pyramided $5 million of warehouse receipts on top of $1 million of reserves. Its reserves consist of its checking account with the Central Bank, which are its own warehouse receipts for cash. Its fractional reserve is 1/5, so that it has pyramided 5:1 on top of its reserves."
“Now suppose that depositors at the Martin Bank wish to redeem $500,000 of their demand deposits into cash. The only cash (assuming that they don’t insist on gold) they can obtain is Central Bank notes.”
here is a mises.org site that says http://mises.org/daily/363
"When Joe deposits $1000 with a bank, the accepted practice is to regard the deposited $1000 as part of the bank’s balance sheet. The $1000 is registered on both the asset and liability sides of the bank’s balance sheet.
By registering the deposited $1000 this way, the banks states that Joe supposedly lent the bank $1000. In reality however, the $1000 was never lent to the bank and consequently the ownership on the $1000 was never transferred. So long that deposits are fully backed up by cash, the bank is said to be maintaining a 100% reserve ratio.
Now, if the bank extends a loan of $900 to Chris, the bank creates a deposit and thus new money of $900. For Chris could now pay with a check, when buying goods and services, against the $900 deposit. On the asset side of the bank’s balance sheet we will now have a $1000 in cash plus a $900 loan. On the liability side of the balance sheet we will have $1900 of demand deposits."
“Observe that the $1000 of cash (in deposit account) is backing up only a fraction of deposits, i.e. $1000/$1900 or 10/19. In other words fractional reserve banking gives rise to inflationary credit or “credit out of thin air.””
i assume the author of the article to be describing something close to reality…a fractional reserve process of banking. deposit is made, loan is made from deposit, a fractionj of original is deposit remains but there is a creation of bank-credit added equal to the amount of deposit that was loaned out.