How does a fractional reserve system allow commercial banks to 'create' money?

Question

How does a fractional reserve system allow commercial banks to 'create' money?

Answer 1

Suppose you have $100, and you deposit it in a commercial bank which uses fractional reserve banking with a reserve ratio of 15% (i.e. it needs to keep 15% on hand to cover possible withdrawals, but can invest the rest).   The bank is not going to keep all of your $100 on hand, just $15 of it.  The rest of it is going to use to make loans to borrowers.

So when you deposit your money, you still have $100, but people who have borrowed from the bank have $85 that they wouldn't have had if you'd just kept your money under your mattress.  The bank has used your $100 to put an additional $85 in the system.

Of course, the borrowers are going to have to pay back the $85 with interest at some point, so you might imagine that the  money is not "permanent".  But as soon as the borrowers pay back, so long as you have that $100 still in your account, the bank will pocket the interest (or maybe give you some fraction of it depending on the type of account you have) and lend the $85 out again, so it is always in the system.

Answer 2

By selling money at slightly less than face value, money is then lent or spent inbetween and that small spread on the money is then "created" in the form of articicial profits.

In our present economic state, that is hardly effective because less money is being lent or spent, thus contracting growth. So there is less spread to create new money.

In other words, its a numbers trick fueled by a government printing press.