From Wikipedia on fractional reserve lending.

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Creation of deposit liabilities through the lending process

The proceeds of most bank loans are not, however, in the form of currency (central bank money). In the United States, the Federal Reserve Bank of Chicago has stated:

Of course, they [commercial banks] do not really make loans out of the money they receive as deposits. If they did this, they would be acting just like financial intermediaries and no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits they make to the borrowers' deposit accounts. Loans (assets) and deposits (liabilities) both rise....^[22]

The American Bankers Association has also stated that most bank loans are made not by doling out paper currency and coin, but instead by creating or increasing deposit liabilities owed by the bank:

Typically, bank loans are made to existing customers, or the proceeds of a loan are used to open an account; thus, most bank loans increase total deposits. In the typical credit situation, two balance sheet items --loans and deposits -- are simultaneously increased.^[23]

From Professor Paul Horvitz:

Deposits may arise in a different way, however. Let us suppose a businessman comes into the bank and wants to borrow $1000 to cover the cost of some additional inventory he wants to purchase. The bank may approve the loan, and the businessman will tell the bank to credit the $1000 to his deposit account.

Bank Assets

debit Loans $1000

Bank Liabilities

credit Deposits $1000

The businessman now has an additional $1000 demand deposit. No one else's demand deposits have been reduced. This is clearly an increase in the money supply, and it is apparent that the bank created the $1000.

These derivative deposits are important both quantitatively and theoretically -- it is in terms of derivative deposits that banks can be thought of as creators of money. If all deposits arose from primary deposits, banks could not be said to create money.^[24]

Allowing the issuance of loan proceeds in the form of cash (that is, in the form of paper currency and current coins) is considered to be a weakness in internal control in a bank.^[25]

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^{Don't feel bad Cypul. Most of the mainstream media, a lot of bank employees, most politicians, and millions and millions of other people don't understand that most of the money that they spend comes from nothing. It is created new when they take a loan out. Then this "money", which is actually credit but acts and spends the same as money, freely circulates within the economy as various bank deposits as it gets spent and re-spent until the original loan principal is extinguished.}

^{It is essentially a Ponzi scheme, albeit a long life scheme. As each fractional loan is created, new money is created. As the loan is paid off the "money" goes away. But the interest paid during the life of the loan was not created at the same time. The interest had to come from the existing money supply. That is why in a fractional reserve system it has to continually expand (inflate) to be able to continue to service the debt. There is never enough money to pay off all the debts as well as the interest. So the debt level has to continually expand or the only two possible outcomes for the system is it deflates severely or goes into default.}

^{See why the banks and monied interests like this system? Money is created by debt and the debt has to always expand. And who gets to collect the interest?}

^{That is where we are at right now.  Debt has to keep expanding enough to pay the interest or we severely deflate the money supply or we go into debt default. Those are the mathematical possible outcomes. And the expanding debt path is an exponential path.}

^{It's the banking world we currently live in.}

^John