The original $100,000 never changed, however. It never became two sources of assets on the books - it remains a credit for one and a liability on the other. It remains a credit on the original depositor's books of $100,000. On the bank's books, it becomes a liability of $100,000 upon deposit. When the bank loans out that money, they retain the liability of the $90,000 they loan out, but now gain an asset in the term of a loan or note to the tune of $90,000. The other 10% remains as a liability. The loan recipient or debtor then takes on the liability of the loan amount of $90,000. It's all there in the T accounts. (I'm of course simplifying because at each step you're going to have charges and interest being assessed, but the accounting is all right there.) Even the fact that the debtor uses the money doesn't decrease his liability on the books. All you are doing is transferring money from someone who doesn't need immediate use of it to someone else who is willing to pay a fee to use that money now. That fee is paid in interest payments.

What should be noted, however, is that in a real environment, the loan of the money DOES actually affect the real amount of money available for the original depositor to withdraw. That is what I was trying to point out earlier. Bank runs happen when too many people attempt to reclaim the totality of their accounts and the sum is greater than the reserves on hand which represent the leftover deposits not loaned out. That is the game played by the banks: how close to the line can they operate? Can they maintain enough operating cash to satisfy the withdrawal requirements of depositors while charging enough in interest and fees to maintain business operations?

No, the real "creation" of money happens in the interest payment. And that can be explained by the additional labor that must be supplied by the debtor in order to meet the terms of the loan. His (or her) labor is being exacted in payment of the interest, but in aggregate, there now becomes more "money" (actually labor value represented as money) in supply in the market. What should be recognized, however, is that the money didn't originate out of thin air, but is actually the value of labor of the debtor being transferred back to the creditor. So the money really isn't being created out of thin air, but by the actual output of people.

What the fractional reserve system actually does is directly affect the interest rates of both depositors and debtors. Then the Federal Reserve comes in and charges fees to supply the banks with a kind of backup mechanism for obtaining the short-term funds needed to stay above the mandated reserve rate, which of course they control and charge interest rates for as well. That's the real source of inflation and money supply problems, because the money THEY loan to the banks is ABSOLUTELY fictional. They print it, but it doesn't really represent actual labor. What's also fictional is the FDIC, because the FDIC doesn't actually store money either - they get it from the Feds who just print it!

What we need to recognize is that if the banks were left to themselves to manage their own reserve rates and set their own inter-bank loan rates, I think we'd see the reserve rate climb significantly, and I think that depositors and banks alike would - all via standard market machinations - agree on some terms for deposits and withdrawals that would reflect this reality via interest rates. This in turn would power the downstream interest rates on loans (driving them upward). That would also in turn contract the real money in motion in the market and put a halt to inflation.