And it's worth remembering that banks aren't the only institutions that make loans. There are a lot of businesses that extend credit (post-paid services, invoicing with net 60 terms, etc), which has the same exact macroeconomic effect.
86 karma · joined March 14, 2014
Fractional reserves refer to liqudity, not solvency. If I run a financial institution and I owe depositors $100, but have $10 cash and am owed $100 on top of that, I'm running a fractional reserve.
If on the other hand, I'm MtGox, and I owe depositors $100, but have $10 of cash and am owed nothing on top of that, I'm insolvent. Bankrupt. And if I keep operating, I am a fraud.
This is an incredibly important distinction.