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Fractional Reserve of Confusion

I cant understand fractional reserve banking . Below I will put forth my confused understanding of this .

There are two contradictory(not sure) explanations of fractional reserve banking which are floating around the internet .

VERSION A :

ABC bank has 1000 dollars in reserve . It lends out 900 dollars to Jill and keeps 100 on reserve. Her money eventually ends up in another bank . They keep 90 on reserve and lend out the rest and so an so forth. In this way the banking system repeatedly lends the money to loan out almost 10 times the original 1000 dollars .

VERSION B :

ABC bank has 1000 dollars on reserve . But they lend out 10,000 dollars to Jill .(What if someone turns up at ABC bank with a cheque for 10,000 dollars ? How will they be able to pay for it ? )

Version B sounds unworkable . Version A is possible . But  I dont see what is so unethical about it .

I dont understand this . Its all so confusing . And Banking systems in all countries dont work in the same way .Clear explanation needed .

Comments

hey slambo, take a look at monetaryscience.blogspot.com, for an explantion of this and many other related issues.

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