What role do you believe Fractional-reserve banking has played in today's financial crisis?

In fractional reserve lending banks are allowed to lend many times the amount of money they have in their reserves. Which means that even relatively small losses on the loans they make can make these banks insolvent and bankrupt. And that's what happened to a number of banks recently.





Fractional reserve lending is also a temporary printing of new money. Because banks lend out a lot of money they don't have in their reserves. But this creation of new money is temporary because when the loans are repaid, the extra money disappears according to banking rules. The bank only gets the interest payments as its profits.





Normally, banks recycle their loans. When someone repays his loan, the bank lends the money to someone else. Which has the effect of keeping the money supply inflated permanently. Because the extra money created by banks doesn't disappear from the economy.





But when people keep repaying their loans, and the banks don't make any new loans due to the losses they've suffered. Then this results in deflation of the money supply. Because the extra money that was created through fractional lending disappears from the economy according to banking rules.





A good example of what can happen in Deflation is the Great Depression of the 1930's.