[AmericanChopper]

I have no idea how this became such a popular misconception. Fractional reserve banking allows banks to use a portion of their deposits to make loans. This doesn’t create money out of thin air. It does affect money supply, but in a completely different way. Because deposits are withdrawn from circulation, and loans allow a percentage of that to be returned to circulation. If a bank folded, it would simply have a list of debtors (loan holders), and creditors (depositors). The value of the liabilities may exceed the value of the assets (in which case it would be insolvent), but no money at all will be withdrawn from existence.