The U.S., like most other countries today has a fractional reserve banking system in which only a portion of ceckable deposits are backed up by cash in bank vaults or deposits at the central bank.

Illustration the idea: the Goldsmiths:

• Early traders used gold to make transactions, but realizing that it was unsafe and inconvenient to negotiate with gold, they began to deposit their gold with goldsmiths. These goldsmiths issued receipts to the depositers after receiving the gold deposit charging them a certain fee for allowing them to store their gold in the vaults. Eventually, the goldsmiths' receipts were used to pay for goods, and became the first type of currency.
• At this time, goldsmiths backed their circulating paper money receipts fully with the gold they held in their vaults (it was a 100% reserve system). However, goldsmiths realized that gold was rarely redeemed, and that the public had completely accepted the receipts as paper money, and that the amount of gold being deposited in their "reserves" exceeded the amount that was being withdrawn.
• The goldsmiths began to issue paper receipts in excess of the amount of gold being held in their vaults. They put these receipts into circulation by making interest-earning loans to merchants, producers and consumers. Lenders willingly accepted loans in the form of gold receipts (receipts were accepted as a medium of exchange in the market).
• The goldsmiths began the fractional reserve system of banking; the reserves in bank vaults are a fraction of the total money supply; the gold reserves would be a fraction of the circulating paper money.

Characteristics of fractional reserve banking:

• Banks create money through lending.
• Banks lend money at higher interest rates than the ones they pay out to create money.
• Banks have a system of deposit insurance and operate on the basis that fractional reserves are vulnerable to "runs" or "panics." This is when all the holders demand for their money all at the same time. Although this is highly unlikely, banks still take measures to protect themselves from this disaster that has ruined banks in the past (e.g. in the Great Depression).

A Single Commercial Bank:

• Balance sheet: statement of assets, liabilities, and net worth (capital stock) of the bank at a certain time (value of assets must equal the amount of claims against the assets).
• When federal reserve ratios change, the ballance sheet for banks is skewed, therefore they must do call backs on loans as well as take out loans to ballance their accounts.
• assets = liabilities + net worth. Every $1 change in assests must equal a $1 change in liabilities + net worth and vice versa.

• Vault cash = cash held by a bank, aka. till money.