In a fractional reserve banking system,

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In a fractional reserve banking system, banks are required to keep a fraction of their deposits as reserves and can lend out the remaining amount. This means that banks can create money through the lending process, as the money lent out becomes a new deposit, which can in turn be lent out again. This is known as the money multiplier effect. Bank panics can still occur in a fractional reserve banking system if depositors lose confidence in the banking system and withdraw their funds en masse, leading to a bank run. The monetary system does not have to be backed by gold in a fractional reserve banking system, as the money supply is backed by the assets owned by the banks. The Federal Reserve does have some control over the amount of money in circulation through their monetary policy tools.

In a Fractional Reserve Banking System