Pericles and Yabby, I don't know if you didn't bother to check the link to fractional reserve banking, or you didn't understand it; I thought it gave a fairly clear example of how a bank can borrow (say) $1000. from the central bank, and then lend out $4000.
No mention of interest yet, and I haven't suggested banks get the money for nothing.
The multiplier effect is real and (I thought) undisputed by any economist.
For a very simple example of how this system works, I found this gem on Youtube:
http://www.youtube.com/watch?v=nH2-37rTA8U&feature=SeriesPlayList&p=CECDA315A8848B99&index=2
Another point is, -which isn't mentioned in the vid- that banks do multiply the money they borrow, and they do charge interest on the 'multiplied' amount(M1); while they pay interest on the borrowed amount (M0).
And yes, the money that isn't printed, is borrowed into the system. The reserve bank releases funds to the banks, and the banks aren't in the habit of just giving it away.
I strongly urge you to watch the vid. It makes the point that the multiplier effect doesn't necessarily have to be inflationary; as Pericles has pointed out, a business loan can be profitable, and can be paid back. If it is profitable, and increases real production, then there is no inflation.
Unfortunately, the bulk of loans made are either for depreciating assets, which do not increase real wealth over time, or for real estate; which logically should also depreciate.
Why should a 10 year old house be worth more than it was when it was new?

quoted from
http://neithercorp.us/npress/?p=74

site has numerous links

...While the Private Federal Reserve has continually printed up bailout after bailout for entities such as Bank of America,leighman/sax or Fannie Mae and Freddie Mac, the regular American has plunged deeper into debt than ever before.

The government has deliberately tried to fix the situation from the top down, squandering the wealth of the entire country on the coffers of elite bankers, knowing that the collapse is occurring from the bottom up.

In a credit based economy, if people do not have the ability to take on new debt, then the act of repairing credit markets so that they can lend again is meaningless. Credit is NOT the same as SAVINGS.

In their ignorance, Wall Street automatons have completely forgotten what makes all economies run; the everyday consumer, not banks...[after all our savings become the 'fractional..reserve'...under pinning their new money creation

This ignorance has kept the illusion of market stability going for far longer than it should have, just as credit cards and mortgage loans kept American consumers spending money they never really had.

At this moment, the DOW and everything associated with it are running on the acrid fumes of blind faith. Recent signs show that the smoke and mirrors are beginning to falter, and a timetable for the collapse is beginning to reveal itse

Grim, sorry but I don't do Utube, for my net connection is a mobile
one, with a 1 Gig monthly limit. Vidoes chew up Mbs. Personally
however, I don't think that you should believe all that you see
on Utube lol.

Yup I know how fractional banking works.

*Another point is, -which isn't mentioned in the vid- that banks do multiply the money they borrow, and they do charge interest on the 'multiplied' amount(M1); while they pay interest on the borrowed amount (M0).*

So Grim, basically you are claiming that a bank only has to pay
interest on 1$ and can claim interest on a number of $. Not so,
you have your wires crossed. Take another look at the Westpac
figures and show me where they get money for nothing, apart from
shareholders, which is their Tier 1 Capital.

Yes, banks create money, every time they write another loan, as
its money circulating, the total money supply grows. We know
that. I explained it in a simple way with 1000$, to clear away
the noise and focus on the basics.

Yabby I guess we all tend to make the same mistake; oversimplifying to clarify a point.
I know I have.
To use your example of you putting $1000. in the bank, let's say the bank is generous, and pays you 2% interest on that money.
In the traditional American system, the mandatory reserve banks had to keep was 10%; money held to meet withdrawals.
So the bank holds on to $100 of your money, and lends out $900, at say 4%. We all know banks have to charge more interest than they pay, to cover their costs and make a modest profit, right?
After the $900 is spent, it inevitably winds up back in the (or 'a') bank again, at which time the bank holds on to $90, and lends out $810; at 4%.
The trick can be played over and over, until the total lent is $9000. ($1000= 10% reserve).
The books always balance, as the money is listed on both sides of the ledger; an asset and corresponding liability.
That's as I say, traditional fractional reserve banking. Steve Keen mounts a very persuasive argument that we have passed that stage; as banks hate having that reserve cash sitting in their vaults doing nothing, they tend to lend money first, and worry about raising the reserve later.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Shadow, Daggett did supply an example of a state bank which has continued to profit right through the GFC. It's in the real state of North Dakota, and it's a real (state owned) bank.
http://www.webofdebt.com/articles/state_bank_option.php
You'll notice it still uses the multiplier effect, but it does so on behalf of it's citizens, instead of shareholders, and is able to lend money to the state interest free, for essential services.
Follow the link, it's definitely worth reading.

Pericles wrote, "If I can generate the productivity necessary to repay the principal ..., thus extinguishing it from the economy, and the interest, which becomes an element in the growth of the economy, then so can everyone else."

Pericles, where do you suppose the. money that is paid to your business that, in turn, allows your business to "repay the principal ... and the interest" comes from? It can only come ultimately through someone else having borrowed that money. However, instead of having just had to borrow the original principal, they would have had to borrow the principal plus the interest.

So, for the economy to function, larger and larger loans need to be taken out. This cannot continue indefinitely, except in a perfectly functioning constantly growing economy on a planet with infinite resources.

In the real world, sooner or later people will default on their loans, as we can see happens all too often, usually with the result of smaller farms or businesses being bought out by larger farms or businesses.

This is almost certainly the reason that Islam decided to outlaw usury (whatever other faults that religion may or may not have in the 21st century).

---

Shadow Minister wrote, "The banks of the American colonies operated largely as a monopoly and were essentially free to gouge the clients at will."

I guess 'gouging' is in the eye of the beholder. The evidence cited in "The Web of Debt" shows that the system in the colonies worked perfectly well with everyone prospering until the private Bank of England had the English Parliament outlaw the colonial governments issuing money and forced the colonists to borrow from private banks.

By your logic, the English Parliament thereby liberated the American colonists from the tyranny of their Government operated banking systems.

Why then, do you suppose the colonists, instead of thanking the English Parliament, waged a war to gain independence from that Parliament from 1776 onwards?

Grim has it right and the video he refers to is a good one.

I started thinking about this problem many years ago in a different context. I was looking for a way of preventing water restrictions. The solution I came up with was to pay people who consume little water with special money. The money came from high consumers who paid more for their water. The special money had to be invested in ways to save or increase the supply of water. It turns out that this takes money from one group with whom others share a common resource but gets the other group to invest it increasing the common resource. This "solves" the so called "tragedy of the commons".

It turns out to give us a way to increase the money supply without loans. We look for common resources and fund them through a similar approach of giving everyone who may use the common resource money to invest in increasing the common resource.

However, this idea of giving people money to invest gives rise to a puritanical conditioned response that says people should not get something for nothing. An alternative is to fit within the system and give people loans that have zero interest provided they make a small deposit at zero interest. It doesn't matter where the money comes from as long as it spent on productive assets. This way people do not get "something for nothing" and people are more willing to listen to the solution.

I am about to start to sell the idea to existing financial institutions and to build a demonstration system. This series of posts has enabled me to work out how to approach bankers with the proposition - so thanks to all for forcing me to try to articulate a solution. My next task is to get it into a presentable form and to show a financial institution how they can make a lot of money out of it with zero risk. If anyone knows a financial institution that might be respond then let me know.