Deposits into a bank are recorded as both assets and liabilities.
Deposits that have been received but not lent out are called reserves.
The supply of money in the economy is affected by the amount of deposits that are kept in the bank as reserves and the amount that is lent out.
Loans become an asset to the bank.

Bank “T-Account”
   A “T-Account” illustrates the financial position of a bank that accepts deposits, keeps a portion as reserves and lends out the rest.

Money creation with fractional reserve banking
When a bank makes a loan (from its reserves) the money supply increases.
When banks hold only a fraction of deposits in reserve, banks create money.
The creation of money through loans does not create any wealth, but …
allows banks to charge interest several times on the same bit of wealth.
The Deposit Expansion Multiplier
When one bank loans money, that money is generally deposited into another or the same bank …
creating more deposits and more reserves to be lent out.
The Deposit Expansion Multiplier or Simple Money Multiplier is the amount of money that the banking system generates with each dollar of reserves.

The Deposit Expansion Multiplier
What determines the size of the DEM?
The money multiplier is the reciprocal of the reserve ratio.
With a reserve requirement (R) of  20% or 1/5 . . .
The multiplier will be 5.
Each $1 of additional reserves creates a total of $5 of money
Tools of Monetary Control
  The Fed has three instruments of monetary control:
Open-Market Operations:
Buying and selling bonds.
Changing the Reserve Ratio:
Increasing or decreasing the ratio.
Changing the Discount Rate:
The interest rate the Fed charges other banks for loans.
Problems in Controlling the Money Supply

Two problems the Fed must “wrestle” arise due to fractional-reserve banking:
The Fed does not control the amount of money that households choose to hold as deposits in banks.
The Fed does not control the amount of money that bankers choose to lend.