we do not actually own the money we deposit in our accounts

Technically speaking, we do not actually own the money we deposit in our accounts: under case law, established in 1811, we are merely lending it to the banks, with no guarantee that they will return it. This risk led to the creation of a two-speed banking system. True, when someone deposits money in a bank they are lending it money and when you lend money there is no guarantee you'll get it back. But this applies to all lending not just lending to (or, for that matter, by) banks.

Then you had the rest of the banks and building societies. These were far riskier – for one thing, they lent out more than they received in deposits. But since they were unprotected, savers could have no expectation that their money would be safe should the bank collapse.It is true that banks these days do lend out more than they have received as deposits but this is only because they borrow money from others than depositors -- the money market. It's just not possible for anyone, not even a bank, to lend more than they have or have themself borrowed, either, in the case of a bank, from depositors or the money market. It is true that banks don't have to keep all their deposits in the form of cash but that's another matter.

This is incorrect amonetariste, that's not how fractional reserve banking works. If you want to learn in great detail how it does work you should watch these two videos:

1: Money as Debt (on google video, 47 minutes).
2: Money as Debt II: Promises Unleashed (on YouTube, in 8 parts, 77 minutes total)

These offer a more complete description than any other single source I've found. The second one goes a bit off-topic in parts 7/8 and 8/8, talking about some half-baked kind of monetary reform that the filmmaker dreamed up, but the first six parts are great. The second one is important if you want to get a really good understanding of the specific problems. Zeitgeist: Addendum kind of simplifies it a bit and makes it seem like the "created" money is fraudulent when actually it's fine (mathematically) because it's destroyed again as the capital is repaid, even the interest earned on the created money is justifiable a) to insure the banks' against the risk of lending; and b) to pay for the service they provide (for themselves but also for the general economy) in doing the risk assessment on the person/business receiving the loan - but this is only ok if and only if 100% of the interest is immediately spent back into the economy and not hoarded, re-lent, or invested (which of course doesn't happen and is not practical or possible in the real world, unless the interest was paid in goods or services rather than money).

1: Money as Debt (on google video, 47 minutes).
2: Money as Debt II: Promises Unleashed (on YouTube, in 8 parts, 77 minutes total)

These offer a more complete description than any other single source I've found. The second one goes a bit off-topic in parts 7/8 and 8/8, talking about some half-baked kind of monetary reform that the filmmaker dreamed upI have in fact seen the first of these films by Paul Grignon. Frankly I wasn't impressed. It's completely unhistorical -- as if every market town in the 17th and 18th century had its own goldsmith whereas most didn't have banks until into the 19th century and even then dealings between banks were done mainly in cash. To know what banking was really like in the 18th century re-read the section on banking in Adam Smith's The Wealth of Nations (1776) where there is no question of a bank being able to lend more than has been deposited with it, only of how much of what has been deposited it is safe to issue as bank notes convertible on demand into cash and so how much needs to be kept as cash.

And Grignon doesn't seem to know the difference between a bank and a pawnbroker. The logic of his analysis is some half-baked not to say crackpot scheme for "interest free" money (I think he only allows for interest to be paid in kind and that people should keep their savings under the bed) and not to get rid of money and banks altogether. I believe he's very hostile to Zeitgeist.

What I said about banks not being able to lend more than they have or have borrowed is not incompatible with the theory of "fractional reserve banking". This theory does not claim that an individual bank can create money on its own but only that the banking system as a whole can and depends on money being continually re-deposited in one or other bank in the system. If none of the money is re-deposited in a particular bank that bank can't increase its lending. In fact any bank can only re-lend what has been re-deposited with it (and not all of that). There is nothing mystical or magical about this as one of the features of money is that it circulates, ie is used to make more than one transaction, in this case loans.

I agree with you that paying interest isn't necessarily a problem. In fact most of the money banks lend is not lent to individuals for private consumption (another criticism of Grignon's film) but to companies for investment in production. As long as this turns out to be profitable the interest can be paid out of the profits.

I think you're missing the point of how fractional reserve banking works. The upshot is that banks can lend out 9x more than they have in deposits. This is possible because they actually create money out of thin air when someone takes a loan. This money is created in the form of a credit to the borrowers account, which is just a form of promise (even when the money is transferred to another bank, the recipient of the promise just changes) - i.e. they have promised up to 9x more than they actually have in real deposits to pay out! I think that the part you're missing is maybe that when the money is loaned it is NOT taken from the deposits and it is NOT borrowed from someone else, it is CREATED.

For example a bank with £10 deposits that lends you £9 (by crediting your account) now has total deposits of £19, not of £1 as you might think - the newly created money is ADDED to the deposits, allowing the bank to lend another £8.10, increasing its total deposits to £27.10 and allowing it to lend another £7.29 increasing its total deposits to £34.39, etc. etc. (note the amount it can lend is based on 90% of the total deposits minus the amount already lent).

Regarding Grignon, I don't really care about his views on Zeitgeist or RBE or any of his other views - I only use those films as an example because they do a good job of explaining how the current banking system works. I personally find them very long-winded, but for someone trying to get to grips with how it all works that might be a good thing.

No, the theory of "fractional reserve banking", as set out for instance in Modern Monetary Mechanics, does not claim that for every £10 deposited with it a single bank can then, assuming a "cash ratio" of 10% (in fact it much less than this, about 3%, but the maths is easier with 10%), lend out 9 times this amount. It only says that the banking system as a whole can eventually do this, as long as the money from the original £9 is deposited in other banks in the system. (Your example would only be valid if there was only one big bank and that when the borrower spent the £9 loan those who received it deposited this in the bank as opposed, for instance, to taking it abroad or keeping it under the bed).

The second loan, normally by a second or other banks, of £8.10 is not created out of thin air but is part of the £9 that is assumed to be deposited by those who receive the proceeds of the first loan. Similarly with the third loan of £7.29, this depends on the £8.10 being redeposited in the banking system. And so on. Eventually, if there are no leaks, the total amount loaned will amount to 90, ie 9 times the original deposit of £10. But so will the total amount that will have been (re)deposited with banks.

The problem is the origin of the first deposit of £10. Under the practice of fractional reserve banking this was assumed to come from a commercial bank drawing this from its reserves with the central bank (and which the central bank will have in effect "created out of thin air"). The theory was that the central bank could control the volume of bank lending by making it easier or harder for banks to obtain money from it. Today this method of trying to control the volume of bank lending has been abandoned and replaced by trying to control interest rates, but it was the dominant theory of central banking in the 1960s and 70s when Modern Monetary Mechanics first came out.

I don't think we do our case against money and banks any good by making a claim (such as that any bank on receipt of a £10 deposit can lend out £90) which can be shown not to be the case.

There is no obligation to deposit it at a different bank, in practice this does happen you're right, but this only serves to obfuscate what's going on. There's no reason why a single bank couldn't do this if all the borrowers kept the money in their accounts at the same bank. The fact that it's a loan of created money does not prevent the bank treating it as a deposit.

What is important for this to work for a single bank is not where the borrowers keep their money (obviously they're not going to withdraw the money and simply deposit it in another bank; they're going to spent it), but where those who receive the money when the borrower spends it keep their money. If they -- all of them -- keep their money in the same bank then, yes, that bank could eventually lend out (on the assumption of a 10% cash ratio) 9 times the first deposit. But only because the money keeps on being redeposited with it.

This news item from Friday's Times http://europeadmin.citywebwatch.com/Admin20C/PDFAggregation/ViewFile.asp... throws some light on the question of whether the Bank of England is really independent of the government (the Treasury) and whether it charges the government interest or vice versa. It seems more like a government department that brings in money.rather than an outside body charging it interest as some claim.