The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fraction reserve banking.
That is incorrect. The money supply now includes the 100 USD, which is still circulating, the 100 USD in person A's account and the 100 USD in person B's account. Person A can now pay for their groceries by writing a check, transferring money from their account to the grocery store's account, just as they can pay for their groceries with cash. Bank accounts function like cash, until someone withdraws, at which point money is destroyed.
This "created money" affects the supply of currency just like real hard cash does.
Granted, this is incorrect, however my intention was to show that:
Quote from: Funkypala on June 27, 2011, 10:14:13 pm
At the moment the banks can create digits out of nothing if you lend money from them.
that's a myth, perpetrated by youtube videos and conspiracy theorists.
is incorrect, as digits/checks are created out of nothing. As you say, person A can write a check to the grocery store, despite the funds in his account having been transferred to another bank, which means that the check/digits are created "out of nothing". Fractional reserve works in both of these two ways.