The following quotes are from the referenced article, by Frank Shostak an adjunct scholar of the Mises Institute, tries to explain that the money multiplier is at work because that is the essence of a central bank’s management responsibility!!
“Whilst in a free market economy the practice of fractional reserve banking would tend to be minimal, this is not so in the case of the existence of a central bank. By means of monetary policy, which is also regarded as the reserve management of the banking system, the central bank permits the existence of fractional reserve banking and thus the creation of money out of “thin air.”
“In this respect the modern banking system can be seen as one huge monopoly bank which is guided and coordinated by the central bank. Banks in this framework can be regarded as branches of the central bank. In other words, for all intents and purposes the banking system can be seen as being comprised of one bank.”
“Furthermore, it must be realised that in a free market the tendency of being “caught” practicing fractional reserve banking, so to speak, rises, as there are many competitive banks.”
Note that caught means not having the money on hand when demanded by the depositors. This liquidity crisis can potentially become a solvency crisis.
“In short, as the number of banks rises and the number of clients per bank declines, the chances that clients will spend money on goods of individuals that are banking with other banks will increase. This in turn increases the risk of the bank not being able to honour its checks once it practices fractional reserve banking.”
“We can conclude then that in a free banking environment if a particular bank tries to expand credit by practicing fractional reserve banking it runs the risk of being “caught”. Hence in a true free market economy the threat of bankruptcy will bring to a minimum the practice of fractional reserve banking.”
“Conversely, as the number of competitive banks diminishes, that is, as the number of clients per bank rises, the likelihood of being “caught” practicing fractional reserve banking diminishes. In the extreme case of there being only one bank, it can practice fractional reserve banking without any fear of being “caught” so to speak.”
“Whether legal reserve requirements are applied on the average of the last four weeks deposits or on same day deposits is beside the point, so far as the money multiplier is concerned. The existence of the money multiplier is the outcome of fractional reserve banking, which the current banking system makes possible. In short, it is the existence of the central bank that enables banks to practice fractional reserve banking, thereby creating inflationary credit.”
So it appears that there will be this tendency for TBTF banks to emerge and attempt to dominate the lending landscape in effect aided by the central bank who will perceive big banks as a less complex banking system than alot of smaller banks??