In simple terms-

Commercial banking system-
A simple formula gives the maximum amount of money that an initial deposit can be expanded to, with a specified reserve.

Let reserve be R. then the money multiplier is m= 1/R, and is the maximum amount of money that commercoial banks can create for a given quantity of reserves.

Scroll down in the Wiki article Money Creation (which is pretty good but simplified) to Money Multiplier.

There are problems if the reserve rate is too low or banks make risky loans. Some of these are discussed briefly in the article.

http://en.wikipedia.org/wiki/Money_creation