Fractional Reserve

If a bank issues itís own currency, itís almost always a commodity currency, redeemable for some commodity. This commodity could be many things, from precious metals to government currency. The important point is that the currency can be redeemed at a back for the commodity without haggling or negotiation. For this reason a commodity currency represents or is a proxy for the commodity itself.

If a state issues itís own currency, itís sometimes a fiat currency, with no possibility to be redeemed for anything. The currency has no representative aspect to it and it stands on itís own by simple proclamation alone. It serves no function besides that of currency and therefore can not be redeemed for anything. A fiat currency could be thought of as a commodity in itself.

While there can be many distinctions to what exactly is a fractional reserve system, it essentially comes down to the guarantee of redeemability. Since a bank would typically issues a commodity currency, the level of guarantee as to future redemption is the deciding factor. A full reserve system is when a bank sets aside enough commodity to guarantee each and every piece of currency. A fractional reserve system is when a bank sets aside only a fraction of the commodity needed to guarantee itís outstanding currency.

Modern banks usually operate as a fractional reserve, with securities as the commodity. To redeem bank issued currency means that the bank commodity currency is exchanged for government fiat currency.

US reserves held as redeemable commodities
Detailed explanation of bank reserves linked above