by Michael McLeay, Amar Radia and Ryland Thomas. Quarterly Bulletin, 2014 Q1, p.1-14
This a recent paper published by the Bank of England that explains that most money created in the economy is through commercial lending by banks. Most money in the economy is not created by the central bank. Neither are banks acting as intermediary determining the rate of lending by the quantity of money saved in the economy.
Most money in the economy, approximately 97%, is created via the creation of deposits at a commercial bank. In other words, the issuing of credit is the act of creation of money in the economy. The amount of lending in an economy determines how much the money supply in the economy expands.
The paper also argues that banks are restricted in the amount of lending they can perform due to competition in the financial markets. The myth that banks also get free money is also dismissed. Quantitative easing is also explained.
The purpose of this paper is to tackle the myths and misconceptions about how the creation of money occur in the monetary system by informing the public the operations of the central bank and commercial banks when money is created. .