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Bank of England: How money is created

Bank of England: How money is created

According to the Bank of England’s Monetary Analysis Directorate [1] :
The reality of how money is created today differs from the description found in some economics textbooks:

  • Rather than banks receiving deposits when households save and then lending them out, all bank lending creates deposits.
  • In normal times, the central bank does not fix the amount of money in circulation, nor is the central bank money ‘multiplied up’ into more loans and deposits …

Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base money or broad money.

1. Source McLeay, M. et al, Money creation in the modern economy; Bank of England, Quart. Bull. 2014 Q1 (pp 14-27).

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