Money creation in the modern economy (2014) [pdf]
From the conclusion:<p>&gt; This article has discussed how money is created in the modern economy. 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 or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.<p>The discussion seems incomplete without mentioning government deficit spending. This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren&#x27;t under the same balanced budget constraints as households. Currency issuers can create money by spending it into being.<p>Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different.<p>The MMT perspective is gaining ground, especially as the world&#x27;s governments find it increasingly difficult to avoid deficit spending. A leading proponent (Kelton) proposes ditching deficit targets altogether in favor of inflation targets.