Explainer · stylised £100 examples · UK institutional frame
How money is created and moved
A loan, a payment, a government bond and a central-bank asset purchase are four different transactions. Following who gains an asset and who owes a liability prevents “money printing” from standing in for all of them.
These examples omit interest, fees, taxes and later transactions. A “+£100” is a change, not an account's total balance. They explain mechanics, not the net effect of a policy on inflation or welfare.
1. A bank makes a £100 loan
The bank records a £100 claim on the borrower and credits the borrower's deposit account by £100. The customer gains a spendable bank deposit and owes the loan. No other saver had to hand over an existing deposit first; no central-bank reserves are transferred at this instant.
Repaying the loan principal later reduces the bank's loan asset and a deposit liability. Lending is not unlimited: borrower demand, expected losses, capital, liquidity, funding costs, profitability, regulation and monetary policy all matter. Source: Bank of England, 2014, pp. 16–20 →
2. The borrower pays someone at another bank
Suppose that borrower sends the £100 deposit to a seller at a different bank. The first bank reduces the borrower's deposit and transfers £100 of reserves to the second bank. The second bank credits the seller's deposit. The deposit has moved between people and banks; the banking system has not created another £100 of customer deposits merely by making this payment.
Reserves are balances that eligible institutions hold at the central bank to settle with one another; ordinary households cannot spend reserves directly. Source: Bank of England, 2014, Figure 2 and pp. 18–19 →
3. A government issues a new bond
A new bond is the government's promise to pay its holder under specified terms. If a non-bank investor buys a newly issued £100 bond, the investor exchanges a deposit for that bond; the government receives the proceeds and takes on a £100 bond liability. That is borrowing, not a commercial-bank loan to the investor and not a central-bank QE purchase.
4. The central bank buys an existing bond
In the Bank of England's stylised QE example, a pension fund sells a £100 government bond that it already owns. The pension fund receives a £100 deposit at its commercial bank. The central bank acquires the bond and credits that bank with £100 of new reserves. The bank's new reserve asset is matched by a new deposit liability to the pension fund—not a free £100 windfall.
QE may influence yields, asset prices and spending; it does not mechanically force banks to make new loans. Plain-language QE guide →
What to keep distinct
Deposits are commercial banks' promises to customers. Reserves are central-bank promises to eligible institutions. Government bonds are borrowing obligations. QE swaps an existing asset for newly created reserves and, when the seller is a non-bank, a matching customer deposit.