The movie suggests that the central government directly manufactures an initial amount of money to be put into circulation by issuing debt that is bought by the

The movie suggests that the central government directly manufactures an initial amount of money to be put into circulation by issuing debt that is bought by the central bank. The proceeds are deposited at commercial banks, who then lend money out to the maximum extent allowed under fractional bank lending requirements. This paper argues that in reality, the relationship is exactly the reverse: most money (=debt) creation starts as loans between private commercial banks. Loans become deposits in other bank accounts. If a bank finds itself short on a reserve requirement, it can just borrow reserves from other banks to meet its reserves, or from the central bank. In sum, at least in the United States and England, most money creation stems from loans within the private sector, as opposed to what the movie and textbooks typically suggest. This is explained in the paper: " For the [money multiplier] theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates. In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England. The rest of this article discusses these practices in more detail."