ABSTRACT
To understand what makes banks peculiar, it is helpful to imagine how a government would work if tax payments were voluntary rather than coerced. The Bank of England was recently driven, by the perception of widespread misunderstanding by the public and even by economists, to publish a paper explaining how banks can create money. They explain: 'bank deposits are mostly created by commercial banks themselves', through their lending operations. There is an important parallel here between the bank's IOUs and those of the government. It is in this sense that banks can create money. To understand why bank deposits have come to dominate other such IOUs we need to look more closely at the structure of the monetary system, which we shall do in the following section. First, though, we should note one very important difference between bank deposits and currency.
