One of the most surprising facts in economics is that banks create money. Not physical notes — that is the central bank's job — but the numbers in your account that you use every day. This happens through fractional reserve banking, and it is how the vast majority of money in a modern economy comes into existence.
Here is the mechanism. When you deposit £1,000, the bank keeps a fraction in reserve — say 10% — and lends out the remaining £900. That borrower spends the £900, and the recipient deposits it in another bank. That bank keeps £90 and lends out £810. The cycle repeats, over and over, until the original £1,000 deposit has generated £10,000 in total deposits across the banking system.
This is the money multiplier: in theory, with a 10% reserve requirement, the multiplier is 10. In practice, the actual multiplier is lower because banks hold more reserves than the minimum, and borrowers do not always redeposit 100% of loans.
The important point is that money is created every time a bank makes a loan. When a bank approves your mortgage, it does not transfer money from other depositors — it credits your account with a new deposit. New money has been created. When you repay the loan, that money is destroyed.
This means the money supply is not fixed by the central bank alone. Commercial banks expand and contract it constantly through lending decisions. When banks lend freely, the money supply grows. When they tighten credit — as they did in 2008 — the money supply contracts, worsening recessions.
Central banks try to influence this through reserve requirements, interest rates, and quantitative easing. But the day-to-day expansion of money is driven primarily by the lending behaviour of private banks.