It is surprising that there is any debate about how banks work: surely it is crucial to an understanding of the drivers of both the financial system and the economy. But as a working paper by the Bank of England published at the end of May points out, there is an enormous gulf between how mainstream economic theory views banks and the reality, as described by the authors of the paper, Zoltan Jakab and Michael Kumhof. Banks do not simply lend out money deposited by savers, the so-called loanable funds model that most economic textbooks propound. Instead they create deposits when they make loans, effectively expanding the money supply. They create most of the money in circulation, and are limited in how much they create mainly by their own assessment of the implications of new lending for their solvency and profitability. Central banks have limited control over how much money is pumped into the system in this way, and supply whatever reserves are required. The idea that commercial banks multiply money created by the central bank is plain wrong.