Martin Wolf at the FT has an excellent article summarizing exactly how modern banking works:
The “money multiplier” linking lending to bank reserves is a myth. In the past when bank notes could be freely exchanged for gold, that relationship might have been close. Strict reserve ratios could yet re-establish it. But that is not how banking operates today.
He hints that the modern system might be a problem in a disinflationary trap because it’s so difficult/impossible to create money.
A still stronger reason is that subcontracting the job of creating money to private profit-seeking businesses is not the only possible monetary system. It may not be even the best one. Indeed, there is a case for letting the state create money directly.
