Some years ago I moderated a panel at which a US politician insisted that the Federal Reserve’s money-printing would soon cause hyperinflation. Yet today the Fed’s main concern is rather how to get inflation up to its target. Like many others, he failed to understand how the monetary system works.

Unfortunately, ignorance is not bliss. It has made it more difficult for central banks to act effectively. Fortunately the Bank of England is providing much needed education. In its most recent Quarterly Bulletin, its staff explain the monetary system. So here are seven fundamental points about how it really works as opposed to how people think it does.

First, banks are not just financial intermediaries. The act of saving does not increase deposits in banks. If your employer pays you, the deposit merely shifts from its account to yours. This does not affect the quantity of money; additional money is instead a