In the 15 to 20 years of the Great Moderation, running up to the banking crisis of 2007, the world combined man-made fiat currency with stable low inflation, steady output growth and high and rising employment. During the Great Moderation, central bankers saw monetary stability as, above all, concerned with preventing a return to inflation. But from summer 2007, and more particularly from autumn 2008, the game changed. The quantity of money stopped growing. As the advanced countries entered the Great Recession, the new policy challenge was to avoid deflation. 

The details of QE operations are of mind-blowing complexity, although their essence — the creation of money by the state — is straightforward. To repeat, the dominant monetary assets of our times are bank deposits. As deposits are liabilities of the banking system, their growth depends on that of banks' assets. What went wrong in mid-2007 was that banks' claims on the private sector started to shrink. If nothing had been done, the quantity of money would also have declined and deflation would have set in. 

But the recessionary forces could be easily checked by the state replacing the private sector as the principal new borrower from the banking system and, hence, by becoming the main creator of money. That was and remains the purpose of the operations, the diverse and manifold operations, which come under the label "quantitative easing". If the leading central banks display enough intelligence (which admittedly remains far from certain), QE operations can be designed and calibrated to ensure that the total of bank deposits grows at a rate consistent with macroeconomic stability.

What has this to do with "money printing"? Far less than the backwoodsmen think. The Bank's QE exercise began in March 2009 and ended in February 2010, with £200 billion of asset purchases. Did that mean that the note issue also rose by £200bn? No, it didn't. The Bank return shows that notes in circulation were £45.5bn in March 2009 and £49.5bn in February 2010. In other words, money printing as such was only £4bn and was little more than 2 per cent of the programme. 

QE prevented deflation, as Britain's current inflation is about 3 per cent. It worked not because of its effect on money printing and the note issue, but because it ensured that the quantity of money — broadly defined to include all bank deposits — did not fall too heavily. QE prevented the Great Recession from becoming the second Great Depression, and for that we should be grateful.