Throughout the financial crisis of late 2007 and 2008, the monetary alternative to the "lending-determines-spending" doctrine had always been there. For many years, the Bank of England had been agnostic over major theoretical issues. It may have veered towards the creditist side in the creditist/monetarist debate, but it had not made a final commitment. With base rates down to a mere 0.5 per cent, further significant cuts in the price of money were out of the question. The Bank decided to refocus on the quantity of money. On 5 March, it announced a programme of so-called "quantitative easing", in which enormous purchases of gilt-edged securities, mostly from non-banks, would deliberately add to the level of bank deposits (ie. the quantity of money). 

Credit and money are often confused, and confusions in a subject as arcane as banking theory are understandable enough. However, credit and money are distinct. Lending to the private sector is a totally different entry on a bank balance sheet from the figure for deposits. Increases in banks' loan portfolios add to assets and require extra capital to anticipate the risk of default; increases in bank deposits expand liabilities and may not need any more capital at all. The point is that banks can grow their deposit liabilities by acquiring assets with a negligible risk of default. These assets are of two main kinds, claims on the government (Treasury bills and gilt-edged securities) and claims on the central bank (their so-called "cash reserves"). When the quantity of money increases as a result of banks' acquisition of such assets, no new bank capital is required. 

Reports about quantitative easing in the media have been muddled. Many journalists remain imprisoned in the "lending-determines-spending" box and believe that the purpose of quantitative easing is to stimulate more lending. Again, the mistake is understandable, as the phrases "the quantity of money" and "the money supply" are used interchangeably, and the second of these gives the impression that banks are "supplying money" (that is, "making loans"). However, it must be emphasised that "the money supply" consists of deposits, not loans. The money supply and bank lending are different things. 

The intention of the Bank of England's programme of quantitative easing is to increase the quantity of money by direct transactions between it and non-banks. Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting. In its essence the mechanism at work is very simple, that the Bank of England adds money to the bank accounts of holders of government securities to pay for these securities. (The details can be of mind-blowing complexity, but need not bother us now.) Roughly speaking, the quantity of money in the UK is about £2,000 billion. Gilt purchases of £150 billion over a six-month period would therefore lead by themselves to monetary growth of about seven-and-a-half per cent or, at an annual rate, of slightly more than 15 per cent. This is a very stimulatory rate of monetary expansion. 

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