have shown how questions about money and government’s control of it can be important and contentious

Commercial banks create new money when they advance loans.

The reality is that banks don’t need deposits on their balance sheets before they can make a loan. Specific capital adequacy or reserve requirement regulations might constrain their lending, as will the judgment of their management as to their loans’ profitability and risks.

This is because whatever the borrower spends the borrowed money on, someone else gets a payment to put in their bank account. In this way new loans create their own deposits for bank balance sheets. This ability to essentially create new money highlights why commercial banks require special regulation and oversight.

A government’s spending beyond what it collects in taxes is the second way that money can be created. The convention for developed-country governments is that, for each year that they spend more than they collect in taxes, they must issue the equivalent value of the deficit in government bonds. Investors pay for the bonds in return for receiving yearly interest paid by the government treasury

In theory, even taxes are not absolutely required by governments to fund their spending. But taxes are still crucial. They take out a major slice of the population’s purchasing power, to free up the resources required for government spending. Without taxes, government spending would constitute hyperinflationary spending of newly created money

fiat money depends on trusting the authorities that issue it, and these deeply established conventions and norms help back up that trust with practical limits on behavior.