The Pound in Your Pocket: Where Does Britain's Money Come From?

1 · Money as IOUs

Money is a promise others accept

Money is a kind of IOU, a promise that society agrees to accept. If I owe you, and you trust that promise enough to pass it on to someone else, my IOU starts to act like money. Modern money works in a similar way, just on a much bigger scale.

The banknote in your wallet still carries the words “I promise to pay the bearer on demand”. But most money in Britain today isn't notes and coins at all. It's numbers in bank accounts, and those numbers are also promises: what your bank owes you.

Around 95% of the money people hold for payments is bank deposits (BoE/HMT digital pound consultation, 2023, p22).

2 · How banks create money

In the Bank of England's own words

Many of us picture banks like this: savers put money in, and the bank lends that money out. In 2014 the Bank of England published a paper called Money creation in the modern economy. It explains that this common picture is not how most money is created.

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.”McLeay, Radia & Thomas, Bank of England Quarterly Bulletin 2014 Q1 (PDF)

The bank records two entries at once: a loan you owe the bank, and a deposit the bank owes you. When loans are repaid, that money is destroyed. Banks can't do this without limit: lending is constrained by regulation, profitability, the interest rates the Bank of England sets, and whether people want to borrow at all. So most of the money we use day to day begins life as someone's debt.

Panel 1: a friendly bank clerk in glasses and a bow tie writes a loan into a big ledger with a fountain pen; glowing gold pound coins, each stamped with a £ sign, rise out of the page and float across into the borrower's open wallet. — When a bank makes a loan, it creates a matching deposit, which is new money. When the loan is repaid, that money disappears. How much banks lend is limited by regulation, profitability, interest rates and demand for loans.

Panel 2: the same clerk rubs the entry out of the ledger with a big pink eraser as the loan is repaid; the wallet is now almost empty, with just three gold pound coins left peeking out of it, while a trail of ghostly pound coins drifts up and away from it, spreading out and shrinking as they rise: the lowest are still faint gold coins with an outlined £, the middle ones are barely there, and the highest have vanished completely, leaving only little cartoon pop bursts and sparkles. — When a bank makes a loan, it creates a matching deposit, which is new money. When the loan is repaid, that money disappears. How much banks lend is limited by regulation, profitability, interest rates and demand for loans.

3 · Gilts & government IOUs

The government borrows too

When the government spends more than it raises in tax, it borrows, mainly by selling gilts. A gilt is a government IOU: a promise to pay interest and return the money at a later date. Pension funds, insurers, banks and overseas investors buy them. In recent years the Bank of England also bought large amounts of gilts through quantitative easing, creating central bank money to do it. The Bank is now running quantitative tightening, reducing those holdings (Bank of England, Sept 2026).

Governments of every colour have borrowed this way, in good times and in bad. Interest on those gilts comes out of the same public budget as schools, hospitals and defence. So when someone says there's no money, part of the real question is how much already goes on servicing past IOUs.

Debt and deficit are not the same thing. The deficit is how much more the government spends than it raises in a single year: £134.2 billion in the year to March 2026 (ONS). The national debt is the running total of all those years of borrowing still owed, now about £3 trillion (ONS). So a smaller deficit doesn't mean the debt is shrinking. It means the debt is still growing, just more slowly. The debt in pounds only falls when the government runs a surplus, raising more than it spends. Compared with the size of the economy, though, it can shrink when the economy grows faster than the debt.

How can a government bring the debt down? There are only a handful of ways, and each has a cost:

Raise taxes: more income for the government, less for households and businesses.
Cut spending: smaller budgets for public services, benefits or investment. Done deliberately, it can also mean a smaller state that does fewer things, which some see as a cost and others as a goal.
Grow the economy: the debt stays the same in pounds but shrinks compared with the size of the economy. This is the least painful option, but it's hard to deliver on demand.
Let inflation erode it: rising prices make old debts worth less in real terms. This quietly takes buying power from savers and anyone whose pay doesn't keep up.
Keep interest rates below inflation: borrowing becomes cheap in real terms, but savers lose out year after year.
Sell public assets: this raises cash once, but the asset and any income from it are gone.
Default or restructure: refuse or delay repayment. This is rare for countries like the UK and would badly damage trust and borrowing costs.

In practice governments mix these. Inflation and low real interest rates are the least visible, which is why they're tempting, and why savers often end up paying.

Why does the debt so rarely come down? Taxes do go up, but mostly to keep pace with rising spending, not to pay the debt back. Running a real surplus means deeper cuts or tax rises whose pain is immediate and visible: a closed library, a smaller pay rise, a bigger tax bill. The benefit, a lower debt, arrives slowly and years later, often after the next election. Spending now and borrowing for it tends to win votes, while paying it back tends to lose them. So whoever is in power faces the same pull towards more borrowing, and the debt keeps rolling forward.

A painted scene in a wood-panelled room with the Houses of Parliament and Elizabeth Tower seen through the window. Four smiling politicians in plain dark suits hand rolled paper certificates sealed with red-brown wax across a long table to three investors: an older man in a tweed jacket, a grey-haired woman in spectacles and a cardigan, and a man in a pinstripe waistcoat. The investors slide sacks and tall stacks of gold pound coins back across the table, while a small jug pours more gold pound coins out to one side. — What the UK government owes in total, and what it pays each year just in interest on its borrowing.

4 · Money… or just currency?

Two jobs, only one done well

For most of history, money had to do two jobs. It had to be a medium of exchange: something everyone accepts so we can buy and sell. And it had to be a store of value: something you could set aside today and still buy roughly the same with years later. When something does both, you can fairly call it money.

What we use now is brilliant at the first job and far weaker at the second. A medium of exchange that can be expanded at will (and that steadily loses buying power) is currency.

What is inflation?

Inflation means prices rising over time. Another way to see it: each pound buying a little less. When new currency is created faster than the economy makes more goods and services, more pounds end up chasing the same things, and prices drift up. So inflation isn't just shops charging more. It's the pound losing buying power. Prices also move for other reasons, like energy shocks or poor harvests, but over the long run it's the steady growth in currency that keeps the overall trend pointing up.

When inflation "comes down", say from 10% to 2%, prices don't fall. They keep rising, just more slowly, and each year's rise builds on the last.

2% is the Bank of England's target, set by the government, not a promise. Even if it's hit exactly, prices still double in about 35 years. It's rarely hit precisely: since the 2% target began in 2004, inflation has averaged about 2.8% a year and has been above 3% in about three months in ten, peaking at 11.1% in October 2022 (ONS).

The Bank of England's official target is two per cent inflation a year. Two per cent a year, every year, compounds: over about thirty-five years, prices roughly double. A pound saved at the start of a working life, kept as cash earning no interest, buys about half as much by retirement, even when the target is met exactly.

Year 0: a smiling young shopper in a red coat and mustard scarf pays a stocky greengrocer with ginger hair and beard turning grey at the temples and streaked with grey, in a green apron with gold pound coins, her basket overflowing with bread, oranges, an apple, milk, jam, greens and eggs. — The line shows what £1 kept as cash (earning no interest) can buy if prices rise by 2% a year, the Bank of England's target. After 35 years it buys only about half as much: the same coins, half the shopping.

Year 35: the same shopper, now 35 years older with grey-white hair, glasses and a lined face but still in her red coat and mustard scarf, pays the greengrocer's grown-up son, ginger-bearded like his dad but in a modern fitted dark t-shirt, slim navy apron and smartwatch with a contemporary haircut, with the same gold pound coins; her basket holds only about half as much, a loaf, three oranges and a modern plastic bottle of milk with a green cap, and she looks dismayed. — The line shows what £1 kept as cash (earning no interest) can buy if prices rise by 2% a year, the Bank of England's target. After 35 years it buys only about half as much: the same coins, half the shopping.

5 · Continuous debt expansion

New lending has to outrun repayments

If most of our currency is created when loans are made, and destroyed when loans are repaid, then for the amount in circulation to keep growing, new lending has to keep running ahead of repayments. Interest adds to this: borrowers pay back more than they borrowed. Economists debate how tight this link really is: currency circulates, interest becomes someone's income, and growth matters. But the general shape isn't controversial. When lending slows sharply, as it did in 2008, the whole economy feels it.

Nobody sat down and planned it this way. Piece by piece, over decades and centuries, banks, governments, borrowers and savers each responded sensibly to the incentives in front of them. Together those choices produced a system that depends on debt continuing to grow. It's how the plumbing ended up working.

Panel 1: a smiling British gardener in a flat cap, checked shirt, waistcoat and ordinary garden shoes stands happily on a lush green lawn beside a thin blue hose gently trickling water with pound signs flowing in it. — At first, new loans help things grow. But new debt-based currency keeps pouring in faster than the economy can soak it up, and prices have to keep rising just to stay above water.

6 · Shop, home, wages

What it means for everyday life

When new currency mostly enters the economy as loans, it doesn't arrive everywhere evenly. A lot goes into mortgages, so it flows into housing first, helping bid up prices for anyone already on the ladder and pushing it further away for anyone trying to get on. Renters feel it in what landlords need to charge; first-time buyers in the size of the deposit. In 1997, the first year of the official series, a typical home in England and Wales cost about three and a half years of a full-time worker's pay. In 2025 it cost 7.6 years' pay in England.

Over time, prices for everyday things rise too (that's inflation, the overflow from section 5). What cost £1 in 1991 costs about £2.40 today. Wages rise as well, but more slowly and later: after inflation, average weekly pay is only about 3% higher than in early 2008. Savers who did everything right watch their savings quietly lose buying power. These experiences cut across every constituency, every age group and every voting habit.

The young shopper in her red coat and mustard scarf stands on a terraced street holding an open purse with a couple of gold pound coins, gazing up at a house with a red and white For Sale board outside, whose front steps are piled with ever-taller stacks of gold pound coins. — The long view from official UK statistics: a typical home has gone from about 3.5 to 7.6 times a full-time salary since 1997, everyday prices have risen 2.4 times since 1991, and pay after inflation is barely higher than in 2008. Housing has eased a little since its 2021 peak and real pay is growing slowly again. These pressures are felt in every part of the country, whoever people vote for.

The same shopper, in her red coat and mustard scarf, holds a jar of jam in one hand and a single gold pound coin in the other, looking surprised at shelf price tags marked with little upward arrows. — The long view from official UK statistics: a typical home has gone from about 3.5 to 7.6 times a full-time salary since 1997, everyday prices have risen 2.4 times since 1991, and pay after inflation is barely higher than in 2008. Housing has eased a little since its 2021 peak and real pay is growing slowly again. These pressures are felt in every part of the country, whoever people vote for.

7 · A structural question

Can debt grow faster than incomes forever?

None of this means a crash is coming tomorrow. Britain has run on this system for a long time, and it has delivered real growth and real prosperity. But it raises a fair structural question: if the system needs debt to keep growing faster than the incomes that service it, how long can that go on?

Each new layer of borrowing, private or public, makes the economy more sensitive to interest rates. When rates rose recently, households with mortgages felt it, and so did the public budget. No one designed it to reach this point; it grew out of incentives that made sense at each step. So is a system that needs ever more debt, and that steadily erodes the value of savings, sustainable over the long term?

The common root. Rising prices, unaffordable homes, pay that lags behind, savings that shrink and a national debt that keeps growing are usually treated as separate problems, each with its own culprit. Look underneath, though, and they share a foundation: the quality of the money itself, and the incentives built into how it's created.

When most new money arrives as debt, the system only stays healthy if borrowing keeps growing. That rewards whoever borrows first and owns assets, like homes and shares, which rise as new money flows in. It quietly penalises savers and people living on wages, who meet the higher prices later. Governments are pulled the same way: borrowing now is easy, and repaying is painful and unpopular.

Other things matter too. Housing supply and planning, weak productivity, energy shocks and an ageing population all play a part. But each of them lands on top of money that steadily loses value and a system that needs ever more debt, and that makes every one of them worse.

That's why changing who is in charge rarely changes the direction. Every party inherits the same incentives. Debt can't keep outrunning incomes forever, so the lasting fix has to start with the money itself.

Early on: the gardener sits relaxed at his kitchen table sipping tea, with a pay envelope and two stacks of gold pound coins on one side and a small, tidy pile of bills on the other. — When what you owe grows faster than what you earn, every year it takes a bigger share of your income just to keep up, and the pile gets harder to pay down. That can carry on for a while, but not forever.

Years later: the same gardener's coin stacks are only slightly taller, but the pile of bills and loan papers has become a huge, wobbling tower reaching towards the ceiling, shedding sheets, and he leans back with his hands up, worried it will topple. — When what you owe grows faster than what you earn, every year it takes a bigger share of your income just to keep up, and the pile gets harder to pay down. That can carry on for a while, but not forever.

8 · The digital pound (CBDC)

Why a digital pound (a CBDC) isn't a fix

What is it? The digital pound is the UK's proposed CBDC (Central Bank Digital Currency), issued and recorded by the Bank of England. The Bank and HM Treasury's 2023 paper sets out “the case for a retail central bank digital currency (CBDC) – a so-called ‘digital pound’” (consultation paper, Feb 2023). The UK is not alone: the Treasury Committee reported that 130 countries are exploring a CBDC (Treasury Committee, Dec 2023).

Status, 3 Nov 2026: no decision has been made yet. HM Treasury says it will announce a decision by the end of 2026 (Bank of England; written answer 34410, Oct 2026).

A central bank digital currency changes the form of the pound, not how pounds are created.

The Bank of England and HM Treasury describe a digital pound as “a new form of sterling, similar to a digital banknote” (consultation paper, Feb 2023), and say “£10 of digital pounds would always have the same value as, and be interchangeable with, a £10 banknote” (response, Jan 2024). Same pound, same creation rules: currency would still mostly begin life as bank lending, so the debt-expansion pattern would carry on, and so would the steady loss of purchasing power.

What it would add is a central ledger run by the Bank of England. The House of Lords Economic Affairs Committee said it had “yet to hear a convincing case” for a UK retail CBDC, and listed risks depending on design, including “state surveillance of people's spending choices”, “an increase in central bank power without sufficient scrutiny” and “a centralised point of failure” (Lords report, Jan 2022).

The Bank and Treasury proposed holding limits of between £10,000 and £20,000 per person, and say neither they nor the Government would programme users' money or access personal data, with legislation to guarantee this (response, Jan 2024).

Those are real safeguards, but they would be set in law, and laws change. Under parliamentary sovereignty, “no Parliament can pass laws that future Parliaments cannot change” (UK Parliament). Any protection written into a digital pound Act could later be amended by another Act, by any future government, for reasons that seem sensible at the time.

Rules on money have changed quickly in emergencies elsewhere. In February 2022 Canada's government used emergency powers to direct financial institutions to temporarily stop providing services to accounts linked to blockades, allowing them to be frozen without a court order; the order was revoked about a week later (Department of Finance Canada; Public Safety Canada). That involved ordinary bank accounts. A central ledger would make such steps simpler to apply directly.

Opinion: Safeguards written into law today can be rewritten tomorrow. Once the system exists, its controls are available to whoever holds power in future. Money that can be programmed, limited, watched and frozen from the centre is a tool suited to control, not freedom. In the wrong hands, it could become an instrument of authoritarianism.

So the useful question isn't anyone's intentions today, but what the design would allow if the rules changed. The panel sets that out.

Risks if the rules changed

Potential harms the design would make possible, not claims about anyone's plans.

Your money could be programmed: told where, when or how it can be spent
Savings could expire: if not spent by a deadline
Spending could be blocked by category: some goods, places or recipients ruled out
Holding limits could be tightened: capping your savings below today's proposed £10,000–£20,000 (BoE/HMT 2024)
Every transaction visible to the state: privacy would rest only on law; the Lords warned of “state surveillance of people's spending choices” (Lords 2022)
Wallets could be frozen centrally: without going through your bank (compare Canada 2022)
Access could depend on permission: wallets only through approved, identity-checked providers
A single central point of failure: the Lords: “a centralised point of failure” (Lords 2022)
Supply can still expand: eroding buying power, exactly as now

Different rules, different trade-offs
Feature	Digital pound (CBDC)	Sound money*
Digital, portable, divisible	Yes	Yes
How new units are created	As now: mostly through bank lending, within Bank of England policy	By the asset's own rules (mining, a fixed protocol), so supply is more predictable and can't be expanded at will
Who holds the record	One central ledger: a single point of control and failure	Decentralised: held by individuals or spread across many independent parties

*Sound money here means money such as gold, silver or bitcoin, whose supply is limited by its own nature or rules rather than set by a central bank. Each comes with trade-offs, including price swings and safe storage. See the gold and silver and Bitcoin illustrations, and more in Directions below. Not financial advice.

A painted scene in a cosy British grocer's shop. A young woman in a red coat holds up her phone showing a glowing digital pound coin, but a red padlock floats beside it and the card reader glows red, so her payment is blocked. She looks worried. Through the window a stone tower with a glowing red eye watches, and faint chains drift from it towards her phone. Behind the counter, the bearded shopkeeper frowns with worry at the red card reader. — A digital pound would be issued and run by the central bank. The same tools that make payments easy could also let spending be tracked, limited or blocked.

Warnings across the centuries

Who should control the money?

Five voices from different eras and different schools of economics. Keynes and Hayek stood on opposite sides of most arguments. They did not all reach the same conclusion, but each warned about what happens when money is too easily bent to the needs of those in power.

Pen-and-ink sketch portrait of Adam Smith, in an 18th-century coat and powdered wig — **Adam Smith**Philosopher and economist · The Wealth of Nations, Book I, ch. 4 (1776)Source: Adam Smith Works

Pen-and-ink sketch portrait of David Ricardo, in a Regency coat and cravat — **David Ricardo**Economist and MP · Plan for the Establishment of a National Bank (1824)Source: Works of David Ricardo, vol. 4 (Sraffa ed., Liberty Fund)

Pen-and-ink sketch portrait of John Maynard Keynes, with a moustache, in a three-piece suit — **John Maynard Keynes**Economist · The Economic Consequences of the Peace, ch. 6 (1919)Source: Wikisource

Pen-and-ink sketch portrait of Friedrich Hayek, with round spectacles and a moustache, in a pinstripe suit — **Friedrich Hayek**Economist (LSE; Nobel 1974) · interview with James U. Blanchard III, Freiburg, May 1984 (Cato Policy Report, May/June 1984)Source: Cato Policy Report (1984)

Pen-and-ink sketch of the Houses of Parliament: the Palace of Westminster and Elizabeth Tower — **House of Commons Treasury Committee**Cross-party select committee · The digital pound: still a solution in search of a problem?, HC 215, para 45 (Dec 2023)Source: UK Parliament

Pen-and-ink group sketch of Adam Smith, David Ricardo, John Maynard Keynes and Friedrich Hayek standing side by side as equals in front of the Houses of Parliament and Elizabeth Tower.

The common ground

Across 250 years and different schools of thought, one warning keeps coming back:

Whoever controls the creation of money is tempted to use it for their own ends.
The cost often falls quietly on ordinary people, through lost buying power or lost privacy.
Good intentions today are no guarantee of how that power is used tomorrow.

9 · Directions, not a prescription

People reach different conclusions

Some look to sound money: things with a fixed or hard-to-expand supply that have held value over long stretches, such as gold, silver, bitcoin and similar. Some want different rules for how currency is created, and by whom. Some focus on public budgets, interest rates and what we ask the Bank of England to aim for, so the system leans less on debt that must keep growing.

Alongside those debates, you can open these pages to see how buying power has changed:

These are illustrations of changing buying power, not recommendations.

One path that doesn't fix the pattern is a digital pound (CBDC) (see why above). These are directions and debates, not a single answer. What shouldn't be optional is starting from how the system actually works.

Some argue for taxing wealth more heavily. Whatever your view, any tax or spending choice changes who holds the pounds, not how they're made. So the debt keeps growing, and the pound keeps losing buying power.

Four friendly people of different ages and backgrounds, dressed in soft natural colours, stand at a countryside crossroads around a small pile of gold pound coins, each pointing down a different path. One path climbs to a stone vault holding gold and silver bars, one leads to a workshop with a blueprint on a drafting easel, and one ends at balanced brass scales in a garden. A fourth path is blocked by a red-and-white barrier under a warning triangle and fades into a grey digital grid. — People who worry about how money is made don't all agree on the answer. Three broad directions get argued for: money that is hard to expand (a vault of gold and silver), new rules for creating currency (a fresh blueprint) and less reliance on debt (balanced scales). A central bank digital currency is shown blocked because it would keep the same debt-based system while adding new risks to privacy and control. These are directions to explore, not recommendations.

Where Does Britain's Money Come From?Where DoesBritain'sMoney Come From?