In the macro econ textbooks, the mainstream explanation for money creation is the story of fractional reserve banking where reserves limit the amount of loans made.  In the traditional theory, the central bank (The Fed in U.S.) controls the amount of reserves banks have through either reserve reqmts or open-market operations.  Commercial banks are supposedly limited in their ability to make loans until they have sufficient excess reserves to “loan out”.  These new loans are what creates new money (at least the M1 variety of bank-credit money).  A lot rides on this theory.  For example, the theory implies that the Central bank has the power to control the supply of money and loans to the economy as opposed to only controlling short-term interest rates.  The theory doesn’t really fit reality very well.  There’s lots of problems with it.  (follow the posts at Bill Mitchell’s blog http://bilbo.economicoutlook.net).  Among the problems are that, in many countries (and in the US for savings accounts) there is no reserve requirement.  Another is that operationally, banks aren’t limited by reserves.  They make loans, then find out how much reserves they have to borrow.  Not the other way ’round.

But a critical piece of the mainstream theory that underpins monetarist theory is that banks, being profit-maximizers, will always lend out their excess reserves.  Wrong.  Check this out: