Perhaps the following thought experiment helps to understand how this is possible.If you imagine two drawers, each representing an account. The first drawer contains 100 gold coins and the second is empty. Also imagine that there are no other gold coins available at this time. Let's call the first drawer account A and the second account B. Now if you want to transfer 30 gold coins from account A to account B, you would actually first have to take the coins out of drawer A and then place them into drawer B. Account A will then necessarily have 30 coins less in it. Now imagine accounts A and B are held in a computer as electronic money. Instead of 100 gold coins, account A only contains the computer generated number '100' and account B shows '0'. To get account B to show a balance of '30', it would now simple be necessary to change the '0' to '30' on the computer. The need to raid account A and to take '30' from the number '100' before you could credit account B does not exist. Money is created as it is entered in B's account irrespective of whether A's account is debited before or after this process or not at
Government Spending (Current Practice)
Government Spending at a certain point leads to spending in excess of tax receipts. This will automatically lead to the issue of treasuries in the belief that the excess spending must be financed by borrowing (although the government has the capacity to create money). This in turn will increase the national debt.
Consequences that follow from this practice:
1) That national debt increases whenever the government spends in excess of tax receipts.
2) That the government must pay interest on the debt issued, which in turn increases and reinforces the need for government spending.
3) That the interest paid on treasuries will increase private sector income.
There is an alternative view, supported by Modern Monetary Theory, of how government spending can proceed. Please see this Insight: