You must read "Money creation in the modern economy" http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, a paper co-authored by three economists from the Bank of England.

The paper explains how the majority of money in the modern economy is created by commercial banks making loans. This is because money is really just an IOU (I Owe You: An informal document that acknowledges a debt owed)

There is also a short video filmed in the Bank gold vault's that discusses some of the key topics from the paper.
http://www.youtube.com/watch?v=CvRAqR2pAgw