You are correct that when bonds are sold to secure funds to lend out (and ONLY the face amount of the bonds are lent out), new money is not being created. Existing surplus capital is being lent out, much as if a rich uncle were to loan me money by taking money out of his savings account. The Farm Credit System sells bonds worldwide as a source of funds for their lending. What I do not know is if this is their entire source of loan funds, for every dollar they loan. Anyone know?

How much or what percentage of loans consist of these type loans I do not know. But it is also possible to use bonds as security and by rehypothecation of security new money can be created also. I don't know how much of this is done on a percentage basis, but MF Global is a good example of money being created to speculate with via rehypothecate customers assets to borrow money. This borrowed money did not exist prior to using the customers assets being used as collateral to borrow it.

Then there is the overnight repo market that I don't pretend to fully understand. This is the market where bank assets are rehypothecated and banks loan money to other banks and large corporations. This most definitely is about creating new money (and destroying it as the loan is paid back only to be renewed again the next day) via fractional reserve and the dollar amounts are enormous. The whole financial crisis was brought about when banks were afraid to loan to other banks in the overnight repo market because no one knew who would be solvent the next day. This was bringing the credit markets to a grinding halt and brought about the Fed panic to bail out the banks after a large insurer could not settle some derivatives that might have brought down the whole chain of collateral.

There is money created via fractional reserve that would make our head spin. The whole deal about the Fed buying up too many government bonds has to do with there not being enough high quality collateral that the repo markets depend on to do their fractional reserve thing. It is a tangled mess that few understand (I certainly do not understand it all) and the ones in charge are not trying to explain it all to us likely because they do not want us to know.

The Bank of England PDF paper is an unusually clear description of a portion of it.

John