Let's say you owe £1,000 to your neighbour. What are the ways you can pay it back? The obvious one is to raid your bank account - your existing supply of money. More drastically, you could sell off assets to the value of £1,000.
However, if you are a government, you have another option - create an IOU for £1,000 and sell it to a central bank. That central bank pays for it by printing £1,000. The exact process is a bit more complex in practice but near enough equivalent to you settling your original debt by creating £1,000 out of thin air.
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