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What is money and where does it come from?

Discussion in 'Speaker's Corner' started by Berserker, 21 May 2006.

  1. Berserker

    Man of Honour

    Joined: 4 Nov 2002

    Posts: 15,451

    Location: West Berkshire

    Just one of those random thoughts I had on the train while half asleep. I thought I'd post it here as there's bound to be someone around here who can put me straight. :)

    Just to be clear, I'm not talking about the notes and coins in your pocket, as that's relatively easy to answer, but rather on the national and global scale.

    So, firstly the easier one: Save for the relatively few (I believe) cases where governments 'determine' the value of their currency, who or what decides how much one currency is worth against another? I know large institutions can and do buy and sell currency of different nations in the hope of making a profit, but what determines the price at which they buy and sell?

    Secondly, taking all currencies as a whole, how does the 'value' of the world increase (or decrease), and who or what decides this?

    I'm sure there is some obvious answer (or a link to some obvious website providing the answer), and I was probably even taught some of it in A-level Economics, but I did rather badly at that. :o :)

    So, can someone help me out? :)
     
  2. MikeTimbers

    Soldato

    Joined: 18 Oct 2002

    Posts: 7,302

    Location: New Eltham, London

    Currency traders decide how much a currency is worth compared to another based on things like the amount of money in the system - this is measured in a variety of ways to do with notes and coins, or including credit card debt and overdrafts, or including mortgages or whatever - the base rates set by the central bank, the GDP of the country, the economic growth of the country, the stability of the country, inflation etc. Of these, the interest rate, inflation and stability are probably the most important as these have the most direct bearing on the safety of the investment. After all the exchange rate is the price of buying the currency as measured in another.
     
  3. Berserker

    Man of Honour

    Joined: 4 Nov 2002

    Posts: 15,451

    Location: West Berkshire

    So, that covers the first part. Anyone got any inspiration for the second? :)
     
  4. Psyk

    Sgarrista

    Joined: 18 Oct 2002

    Posts: 8,444

    Location: Leamington Spa

    I've always tried to get my head around this. Sometimes you think, why can't a government just print more money if it needs it? But that doesn't work as the money becomes almost worthless.
     
  5. MikeTimbers

    Soldato

    Joined: 18 Oct 2002

    Posts: 7,302

    Location: New Eltham, London

    Poor man discovers gold nugget the size of a house, is now rich man. World is richer.
    Corporation discovers oil in North Sea, government takes huge slice of revenue and spends it building hospitals (I wish!), asset value of UK increases.
    Small company invents process by which sand is made into silicon with little lines all over it and sells it for billions of dollars to lots of other companies enabling them to become more efficient, meaning they make the same things for lower costs, making bigger profits and paying their workers higher salaries (yeah, right!).
    It all comes from either new inventions or new resources.
     
  6. daz

    Capodecina

    Joined: 18 Oct 2002

    Posts: 24,007

    Location: Bucks

    There are several economic theories regarding the value of a nation's worth, and thus its currency. It used to be held that mercantilism was the best way to move forward - low imports and lots of exports, whilst keeping large reserves of valuable metals, especially gold. You can encourage this by putting taxes on imports and giving companies bonuses on producing things in your country for exports. The only problem with this, is that if everyone does this, nobody wins - protectionist markets aren't generally good for the whole.

    Adam Smith with his Wealth of Nations attacked mercantilism, and said that the wealth of a nation is based upon it's workforce, and the value of the goods that the workforce can produce.

    I'm not an economist though, so somebody correct me if I'm wrong. :o
     
  7. teaboy5

    Soldato

    Joined: 12 Jan 2006

    Posts: 5,545

    Location: NI

    Regarding the printing of money, is this not the problem the USA has come up with. Its just printing and printing money therefore the dollar is now becoming worthless and when it does the rest of the world is going down with it?
     
  8. Cyanide

    Mobster

    Joined: 5 Mar 2006

    Posts: 3,971

    Location: Nottingham

    It's what happened to Germany just before WW2, they were using money as toiletpaper it was so worthless...
     
  9. daz

    Capodecina

    Joined: 18 Oct 2002

    Posts: 24,007

    Location: Bucks

    Paper money has a limited lifetime. When a note in bad condition gets passed to a bank, the bank collects them all up and sends them to the government to be incinerated. The bank receives shiny new notes in exchange. The Tonbridge depot that was robbed recently was one such place where the notes were exchanged/swapped.

    If too many notes are made, then obviously the value of money falls, because it is in too easy supply, so to artificially restrict the supply of money, the government will increase interest rates to make it hard for people to borrow money etc. Badly run economies have had this happen a lot in history, and it can lead to hyper-inflation. Thus the supply of money has to be carefully controlled - which is not an easy business.

    Before Keynesian economics, people and governments were rather lassez-faire about the whole economy... if you're in a depression, save your money and eventually you'll get through to the other side, "the economy will sort itself out". Unfortunately, if governments and people stop spending during times of depression, it's plain to see that this eventually exacerbates the problem.