What follows is an effort to inform anyone who has asked this questions "What is money?", "What is a pound?", "Why do interest rates affect inflation?", "What the hell causes things to cost more each year in the first place?", "Why does EVERYONE, normal people, the government, the NHS, seem more in debt EVERY year?". Many people have been mentioning this recently, and I beleive most people simply do not know the answers to these questions. It is also a personal effort to organise my thoughts in a manner that is open to critical reaction. Take heed however, this will be quite long.
Have you ever asked yourself, while holding a slightly crumpled five pound note, "What is money?" "How much money is there?" Well, in the UK, there are loosely 2 very distinct forms of money. One is obvious; it is is the notes and coins that you can use to pay for goods and services, though as you may have noticed these are used with decreasing frequency in the modern day. I find it best to refer to this money as simply "cash".*
The second may be called "Bank Money". Bank money is the sum total of all bank account balances. As we can all use cheques, money orders, debit and credit cards these days to pay for goods and services as easily, more easily, than cash, it is clear that this can also be considered money. Now comes a good question "If I added up all the cash in the country, does it equal all the money in the banks?". The answer is a flat NO. Not by a long, long way.**
Still, I've simply explained two forms of money and said nothing about how they are made, which is the interesting part, of which I will try to give two explanations, one simplified and one accurate. To the first:
Imagine, if you will, that there exists a central bank, an arm of the government, resonsible for printing cash. All other parties are legally restricted from printing cash. Imagine too that there exists one, and only one, private, consumer bank - just imagine that it is true for a moment. Now, if I work for the central bank as a fireman, policeman, rescue dog, what ever, and the central bank gives me £100 in cash as renumeration.
Now, I don't really need the money right now, and the private bank turns to me and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good", I think and give it the money. The private bank then turns to someone else, lets call him Gordon2, and says "Do you want to borrow this £100?, if you pay me 7% a year it's yours". "Sure" Gordon2 thinks, "I can buy something that will make me more money than that!", and so Gordon2 takes this cash and buys a, er, house from Gordon3. This all seems very normal, obvious even, but it's not over yet. The private bank then turns to Gordon3 and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good" thinks Gordon3, and gives it the money to the bank, which quickly turns to Gordon4 and lends it out at 7%. Gordon4 then spends the money on Gordon5 who then puts the money back in the bank at 5%. This, borrowing, spending, lending cycle continues in the UK over 33 times using figures from the Bank of England figures, I'm not making this up! The limiting factor is generally people coming into the bank and asking for cash so they can come out and make purchases outside of the private banking system.
Why is this bad? Because at the end of this cycle 33 people have "100 pounds in the bank" and yet only 100 pounds of cash exists, or that only 3% of money is cash. As everyone uses credit, debit cards and cheques, clearly they can still use this extra £3200 exactly as if it was cash. This causes two problems immediately. [1] If 33 people have 100 pounds, where only one did before, surely each pound of money is worth roughly 33 times less than before this system began? This is the root cause of inflation, the fact that the amount of "money" increases at a current rate of about 12% every year means, surprise surprise, goods cost roughly this same amount more each year, as money becomes increasingly worth-less. Who here really believes inflation isn't running at much closer to this value than the 2.1% CPI the government clings too? A reasonable measure of inflation may simply be money supply growth minus nominal GDP growth, but I digress.
[2] What happens when more than 3% of people go into the bank and ask for "their cash" back? As you can clearly see the, if this happens there is not_enough_cash. That means if today a mere 3% of people in the country went and asked for their cash, the whole banking system collapses! Clearly this is one of the most unstable systems ever created, where the entire stability of the nation rests on the whims of ANY 3% of the wealth! Moreover, even if only 1% or 2% of people ask for "their cash" over the usual just to hold onto it, the bank has to call in 33% or 66% of its ENTIRE loan portfolio to maintain the same operating conditions. That's why banks are not loaning out any more money right now, because there is an increase in people simply going in and "asking for their cash", corporate and private, so banks now have to call in more loans and certainly aren't interested in making them.
I promised a second, accurate explanation of the system, and here it is. Start again with a central bank but this time with any number of private banks. Again, I am given £100 pounds cash for my services to the government as a fireploddog. I give that to any private bank, in exchange for this promise of 5% extra a year. The bank then holds onto this cash, and 32 people come in and ask to borrow £100 pounds. The bank says "sure, why not" and credits each of their accounts with £100 it_does_not_have at interest. As they know such a small percentage of people (3%) go in and actually ask for their money in cash, they can lend out 1/0.03 times the amount they actually have, and in the process "create" £3200 pounds of money, weakening the buying power of the original guy who put the money in the bank (me).
This is, in all ways, a tax, the tax you never knew you paid. it's decreasing the value of money you earned, in a way that you have no say over. It's a tax where almost all of the proceeds go to private banks and you are never told why. If this rouses any interest, in part II I will go more into detail on the effects of interest rates, the deflation or hyper-inflation debate, and the exponentially growing nature of this system in a finite world, and in part III, the solutions.
*I neglected to mention the money that private banks are obliged to hold in accounts at the Bank Of England may also be considered in this first kind of money. This complication is not essential for the understanding of the situation. The correct terms for this first kind of money are, in any case, "M0 money" or "Narrow money".
**"Bank money" is not the technical term; this money's name is "M4 money" or "Broad Money". As of November 2007, there is currently 33 times more bank money than exists as cash.
***I'll spell and grammar check later, for now I deserve a cookie.
Full Version: What Is Money? (part I Of Iii)
Nice post.
I think you might have missed a few bits but there is more coming so I shall say nothing for now and merely award you some of my own money -
£1,000,000
Spend it wisely.
I think you might have missed a few bits but there is more coming so I shall say nothing for now and merely award you some of my own money -
£1,000,000
Spend it wisely.
absoloutly brill....thank you
Steve
Steve
QUOTE (agb41 @ Jan 20 2008, 01:23 PM) 
What follows is an effort to inform anyone who has asked this questions "What is money?", "What is a pound?", "Why do interest rates affect inflation?", "What the hell causes things to cost more each year in the first place?", "Why does EVERYONE, normal people, the government, the NHS, seem more in debt EVERY year?". Many people have been mentioning this recently, and I beleive most people simply do not know the answers to these questions. It is also a personal effort to organise my thoughts in a manner that is open to critical reaction. Take heed however, this will be quite long.
Have you ever asked yourself, while holding a slightly crumpled five pound note, "What is money?" "How much money is there?" Well, in the UK, there are loosely 2 very distinct forms of money. One is obvious; it is is the notes and coins that you can use to pay for goods and services, though as you may have noticed these are used with decreasing frequency in the modern day. I find it best to refer to this money as simply "cash".*
The second may be called "Bank Money". Bank money is the sum total of all bank account balances. As we can all use cheques, money orders, debit and credit cards these days to pay for goods and services as easily, more easily, than cash, it is clear that this can also be considered money. Now comes a good question "If I added up all the cash in the country, does it equal all the money in the banks?". The answer is a flat NO. Not by a long, long way.**
Still, I've simply explained two forms of money and said nothing about how they are made, which is the interesting part, of which I will try to give two explanations, one simplified and one accurate. To the first:
Imagine, if you will, that there exists a central bank, an arm of the government, resonsible for printing cash. All other parties are legally restricted from printing cash. Imagine too that there exists one, and only one, private, consumer bank - just imagine that it is true for a moment. Now, if I work for the central bank as a fireman, policeman, rescue dog, what ever, and the central bank gives me £100 in cash as renumeration.
Now, I don't really need the money right now, and the private bank turns to me and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good", I think and give it the money. The private bank then turns to someone else, lets call him Gordon2, and says "Do you want to borrow this £100?, if you pay me 7% a year it's yours". "Sure" Gordon2 thinks, "I can buy something that will make me more money than that!", and so Gordon2 takes this cash and buys a, er, house from Gordon3. This all seems very normal, obvious even, but it's not over yet. The private bank then turns to Gordon3 and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good" thinks Gordon3, and gives it the money to the bank, which quickly turns to Gordon4 and lends it out at 7%. Gordon4 then spends the money on Gordon5 who then puts the money back in the bank at 5%. This, borrowing, spending, lending cycle continues in the UK over 33 times using figures from the Bank of England figures, I'm not making this up! The limiting factor is generally people coming into the bank and asking for cash so they can come out and make purchases outside of the private banking system.
Why is this bad? Because at the end of this cycle 33 people have "100 pounds in the bank" and yet only 100 pounds of cash exists, or that only 3% of money is cash. As everyone uses credit, debit cards and cheques, clearly they can still use this extra £3200 exactly as if it was cash. This causes two problems immediately. [1] If 33 people have 100 pounds, where only one did before, surely each pound of money is worth roughly 33 times less than before this system began? This is the root cause of inflation, the fact that the amount of "money" increases at a current rate of about 12% every year means, surprise surprise, goods cost roughly this same amount more each year, as money becomes increasingly worth-less. Who here really believes inflation isn't running at much closer to this value than the 2.1% CPI the government clings too? A reasonable measure of inflation may simply be money supply growth minus nominal GDP growth, but I digress.
[2] What happens when more than 3% of people go into the bank and ask for "their cash" back? As you can clearly see the, if this happens there is not_enough_cash. That means if today a mere 3% of people in the country went and asked for their cash, the whole banking system collapses! Clearly this is one of the most unstable systems ever created, where the entire stability of the nation rests on the whims of ANY 3% of the wealth! Moreover, even if only 1% or 2% of people ask for "their cash" over the usual just to hold onto it, the bank has to call in 33% or 66% of its ENTIRE loan portfolio to maintain the same operating conditions. That's why banks are not loaning out any more money right now, because there is an increase in people simply going in and "asking for their cash", corporate and private, so banks now have to call in more loans and certainly aren't interested in making them.
I promised a second, accurate explanation of the system, and here it is. Start again with a central bank but this time with any number of private banks. Again, I am given £100 pounds cash for my services to the government as a fireploddog. I give that to any private bank, in exchange for this promise of 5% extra a year. The bank then holds onto this cash, and 32 people come in and ask to borrow £100 pounds. The bank says "sure, why not" and credits each of their accounts with £100 it_does_not_have at interest. As they know such a small percentage of people (3%) go in and actually ask for their money in cash, they can lend out 1/0.03 times the amount they actually have, and in the process "create" £3200 pounds of money, weakening the buying power of the original guy who put the money in the bank (me).
This is, in all ways, a tax, the tax you never knew you paid. it's decreasing the value of money you earned, in a way that you have no say over. It's a tax where almost all of the proceeds go to private banks and you are never told why. If this rouses any interest, in part II I will go more into detail on the effects of interest rates, the deflation or hyper-inflation debate, and the exponentially growing nature of this system in a finite world, and in part III, the solutions.
*I neglected to mention the money that private banks are obliged to hold in accounts at the Bank Of England may also be considered in this first kind of money. This complication is not essential for the understanding of the situation. The correct terms for this first kind of money are, in any case, "M0 money" or "Narrow money".
**"Bank money" is not the technical term; this money's name is "M4 money" or "Broad Money". As of November 2007, there is currently 33 times more bank money than exists as cash.
***I'll spell and grammar check later, for now I deserve a cookie.
Have you ever asked yourself, while holding a slightly crumpled five pound note, "What is money?" "How much money is there?" Well, in the UK, there are loosely 2 very distinct forms of money. One is obvious; it is is the notes and coins that you can use to pay for goods and services, though as you may have noticed these are used with decreasing frequency in the modern day. I find it best to refer to this money as simply "cash".*
The second may be called "Bank Money". Bank money is the sum total of all bank account balances. As we can all use cheques, money orders, debit and credit cards these days to pay for goods and services as easily, more easily, than cash, it is clear that this can also be considered money. Now comes a good question "If I added up all the cash in the country, does it equal all the money in the banks?". The answer is a flat NO. Not by a long, long way.**
Still, I've simply explained two forms of money and said nothing about how they are made, which is the interesting part, of which I will try to give two explanations, one simplified and one accurate. To the first:
Imagine, if you will, that there exists a central bank, an arm of the government, resonsible for printing cash. All other parties are legally restricted from printing cash. Imagine too that there exists one, and only one, private, consumer bank - just imagine that it is true for a moment. Now, if I work for the central bank as a fireman, policeman, rescue dog, what ever, and the central bank gives me £100 in cash as renumeration.
Now, I don't really need the money right now, and the private bank turns to me and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good", I think and give it the money. The private bank then turns to someone else, lets call him Gordon2, and says "Do you want to borrow this £100?, if you pay me 7% a year it's yours". "Sure" Gordon2 thinks, "I can buy something that will make me more money than that!", and so Gordon2 takes this cash and buys a, er, house from Gordon3. This all seems very normal, obvious even, but it's not over yet. The private bank then turns to Gordon3 and says "If you give me that £100 pounds, I'll give you 5% extra for every year you leave it with me." "Jolly good" thinks Gordon3, and gives it the money to the bank, which quickly turns to Gordon4 and lends it out at 7%. Gordon4 then spends the money on Gordon5 who then puts the money back in the bank at 5%. This, borrowing, spending, lending cycle continues in the UK over 33 times using figures from the Bank of England figures, I'm not making this up! The limiting factor is generally people coming into the bank and asking for cash so they can come out and make purchases outside of the private banking system.
Why is this bad? Because at the end of this cycle 33 people have "100 pounds in the bank" and yet only 100 pounds of cash exists, or that only 3% of money is cash. As everyone uses credit, debit cards and cheques, clearly they can still use this extra £3200 exactly as if it was cash. This causes two problems immediately. [1] If 33 people have 100 pounds, where only one did before, surely each pound of money is worth roughly 33 times less than before this system began? This is the root cause of inflation, the fact that the amount of "money" increases at a current rate of about 12% every year means, surprise surprise, goods cost roughly this same amount more each year, as money becomes increasingly worth-less. Who here really believes inflation isn't running at much closer to this value than the 2.1% CPI the government clings too? A reasonable measure of inflation may simply be money supply growth minus nominal GDP growth, but I digress.
[2] What happens when more than 3% of people go into the bank and ask for "their cash" back? As you can clearly see the, if this happens there is not_enough_cash. That means if today a mere 3% of people in the country went and asked for their cash, the whole banking system collapses! Clearly this is one of the most unstable systems ever created, where the entire stability of the nation rests on the whims of ANY 3% of the wealth! Moreover, even if only 1% or 2% of people ask for "their cash" over the usual just to hold onto it, the bank has to call in 33% or 66% of its ENTIRE loan portfolio to maintain the same operating conditions. That's why banks are not loaning out any more money right now, because there is an increase in people simply going in and "asking for their cash", corporate and private, so banks now have to call in more loans and certainly aren't interested in making them.
I promised a second, accurate explanation of the system, and here it is. Start again with a central bank but this time with any number of private banks. Again, I am given £100 pounds cash for my services to the government as a fireploddog. I give that to any private bank, in exchange for this promise of 5% extra a year. The bank then holds onto this cash, and 32 people come in and ask to borrow £100 pounds. The bank says "sure, why not" and credits each of their accounts with £100 it_does_not_have at interest. As they know such a small percentage of people (3%) go in and actually ask for their money in cash, they can lend out 1/0.03 times the amount they actually have, and in the process "create" £3200 pounds of money, weakening the buying power of the original guy who put the money in the bank (me).
This is, in all ways, a tax, the tax you never knew you paid. it's decreasing the value of money you earned, in a way that you have no say over. It's a tax where almost all of the proceeds go to private banks and you are never told why. If this rouses any interest, in part II I will go more into detail on the effects of interest rates, the deflation or hyper-inflation debate, and the exponentially growing nature of this system in a finite world, and in part III, the solutions.
*I neglected to mention the money that private banks are obliged to hold in accounts at the Bank Of England may also be considered in this first kind of money. This complication is not essential for the understanding of the situation. The correct terms for this first kind of money are, in any case, "M0 money" or "Narrow money".
**"Bank money" is not the technical term; this money's name is "M4 money" or "Broad Money". As of November 2007, there is currently 33 times more bank money than exists as cash.
***I'll spell and grammar check later, for now I deserve a cookie.
Very good post, perhaps you should put it on the main forum and let it sink in...
I like the namesake used too, how very apt, perhaps you could have added his surname as prudence - ahem
Looking forward to pt2 & pt3.
Edit: ahh never mind, i found the other parts. 
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