Money?

botheredbothered Manchester UK
edited June 2006 in The Pub
I’ve asked this before but I still don’t know. How does money work?
Say the Royal Mint here in the UK today prints £1m. This money goes out to the banks. How does that work? The banks don’t pay for the money (I’ll sell you £1m for £1m is just stupid) so how do they get it for free? If I set up a bank would the Mint give me money? I think not. I think we’re being scammed here somewhere.

Comments

  • NightwolfNightwolf Afghanistan
    edited June 2006
    I don't know....but since that cotton/lenon blend has no real value, it doesn't bother me much.
  • RWBRWB
    edited June 2006
    Here in the US, if I am not mistaken, banks pick up old bills and send them on their merry to the US mint whom returns them that amount in new crisp clean notes. They're in effect just trying to prevent those horribly misfigured bills from being used further.
  • botheredbothered Manchester UK
    edited June 2006
    I'm sure that accounts for a chunk of new money but, there is a lot more money in circulation than there was x years ago.
  • edited June 2006
    That's due to inflation and the price of gold going up. Gold is the basis for all money here in the US.
  • botheredbothered Manchester UK
    edited June 2006
    Yeah I understand that but my question is about the new 'extra' money that goes out, the money that is not covered by the old bills coming back.
  • deicistdeicist Manchester, UK
    edited June 2006
    madmat wrote:
    That's due to inflation and the price of gold going up. Gold is the basis for all money here in the US.


    That's actually a commonly held misconception. The value of the dollar hasn't been pegged to the value of gold since the 70's. Nixon wanted the value of the dollar to be set by the market and it has been ever since.

    There's an interesting article about money supply and value here:

    linky

    My basic take on it is the central bank decides how much inflation should be to match any growth / downturn in the size of the economy. They then issue or recall notes to dilute the value of money to a certain extent. For example if the economy grows the bank needs to issue more notes so that the amount of money in circulation matches the size of the economy. When they screw up and issue to many notes money becomes devalued. Also worth considering is that physical money doesn't actually mean anything now, it's just a representation of data in a computer system somewhere. And, interestingly there's a lot more 'money' in the world (in the form of data in bank computers) than there is physical cash to represent it. Economics is complicated. It makes my brain hurt.
  • edited June 2006
    In the US, the branch banks aren't given free money by the Federal Reserve - the Fed issues new money into the economy primarily through the sale of bonds. On a macroeconomic scale, the Fed has two tools at its disposal: issuing bonds and raising the interest rate. These work in opposite ways - raising the interest rate will tighten up slack in the economy, slowing it down and decreasing inflation, and issuing bonds will put money in circulation, stimulating the economy in down times and increasing inflation (not all inflation is bad, as it is a sign of a healthy economy - the Fed targets a rate of around 3%).

    Unfortunately, I don't know how the money is distributed in Britain.

    //edit: I just read deicist's post, which said pretty much the same thing I did, only three hours earlier. Kick me.
  • deicistdeicist Manchester, UK
    edited June 2006
    Nah, I never even mentioned bonds... I kind of understand the general theory of how the Bank uses inflation to match the economy, but I've never really considered the pratical side of it. Which is what the thread was originally about anyway :)
  • Sledgehammer70Sledgehammer70 California
    edited June 2006
    The truth of the matter is the US has Gold to back every Dollar, well gold and silver. If you really want to look into it, the US has more gold Bullion than there are notes representing it.
  • LincLinc Bard Detroit
    edited June 2006
    The truth of the matter is the US has Gold to back every Dollar, well gold and silver. If you really want to look into it, the US has more gold Bullion than there are notes representing it.
    This is unequivocally false. There is no set correlation between gold/silver/any precious metal and US currency other than the price you'd pay if you got it into your head to go buy a chunk of it. We dropped the silver standard in 1900 and the gold standard in 1975. There is nothing backing our currency except the good faith that it will continue to be worth something tomorrow. I'm sure the US government has a wonderful deposit of gold scattered throughout the nation, but it isn't for the currency system any more.

    GH did a great job summing up the US Reserve system :thumbsup:
  • RADARADA Apple Valley, CA
    edited June 2006
    madmat wrote:
    That's due to inflation and the price of gold going up. Gold is the basis for all money here in the US.


    Actually, The US dropped the use of a Gold Standard years ago. The value of a dollar is based on the people's faith in the strength of the US govenment.

    Edit: What Keebs said too, LOL!

    EDIT 2: the US Government dropped the use of the Gold Standard on April 25th, 1933.
  • Sledgehammer70Sledgehammer70 California
    edited June 2006
    So the $100 bill in my hand is worth nothing!
  • Red-DawnRed-Dawn Been kidnapped and being held hostage in Edinburgh
    edited June 2006
    yup, but if u wish i'll take it off ur hands :P
  • LeonardoLeonardo Wake up and smell the glaciers Eagle River, Alaska
    edited June 2006
    So the $100 bill in my hand is worth nothing!
    It is an official promissory note. It is a receipt for services and goods. The general US market and world markets size up the US economy and productiveness and determine the value a dollar. That is why money cannot just be printed without lending, as there will be more notes, legal tender for goods and services, than there are actual goods and services available. Massive inflation if there is nothing real backing the notes. Each dollar is a representative fraction of the total capital and services in the United States. It's almost like a stock certificate. Your $100 bill is worth a slice of the pie of the US economy.
  • deicistdeicist Manchester, UK
    edited June 2006
    from wikipedia:
    Silver and Gold Standards

    From 1792, when the Mint Act was passed, the dollar was pegged to silver and gold at 371¼ grains of silver, 24¾ grains of gold (15:1 ratio). 1834 saw a shift in the gold standard to 23.2 grains, followed by a slight adjustment to 23.22 grains in 1838 (16:1 ratio).

    In 1862, paper money was issued without the backing of precious metals, due to the Civil War. Silver and gold coins continued to be issued and in 1878 the link between paper money and coins was reinstated.

    In 1900, the silver standard was abandoned and the dollar was defined as 23.22 grains of gold. Silver coins continued to be issued for circulation until 1968.

    Gold coins were withdrawn in 1933 and the gold standard was changed to 13.71 grains, equivalent to setting the price of 1 troy ounce of gold at $35. This standard persisted until 1968. Between 1968 and 1975, a variety of pegs to gold were put in place. 1975 saw the U.S. dollar freely float on currency markets.

    So the US opted out of the international gold standard in 1933, however up until 1975 the value of the US dollar was still based on Gold. Since then the value has been determined by 'the market' (ie: as Leo said, your money is basically a slice of the US economy)
  • MountainDewMountainDew Kentwood, MI
    edited June 2006
    if you look at the bottom bill, it actually says its redeemable for silver.
    dollars.jpg
    so i guess they stopped this around '75? or maybe '68?
  • NightwolfNightwolf Afghanistan
    edited June 2006
    That bottom bill wouldn't be in circulation anymore, but if you find one get some silver...
  • MountainDewMountainDew Kentwood, MI
    edited June 2006
    heh i do have one actually, but i didnt think silver was still redeemable since the note is out of circulation.
  • airbornflghtairbornflght Houston, TX
    edited June 2006
    damn!! do you know how many Ive had of those, oh well, $1 worth of silver is..um..well not very much.
  • NomadNomad A Small Piece of Hell
    edited June 2006
    All American money is based off faith, same with all European countries at this point. A dollar is worth a dollar because we've agreed it's a dollar. The complexities for economics, particularly inflation, controls why more or less money circulates in an economy at any given time. Typically the government controls the influx of new money to replace older currency and also adjusts the amount of money being recirculated to control inflation.
  • airbornflghtairbornflght Houston, TX
    edited June 2006
    Yeh, so just remember, at any point in the day, that dollar can be worth exactly what it is, a piece of cloth. if we ever see a hyper inflation like what was witnessed in germany a long time ago, money may be blowing down the street someday. but with our excelent leaders and economists, that could never happen to us.
  • EMTEMT Seattle, WA
    edited June 2006
    GHoosdum wrote:
    In the US, the branch banks aren't given free money by the Federal Reserve - the Fed issues new money into the economy primarily through the sale of bonds. On a macroeconomic scale, the Fed has two tools at its disposal: issuing bonds and raising the interest rate. These work in opposite ways - raising the interest rate will tighten up slack in the economy, slowing it down and decreasing inflation, and issuing bonds will put money in circulation, stimulating the economy in down times and increasing inflation (not all inflation is bad, as it is a sign of a healthy economy - the Fed targets a rate of around 3%).

    Unfortunately, I don't know how the money is distributed in Britain.

    //edit: I just read deicist's post, which said pretty much the same thing I did, only three hours earlier. Kick me.

    Good explanation. I'd add that it's more of a two-way street... they can sell bonds or buy bonds, raise interest or lower interest. I think there's some important difference between those methods... wish my high school econ wasn't so fuzzy these days. Anyway, lowered interest or bonds bought back stimulate the economy, and increased interest and bonds sold to people fight inflation.
  • RWBRWB
    edited June 2006
    Yeh, so just remember, at any point in the day, that dollar can be worth exactly what it is, a piece of cloth. if we ever see a hyper inflation like what was witnessed in germany a long time ago, money may be blowing down the street someday. but with our excelent leaders and economists, that could never happen to us.

    I'll hoarde all that money... always wanted to make a million dollar fire place :cheers:

    Well not really....
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