[Tietäjä]

Originally Posted by milo

I'm trying to find out how/why this is used but i can't find anything beyond 'the bank of england changes to base rate to affect things like inflation'

The IS-LM should explain it, and it's a fairly simple model. To sum it up, the higher the interest rate is, the more expensive it is to take a loan and for example buy machines with it. The less investment happens. Higher interest rates encourage less consumption, while lower interest rates encourage more consumption and more lending. To simplify it, more spending leads to more requirement for production, which leads to more demand for labour, which leads to wage rises, which leads to higher prices (as compensanted in firms in form of higher wages).

Originally Posted by milo

I wasn't aware central banks had any kind of duty to bail out private institutions

It's not a "duty", but when it's seen useful it happens. A practical example would be the Finland's depression in the early 1990s, when the Central Bank stepped in on a number of going-down private banks in order to maintain some level of credibility on the market. With the intervention, the Central Bank sent out a message that they are going to take measures in order to restore the market stability, hence restoring credibility.

Originally Posted by Dante Hicks

However, if the general public lost confidence in the banking system (e.g. Barclays went under) and everyone started withdrawing their savings the economy would be ****ed very very quickly.

This is why the Central Bank of Finland intervened, in the given example. Banks hold cash reserves relatively small to the amount of currency they create through credit expansions. Mickey mouse money, so to say.

Originally Posted by milo

if you want 'currency' to be controlled by states they make sense, but in the absence of that i don't see why every bank shouldn't issue its own currency.

The idea of every bank issuing it's own currency is the exact opposite direction of what we're going for at the moment. The downside of several different currencies is that it generates market risk (if the bank goes down, the currency goes down). The smaller the currency is, the higher the incentive for private investors to launch speculative attacks on it (in order to gain short term profits, investors may choose to play on a weak currency in order to push the central bank into actions that favour them - this has caused problems on state level, not to imagine how the public might tear apart smaller institutions, such as small private banks). To add to this, currencies cause transaction costs - this is why we're moving towards a common currency, in form of the euro for example. To reduce market risk and to get rid of transaction costs caused by volatile currency rates.

Originally Posted by Nodrog

This is the entire reason central banks exist. I dont think theres anything stopping private banks issueing their own currency in England if they wish to do so

In a form, private banks can issue their own "currency". Mainly in the form of bonds. You trade your money into a ticket that gives you gains. It's not currency in the traditional purpose (it's not very transferable), but it's "money" irregardless. In history, Henry Ford at his peak times had an attempt to create a currency of his own (I think Disney had a try too, but it didn't quite catch).. It failed, and in the current system an attempt by a relatively small institution to generate it's own currency is likely to fail. Private banks, firms, and such generally lack the credibility and resources to provide a currency of their own.

Originally Posted by Nodrog

And because the vast majority of people have no real knowledge of the modern banking system and dont understand what a complete sham it is

Originally Posted by All Systems Go

Sorry, I was hoping for something more profound.

What he is trying to say, is, that the "value" of the pound is solely based upon agreements and the credibility of Bank of England to maintain the nominal and real value of the agreement. Gold standard's way gone. You're not going to get gold in exchange of your money from the CB anymore. What's profound about it? The whole system is based upon series of explicit and implicit agreements, that can be very volatile (Germany between the World Wars). The functionality requires bureaucracy, central banks, and regulation.

This means that the CB has to carefully guard it's currency from the mentioned speculative attacks, ensure nobody goes Germany and prints millions, and such.

Originally Posted by Nodrog

they have no reason to find fault in government-supported fiat currency.

What is the fault there? It's working perfectly well, and there's not been a better system of trade introduced so far. Even plastic money (credit cards and so on) still carries a fund of currency with it. Paper and coin themselves are on the decline. Sham in the way that the pound isn't worth itself in real terms, and a minor percentage of the world's money actually excists on something else than as numbers on balance sheets.