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Unread 14 May 2007, 23:12   #1
milo
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'Base interest rate' and capitalism

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'. What exactly does the base rate 'do'? Also id always regarded capitalism as being ultimately about self-perpetuation/regulation, ie without statist control (ideally).

In a system like anarcho-capitalism i assume central bank control is redundant, so im confused about what the role of central banks actually is. Surely it would be better for every private bank to issue its own currency? (that was affected by consumer confidence in each bank concerned)
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Unread 14 May 2007, 23:35   #2
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Re: 'Base interest rate' and capitalism

You do realise we don't have an anarcho-capitalist system, right?
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Unread 14 May 2007, 23:36   #3
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by milo
Also id always regarded capitalism as being ultimately about self-perpetuation/regulation, ie without statist control (ideally).
of course you do

because you can not accept 2 truths:
1) your brain can not understand all that is
2) because of this you crave (like an addict) simplicity
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Unread 14 May 2007, 23:43   #4
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Re: 'Base interest rate' and capitalism

What are you asking? Central banks generally do various things, like controlling the money supply and bailing out other banks if they get in trouble in a way which is going to damage the economy. Obviously there wouldnt be a government mandated central bank if you had anarchy, but there could still be a de facto bank which acted as the centre if the private banks thought this would be a useful thing to have.

http://www.federalreserve.gov/moneta...scountrate.htm = base interest rate
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Unread 14 May 2007, 23:48   #5
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by All Systems Go
You do realise we don't have an anarcho-capitalist system, right?
No...


Quote:
Originally Posted by Nodrog
What are you asking? Central banks generally do various things, like controlling the money supply and bailing out other banks if they get in trouble in a way which is going to damage the economy. Obviously there wouldnt be a government mandated central bank if you had anarchy, but there could still be a de facto bank which acted as the centre.

I wasn't aware central banks had any kind of duty to bail out private institutions , surely something like Enron or WorldCom were as detrimental to the economy as say an insolvent bank (and bearings wasn't bailed out). Basically i don't see the purpose of central banks, 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.


edit having read that i disagree with the notion of a 'discount window' on general principles
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Unread 14 May 2007, 23:53   #6
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Re: 'Base interest rate' and capitalism

Quote:
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.
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 Scotland only coins are legal tender and all banknotes are issued by private banks but the laws might be different.
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Unread 14 May 2007, 23:57   #7
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Re: 'Base interest rate' and capitalism

Quote:
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 Scotland only coins are legal tender and all banknotes are issued by private banks but the laws might be different.

Apparently the laws are severely restrictive. In scotland and NI private banks issue currency but they don't control it, its issued only with the agreement of the Bank of England. I agree with the idea of 'free banking' and would wish that to be re-introduced. Anyone who lost 'value' to shoddy people would only have themselves to blame.
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Unread 15 May 2007, 10:11   #8
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Re: 'Base interest rate' and capitalism

Aside from currency issues, the Bank of England is the lender of last resort. The reason why you don't get It's a Wonderful Life type scenes all the time (well, not in the UK/US anymore) because even if Barclays "ran out of money" then they could simply borrow from the Bank of England. (That's making a bit overly simplistic, but you get the idea).

The "base rate" also affects the yield of govt bonds and stuff, which aren't necessarily as sexy as the stuff which dominates the financial pages, but still represent huge sums of cash.
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Unread 15 May 2007, 10:26   #9
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Re: 'Base interest rate' and capitalism

Also...

Quote:
Originally Posted by milo
surely something like Enron or WorldCom were as detrimental to the economy as say an insolvent bank
Not really.

"The market" in terms of equities is probably less than a million people (in decision making terms). In terms of major volumes, I don't know, maybe it's 50k fund manages globally plus 100k other random brokers plus 50k investors playing with sums of more than £10m privately. So when they say "the market kept it's head" they're talking about smallish numbers of people.

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. Fortunately no-one has savings in the UK/US anymore and you don't really have a choice about getting paid in cash, but the general principle applies.
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Unread 15 May 2007, 10:39   #10
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by milo
Apparently the laws are severely restrictive. In scotland and NI private banks issue currency but they don't control it, its issued only with the agreement of the Bank of England. I agree with the idea of 'free banking' and would wish that to be re-introduced. Anyone who lost 'value' to shoddy people would only have themselves to blame.
I dont think the laws are 'severely restrictive' - your link doesnt support this claim anyway. Free banking technically exists in that people are free to use other currencies like egold/liberty dollar/whatever - there arent any laws in place similar to the disgusting prohibitions on trading gold that existed in various countries in the mid-20th century. The problem is that a currency is only useful if a lot of people use it - if only a few thousand people are willing to trade in liberty dollars then its pretty much useless. 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, they have no reason to find fault in government-supported fiat currency. Like most things, its primarily a problem caused by lack of relevant education (and obvious state-schools built around government-mandated curricula are never going to have an incentive to teach this sort of thing).

Last edited by Nodrog; 15 May 2007 at 10:45.
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Unread 15 May 2007, 10:45   #11
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Re: 'Base interest rate' and capitalism

Quote:
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
I don't understand it. Explain it to me.
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Unread 15 May 2007, 10:55   #12
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by All Systems Go
I don't understand it. Explain it to me.
What is a pound? What gives a piece of paper its value? Banknotes say on them that they are issued by the bank of england, so if you took your a 10 pound note to the bank of england and asked to redeem it, what would they give you in exchange?
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Unread 15 May 2007, 11:24   #13
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Re: 'Base interest rate' and capitalism

Sorry, I was hoping for something more profound.
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Unread 15 May 2007, 11:46   #14
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Re: 'Base interest rate' and capitalism

Quote:
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).

Quote:
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.

Quote:
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.

Quote:
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.

Quote:
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.


Quote:
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
Quote:
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.

Quote:
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.
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Unread 15 May 2007, 11:59   #15
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Nodrog
What is a pound? What gives a piece of paper its value? Banknotes say on them that they are issued by the bank of england, so if you took your a 10 pound note to the bank of england and asked to redeem it, what would they give you in exchange?
A box full to the brim of the highest quality British air (ten pound's worth)!!
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Unread 15 May 2007, 12:01   #16
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Re: 'Base interest rate' and capitalism

Quote:
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'. What exactly does the base rate 'do'? Also id always regarded capitalism as being ultimately about self-perpetuation/regulation, ie without statist control (ideally).
Perhaps if you have a quick read through this link, it explains how central banks (in this case, the Reserve Bank of Australia) goes about controling inflation, and why that is neccessary.

To summarise (and thus wade in the glee of simplicity);
Effectively, the "cash rate" is the rate at which the Reserve Bank lends money to all other financial institutions for overnight loans; its a huge huge sum of money and happens every day. Then, whilst private banks are not forced to, they tend to charge a higher rate to customers who borrow from them and a lower rate to customers who deposit with them, thus giving profit margins that (along with other activites) for a large percentage of a private bank's profits.

Because Australian Dollars are the only legal tender in the Commonwealth of Australia and its Territories, the Reserve Bank has a position of power as they are the only legal authority who are permitted to "print money".

The cash rate is determined by a government-independent board of directors at the Reserve Bank, so whilst its a "government institution", its not controlled by "the Government" - appointments of chairman et al aside, the Government cannot intervene and stipulate what the cash rate should be changed to. Anyway, as i understand it, that cash rate is achieved through normal open market operations; if the rate is rising, the Reserve Bank "prints" money to bring the rate down to the (pre-established by the Board) level, else it "destroys" money if the rate is too low, thus bringing it up. However, that's at the theoretical level, i would imagine that in the 'real world' the bank would effectively declare what the rate actually was and then everyone else would follow suit; the wonders of the expectations based economy that nodrog was refering to with regards to what money actually means these days.

Other things that the Reserve Bank does is advise on prudential issues (like having minimum reserves of hard currency) and the like.

So, effectively, the Reserve Bank uses the cash rate to influence the private banks et al to keep inflation within a manageable level to the extent that it is able in order to promote prosperity.

Quote:
In a system like anarcho-capitalism i assume central bank control is redundant, so im confused about what the role of central banks actually is. Surely it would be better for every private bank to issue its own currency? (that was affected by consumer confidence in each bank concerned)
Whilst i cant go into depth regarding anarcho-capitalism as i've only breifly read the wiki article on the issue (having never heard of it), what you are talking about here sounds somewhat similar to the ideals of the Free Bankers, who argue that the existance of a central bank is either unecessary and/or counterproductive, and that the provision of the Lender of Last Resort does nothing except promote inefficient and unstable financial institutions which will eventually lead to economic collapse. Personally, whilst i think the idea has some merit (you wont take so many risks if you know there is no safety net), it seems that evidence from the 'real world' would suggest that LLRs etc result in less economic damage (eg, the run on american banks, Asian crisis of 1997 etc). Either way, national currencies have power because they are so freely available to everyone and obviously interchangeable with eachother; if you had a huge variety of currencies within a single country, buyers and sellers of goods would have to be aware of the immediate exchange rates between their own currencies in order to make the most economic decisions, and it makes convertability of goods more difficult (eg, only accepting Freedom dollars instead of Independence dollars), both of which should lead to more inefficiencies within an economy (primarily because of opportunity costs, but also due to damage should one or multiple currencies fall).
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Unread 15 May 2007, 12:29   #17
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Re: 'Base interest rate' and capitalism

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Originally Posted by Tietäjä
What is the fault there?.
Indirect taxation via inflation would be the most obvious.
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Unread 15 May 2007, 12:31   #18
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Re: 'Base interest rate' and capitalism

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Originally Posted by Nodrog
What is a pound? What gives a piece of paper its value? Banknotes say on them that they are issued by the bank of england, so if you took your a 10 pound note to the bank of england and asked to redeem it, what would they give you in exchange?
off-topic : Have you ever seen any of The Beiderbecke Trilogy? (tv-series shown in the 80's on ITV written by Alan Plater, also a book)
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Unread 15 May 2007, 12:33   #19
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Re: 'Base interest rate' and capitalism

nope
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Unread 15 May 2007, 13:05   #20
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Re: 'Base interest rate' and capitalism

OK - no reason you would have and you'd probably hate it* (80's leftist school of tv drama, minus the grit). It's just that one of the characters says pretty much exactly those words when trying to explain in laymans terms why the system is a bit of a sham.

I'm sure tonnes of people have thought/said the same thing but I was curious if it was an unconscious quote or whatever.

* Everyone else should watch it though, it's pretty good given that it was both an ITV show and was made in the 1980's.
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Unread 15 May 2007, 15:55   #21
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Nodrog
Indirect taxation via inflation would be the most obvious.
Inflation tax is a minor "issue" which is broadly acknowledged, and could be battled with relatively easy methods if the government given was interested. A modern trend in Finland at least is consencutive tax cuts irregardless of economical development, so from this perspective inflation tax may not only be a problem either. Even if it was an issue, it would be a minor price to pay for a very functional system, instead of reverting to trade economy. (Unless, of course, we assumed it'd create a cycle in the form of the Baumol's cost disease, which it doesn't).


Quote:
Originally Posted by Ultimate Newbie
Effectively, the "cash rate" is the rate at which the Reserve Bank lends money to all other financial institutions for overnight loans; its a huge huge sum of money and happens every day.
I may be confused behind a language barrier here. Does this Australian "cash rate" equal marginal lending facility (or main refining operations minimum bid rate)?

Quote:
Originally Posted by Ultimate Newbie
Anyway, as i understand it, that cash rate is achieved through normal open market operations; if the rate is rising, the Reserve Bank "prints" money to bring the rate down to the (pre-established by the Board) level, else it "destroys" money if the rate is too low, thus bringing it up.
Erm. You actually destroy and print money to work out the interest rate? What's the point? That sounds awfully medieval. Does this mean, if you destroy money, there will be less money on supply hence the banks will bid higher, and vice versa? If so, why actual destruction or print of money would be required is beyond me (the CB could just store the cash, or if they'd want less cash on the market, they could just increase the amount of cash banks need to store, well, the cash reserve ratios, and vice versa. Actually printing and destroying money as means of monetary policy sounds very medieval to me).

Quote:
Originally Posted by Ultimate Newbie
However, that's at the theoretical level, i would imagine that in the 'real world' the bank would effectively declare what the rate actually was and then everyone else would follow suit; the wonders of the expectations based economy that nodrog was refering to with regards to what money actually means these days.
Yeah, that's what they in Europe, declare the rates and lend money to the banks with the given rates. I don't think we here destroy money, though, and print only if it's actually needed. Generally, printing more money as a tool of monetary policy may just beat the cash reserves requirements, and result in inflatory development.

Quote:
Originally Posted by Ultimate Newbie
Other things that the Reserve Bank does is advise on prudential issues (like having minimum reserves of hard currency) and the like.
Yeah. Minimum reserves of hard currency may also be used as a tool for controlling interest rates. The higher reserve requirements, the less banks can splash around.

I guess it's quite like with the European Central Bank in Australia too, just that I haven't heard that there'd actually be destruction and printing of money happening as tools of fiscal policies here. I reckon, if ECB doesn't include printing and destroying money as "normal open market operations", but if they feel the interests are going too high, they'll increase money supply by reducing the marginal lending facility, and vice versa.
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Unread 15 May 2007, 16:46   #22
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Tietäjä
Erm. You actually destroy and print money to work out the interest rate? What's the point? That sounds awfully medieval. Does this mean, if you destroy money, there will be less money on supply hence the banks will bid higher, and vice versa? If so, why actual destruction or print of money would be required is beyond me (the CB could just store the cash, or if they'd want less cash on the market, they could just increase the amount of cash banks need to store, well, the cash reserve ratios, and vice versa. Actually printing and destroying money as means of monetary policy sounds very medieval to me).
The huge proportion of money doesnt actually exist, as such "printing" and "destroying" money is merely an alteration in a database somewhere. The Reserve Bank doesnt go around knocking on people's doors and takes money and melts it down - obviously.

It'd be too much fun .

But storing the money wouldnt work; it would still "exist" in the financial system, and thus the expecations that it would be used, and thus doing nothing to alter the cash rate. I suppose, however, the Reserve Bank may choose to remove the currency from domestic circulation by exchanging it for foreign reserves or through bonds, but regardless its effectively meaningless how it is done theoretically; the important (practical) consideration is that the central bank declares what the cash rate is, and all financial institutions take this as a given, and then act in the economy.

I would imagine that for all practical purposes, the Reserve Bank of Australia is effetively the same as the European Central Bank, the Bank of England, the US Federal Reserve et al. Mainly because they are expected to do the more or less same things in the more or less same way in the same financial system, so fundamentally they are the same thing.
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Unread 15 May 2007, 17:00   #23
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Ultimate Newbie
But storing the money wouldnt work; it would still "exist" in the financial system, and thus the expecations that it would be used, and thus doing nothing to alter the cash rate.
Ehm. A Central Bank can alter the cash rate (marginal lending facility in European terms?) by just dictating numbers. Similiarily, hard cash reserves can be altered, and requesting higher hard cash reserves can be used to pull liquid money (the actual quids and bucks) off the market. The money yes would excist, at the Central Bank, but as the Central Bank itself isn't boud by reserve requirements, it's indifferent to the circulation. A central bank can just remove currency from domestic circulation by requesting banks to store more, and sit on them. Right?


Quote:
Originally Posted by Ultimate Newbie
what the cash rate is, and all financial institutions take this as a given, and then act in the economy.
Can you confirm that "cash rate" equals the interest rate of the daily open market operations (ie. lending overnights to private sector), which would equal marginal lending facility? Cash rate isn't described in the ECB glossary, so just to know we're talking about the same subject here.

Quote:
Originally Posted by Ultimate Newbie
I would imagine that for all practical purposes, the Reserve Bank of Australia is effetively the same as the European Central Bank, the Bank of England, the US Federal Reserve et al. Mainly because they are expected to do the more or less same things in the more or less same way in the same financial system, so fundamentally they are the same thing.
Yeah. ECB is just a more expansive one, I guess.

Quote:
Originally Posted by Ultimate Newbie
as such "printing" and "destroying" money is merely an alteration in a database somewhere
Yeah. But the amount of money changes irregardless of how many bills you print, and how many bills you print doesn't really affect the economy, as long as you don't print more bills than there's actual money. Actual destruction of bills and coins seems vastly useless to me too. Could you elaborate why a central bank would destroy bills and coins, and what's the gain to it?
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Unread 15 May 2007, 22:54   #24
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Tietäjä
Actual destruction of bills and coins seems vastly useless to me too. Could you elaborate why a central bank would destroy bills and coins, and what's the gain to it?
He just said that there wasn't any physical destruction of notes/coins, and that it was just an alteration in the database (and that the cash was held somewhere instead of being allowed to float around the economy). Read his post again.
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Unread 15 May 2007, 22:59   #25
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Re: 'Base interest rate' and capitalism

Well obviously there is some re-issuing / destruction of physical currency, simply at a rate to make counterfitting sufficiently hard to be uneconomic. But as mentioned, that's only a tiny % of the overall supply.

Having said that, it's still important. There's probably some research on this already but I'd assume once you reached the stage where more than 5% of (physical) currency was forged you'd start seeing serious side-effects to the economy (i.e. people using dollars instead of your currency or whatever).
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Unread 15 May 2007, 23:19   #26
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Re: 'Base interest rate' and capitalism

5% of physical currency is a HUGE amount though. In any given week I expect I go through about 10-15 banknotes (eg changing a £20 into a £10 and a £10 into a £5 is 3 banknotes).

I've only ever seen one forged note in my life. Now it could be argued that I'd seen more, but they were so professionally done that I didn't realise.

I doubt the actual amount of real forged currency floating around the economy is more than 0.001% though. Obviously I've picked that figure off the top of my head, but then that's the most fun form of statistics
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Unread 15 May 2007, 23:30   #27
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Tomkat
I've only ever seen one forged note in my life. Now it could be argued that I'd seen more, but they were so professionally done that I didn't realise.
I'm not sure I've seen any, although quite a few people have refused notes from me, but I've usually spent them elsewhere. But I think British notes are supposed to be very hard to forge compared to even other countries in the developed world, and god knows about the third world.

OK, it would very quickly become pointless but presumably trying to reproduce a random Latin American peso is much easier and less risky than going for dollars* / Euros / sterlings or yen. The rate of conversion would be terrible, but you'd be able to get it back into "real money" eventually.

* Although I'm assuming here that it's only US Currency counterfitting the US Secret Service investigate in any real depth.

edit : As you imply, starting from a position where you assume you'll recognise a well forged note is probably dodgy. Until about 2 years ago I thought I had never seen an undercover cop, whereas upon thinking about it, that's nonsense.

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Unread 16 May 2007, 01:54   #28
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Re: 'Base interest rate' and capitalism

Quote:
Originally Posted by Tietäjä
Can you confirm that "cash rate" equals the interest rate of the daily open market operations (ie. lending overnights to private sector), which would equal marginal lending facility? Cash rate isn't described in the ECB glossary, so just to know we're talking about the same subject here.
I'm not in a position to confirm or deny anything, however from what you've told me, it sounds like they are very similar concepts. Have a read of this, and if it sounds like the marginal lending facility (which my 5 mins of googling would suggest), then it probably is.


Quote:
Yeah. ECB is just a more expansive one, I guess.
And expensive .

Quote:
Yeah. But the amount of money changes irregardless of how many bills you print, and how many bills you print doesn't really affect the economy, as long as you don't print more bills than there's actual money.
That doesnt make sense. I said "printing" money, which means the creation of money using a term that originated in the times before computers when all money was actually a physical note or coin. Thus, just because money is "printed" doesnt mean into a physical object like a note or coin, but merely money that now exists as opposed to not existing before. "destroying" (for want of a better term), is clearly the opposite.

Quote:
Actual destruction of bills and coins seems vastly useless to me too. Could you elaborate why a central bank would destroy bills and coins, and what's the gain to it?
I said that the Reserve Bank did not do this. I suppose, however, it could be done in a place where the currency no longer had worth, or if it was being changed for a 'new' currency like from francs to euros, but i would imagine a more efficient method would be on a voluntary basis.
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Unread 16 May 2007, 04:40   #29
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Re: 'Base interest rate' and capitalism

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Originally Posted by Nodrog
What is a pound? What gives a piece of paper its value? Banknotes say on them that they are issued by the bank of england, so if you took your a 10 pound note to the bank of england and asked to redeem it, what would they give you in exchange?
Either one 10 pound hooker or two five pound hookers.
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Unread 16 May 2007, 05:47   #30
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Re: 'Base interest rate' and capitalism

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Originally Posted by Ultimate Newbie
That doesnt make sense.
One of my hapless moments, eh!

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Originally Posted by Dante Hicks
Having said that, it's still important. There's probably some research on this already but I'd assume once you reached the stage where more than 5% of (physical) currency was forged you'd start seeing serious side-effects to the economy (i.e. people using dollars instead of your currency or whatever).
Yeah, you'd probably get hit by credibility issues there too. Although, it could just result in people reverting more to plastic money (unless 5% o the economy's credit cards are stolen). And moving on to dollars in a country where a dollar isn't the mainstray currency wouldn't be of a great option either. First, you'd need to have the given dollar as an official currency, after that there'd be massive menu costs for enterprises, from shops up, to change their scheme from the original currency to dollars.
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Unread 16 May 2007, 17:31   #31
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Re: 'Base interest rate' and capitalism

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Originally Posted by Dante Hicks
Having said that, it's still important. There's probably some research on this already but I'd assume once you reached the stage where more than 5% of (physical) currency was forged you'd start seeing serious side-effects to the economy (i.e. people using dollars instead of your currency or whatever).
Presumably if 5% of all pound sterling notes were bad, people would be more likely to use pound sterling notes than anything else since that would make it more likely they were geting rid of notes that could be forged.

http://en.wikipedia.org/wiki/Gresham's_Law
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Unread 17 May 2007, 01:31   #32
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Re: 'Base interest rate' and capitalism

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Originally Posted by Nodrog
Presumably if 5% of all pound sterling notes were bad, people would be more likely to use pound sterling notes than anything else since that would make it more likely they were geting rid of notes that could be forged.
The UK's position is slightly different from other countries though in that (ignoring the Scotland/England thing) it's still relatively rare for places to take any other note but sterling. Prior to the Euro places like Austria or border towns between France/Germany/Holland had much more regular experience with multi-currency exchanges. In the rest of the world today it's normal for people to deal with US dollars in addition to their own countries currency. You're right - here if fivers started getting a bad reputation I'd just avoid them, switching to dollars wouldn't be feasible because it's rare I see a dollar, let alone have an opportunity to use it. There is a de-facto monopoly of legal tender, basically.

Elsewhere it's not so clear cut. And if confidence in your own currency was falling (for whatever reason - uncertain political future, inflation, counter-fitting, chance of government default) then where possible you'd go for non-native currency, worsening the problem.

In this country we're more likely to be stuck with sterling for longer - but given the large exchange of people with the continent I suspect Euro's will be more common over the next few years.

(I did also recently meet a fellow the other day who spoke excitedly about a deal he had exchanging some scrap metal for drugs, although I confess that's hardly likely to become the norm...)

p.s. Do you still have pound notes in Scotland? I vaguely remember them being withdrawn as a child in England and being under the impression that all notes were to be abolished.
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Unread 17 May 2007, 12:49   #33
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Re: 'Base interest rate' and capitalism

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Originally Posted by Dante Hicks
You're right - here if fivers started getting a bad reputation I'd just avoid them, switching to dollars wouldn't be feasible because it's rare I see a dollar, let alone have an opportunity to use it. There is a de-facto monopoly of legal tender, basically.
But you wouldnt, thats the point. If fives had a repuation for being dodgy then youd surely try to get rid of your fives and hence use them as much as possible, preffering to give away 2 fives as opposed to a ten (since this would reduce the liklihood of you holding bad currency).. So would everyone else, and hence because of legal tender laws, theyd stay in circulation.

And yeah, we still have pound notes sadly

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Unread 17 May 2007, 14:47   #34
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Re: 'Base interest rate' and capitalism

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Originally Posted by Nodrog
But you wouldnt, thats the point. If fives had a repuation for being dodgy then youd surely try to get rid of your fives and hence use them as much as possible
Legal tender doesn't mean you're forced to conduct a business exchange though. I tried to buy something in a shop and someone said "No, I'm not accepting that, it's a fake mate." I had other money so it didn't matter, but what could I have done to "force" her to accept the money? Phone the police? Sue her?

And if I was really worried about getting dodgy fives, why wouldn't I avoid spending (say) £4 and then paying with a tenner (or other situations where I'm likely to get a fiver). Cash machines could be set up to give out fivers I guess, but aside from that, enforcing people accepting specific legal tender seems a bit practically difficult.
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