How does government central bank work?

frothy-coffee_2

Hi,
Quantitative easing aside.

Does a country's central bank keep a fixed number of notes and coins in circulation.

Reading a £10 note it just says, " The bank promises to pay the bearer £10"

£10 of what?

Is it valued against a certain commodity, say gold?

£10 buys is worth a certain amout of gold, say one gram?

NB
!! ! I don't know the current price of gold.

DavidHayton

frothy-coffee wrote: »

Does a country's central bank keep a fixed number of notes and coins in circulation.

No, and notes and coins are only a small part of all the money in circulation. The central bank can set tragets for the money supply ... just like the government sets targets for inflation. Whether it meets them or not is another matter entirely.

frothy-coffee wrote: »

Reading a £10 note it just says, " The bank promises to pay the bearer £10"
£10 of what?

£10 of .... pounds sterling

frothy-coffee wrote: »

Is it valued against a certain commodity, say gold?

No

frothy-coffee wrote: »

£10 buys is worth a certain amout of gold, say one gram?

No it doesn't. Gold price floats against the pound like it does against every other currency in circulation.

Not very reassuring, is it?

David

frothy-coffee_2

Thanks, but I still don't understand how they value, say a ten pound note. After all it's only paper. It's surely got to be fixed against some quantifiable asset, no?

Sceptic001

A ten pound note is a means of exchange. It is only worth whatever someone else will give you for it. That is why inflation is so perfidious. It eats away at the value of your pound.

DavidHayton

frothy-coffee wrote: »

Thanks, but I still don't understand how they value, say a ten pound note. After all it's only paper. It's surely got to be fixed against some quantifiable asset, no?

The value of a £10 note isn't fixed against anything ... apart from two five pound notes that is.

That said, the government will always accept £10 notes as payment for tax, and you can use them to settle all debts (that is where the "legal tender" comes in).

David

talexuser

How does the central bank work? - well Government sets an inflation target, and they fail to meet it month after month after month after month - and still keep their jobs and bonuses ... good work if you can find it!

frothy-coffee_2

talexuser wrote: »

How does the central bank work? - well Government sets an inflation target, and they fail to meet it month after month after month after month - and still keep their jobs and bonuses ... good work if you can find it!

It is. But it doesn't help me :cool:

jimjames

frothy-coffee wrote: »

Thanks, but I still don't understand how they value, say a ten pound note. After all it's only paper. It's surely got to be fixed against some quantifiable asset, no?

Nope, its not fixed against anything but does float against other currencies. So at one point you could get $2 per pound sterling, now its about $1.60.

This is the problem many have highlighted with the Quantative Easing programme which is effectively printing money and the reason why some people are looking to gold to give a physical asset against inflation.

cepheus

The Bank of England is supposed to maintain monetary stability by trying to make sure price increases meet the Government's inflation target by adjusting the base interest rate. They can also act as the lender of last resort by extending credit when no other institution will to maintain liquidity in the economy.

However, even after the Bank was nationalised after the war it remained a power unto itself, supporting the City of London, the merchant bankers, deregulation and freedom for financial capital.

The previous governor Eddie George said the Banks purpose was to ensure the effectiveness of the UKs financial services and advance a financial system which enhances the international competitive position of the City of London and other UK financial centres.

That means to promote the City of London as an offshore centre, to allow businesses to avoid tax and attract 'hot money' from just about anyone, ranging from Russian oligarchs to African dictators, and possibly worse. This reduces the accountability of businesses and the rich to anyone but themselves, and ensures the rich get richer.

Masomnia

The value of money is based entirely on the confidence that it is worth something. Nothing more.

I find it's best to just accept it and worry about something else

Loughton_Monkey

frothy-coffee wrote: »

Hi,
Quantitative easing aside.

Does a country's central bank keep a fixed number of notes and coins in circulation.

Even quantitative easing has very little to do with the number of notes and coins in circulation. I believe they keep notes in circulation up to whatever the 'demand' for notes is. I expect it has diminished significantly since the use of plastic.

As far as I know, QE does not involve the physical printing of notes. It is simply a form of putting extra 'electronic' money into the system.

So it's very much akin to us individuals really. I can come and look inside your wallet and pocket and find exactly £53.42. But that is not your true wealth. If you draw £1,000 out of your bank and put it in your wallet, your wealth has not changed by a single penny.

The things that 'determine' the economy have generally been mentioned.... Money supply, circulation rate, confidence, interest rates, inflation........