h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Once upon a time, we had a big reserve of gold. The world market set the price of gold, so our currency was based on this value. If the price of gold was strong- so was the currency.

We have now sold all the gold.

On what do we now base the value of our currency?

Recently, the government 'eased' the financial catastrophe caused by the banks by printing billions of pounds. How exactly is this worth anything when we have nothing to value it against?

I think for most countries it's a series of IOUs off of IOUs to each-other.

Our money's worth what people are willing to pay for it ('absolute' value is meaningless). If you imagine that all the money in the UK can buy all the stuff we produce, then increasing the amount of money means that it simply takes more money to buy the same stuff, and this pushes prices up, ie it's inflation.

So, say the value of the UK economy in 2007 was £10: the amount of money was also £10. If the govt prints an extra £1, then it takes £11 to buy all the stuff in the UK, and prices go up 10%.

The reason why the BoE basically printed money is because so much wealth was lost during the credit crunch. So imagine there's only £9 to buy all the stuff in the UK; prices would actually *fall* by 10 percent, aka deflation.

Deflation's much worse than inflation, because it means that debts effectively go up in value. As well as mortgages etc, all the loans that businesses had taken out would get higher in real terms, turning a pretty severe recession into a full-scale depression. Not pretty.

The BoE are wary of causing inflation through quantative easing, but any problems caused by it (and there will be; the stock market rise might just be another asset bubble) are far easier to deal with than deflation.

Hmm, still as clear as mud. I can't understand how printing additional money can 'ease' the financial mess that we are currently in. If, like you say, something that cost £10 before, and now costs £11, it hasn't really increased in value, it has just increased in price,in line with the amount of money in 'the system'.

My partner works in the NHS- they have been told that their budgets will be cut next financial year as there isn't the funds. Why doesn't the Treasury simply print an extra £1 billion? If they could do it to bail the banks out, why not for the NHS?