SNEAKY TRICKS!      Money can be anything. It is, after all, only a medium of exchange, something to lubricate the mighty cogs of trade (and also the hinges of doors in the corridors of power!), so why did we change from using gold and silver as money?      Why do we use the elaborately printed paper notes and the coins of harder metals today?      When coins were made of the softer precious metals – and things were literally ‘worth their weight in gold’ – many dishonest people found it easy to take the precious metal coins, clip small bits off and melt the cuttings down for themselves.      Others mixed less-precious metals in with the silver or gold and effectively debased or made the coins less valuable – so eventually all people with money –  mostly governments and merchants – had to look for somewhere to keep it safely, in a place of deposit.      So, since the public at large could not be trusted with the ‘real’ money, alternatives had to be found.      It is believed that the Chinese were the first to introduce the idea of paper money. However, as more and more governments began issuing paper notes equal to the value of their ‘precious metal’ coins, it was quickly discovered that more ‘notes’ could be issued than there were coins!      This was because most people were quite happy to carry the paper around with them and not try to cash it in – so long as they were fairly certain they could get the real money if they tried.      Of course, the extra notes the governments issued increased the money supply and, to their delight, paid the governments' bills just as well as silver or gold. If prices went up, so what? The ‘powers that be’ could afford to lower taxation – and still stay relatively popular with the ordinary folk!      This sort of thing has been going on ever since.  And when, in the Great Depression of the 1930s, so many people wanted gold instead of cash, the international agreed European ‘Gold Standard’ of 1867 had to be abandoned.      THE FIRST BANKS      The first private banks were the goldsmiths because they had the best strongboxes. Very soon the banks discovered that they could lend these ‘deposits’ to someone else and charge interest.      Interest is a charge for borrowing money, usually a percentage of the amount borrowed. If you borrow £10,000 at a rate of interest of 10% for one year, you pay back £11,000 at the end of that year. The lender has made money – £1,000!      But, more importantly, the ‘real’ money didn't have to leave the bank. The borrower was given notes certifying that he had the amount of the loan in the bank. He could then use the notes for whatever he wanted to buy.      The original depositor still had his money, the borrower also had ‘money’ and the bank, by making the loan, had created money and thus increased the money supply as well as making a profit on the interest!      And so it is today, except of course, that we no longer use gold or silver to ‘value’ our money. Money is created by the lending banks under the control of the central banks which in turn, with the notable exception of Germany, are controlled by governments.      Out of the £1,000 interest earned by the bank, it will, maybe, invest £250 in something not too risky that will not only earn the bank interest – but also be fairly easy to turn into cash again.

This leaves £750 to lend to other people.      This is how the system works. From each £100 of new deposits, the bank will keep £10 and lend £90 to someone else who wants to buy, let's say, a new suit. The borrower buys the suit and gives the money to the tailor.      The tailor puts the £90 in his bank, which will then keep £9 and lend £81 and so on, and so on. Since the money eventually finds its way back into the banking system, out of each £100 of deposits, £1,000 of spending power is available to the economy.

MONEY MAKES MONEY      More and more people are paying money to borrow more and more money, and more and more people are finding more and more ways of making money out of lending even more money. All rather confusing really . . . or is it?      People who own money like it to work for them. By saving, or depositing their money with a bank or building society, they will earn interest and in turn the bank or building society will also earn interest from lending the savers' money to someone else.

Money can also be ‘earned’ by buying commodities or goods which are expected to rise in value, or it can be invested by government bonds or company stocks and shares. Whatever the method or risk, the money, profit, or capital gain that is made by using other money is called a ‘return.’      For each way of using money to make more money there is a money market, and just as you would expect with something as imaginary as money, each market is not a ‘real’ one. Dealing mostly takes place over the telephone. There are markets in commodities such as gold, oil, and soya beans and, of course, there is a market in government bonds and company shares: the stockmarket.

People with money always try to invest it where it can earn the best return – which often depends on how long they are prepared to invest their money. The more money you have to save or lend, the higher the return. The longer you are prepared to save or lend your money, the higher the return. The more risk you are prepared to take,  the higher the return – if all goes well!      INTEREST RATES . . . THE RISE . . .      There are different rates of interest for borrowing, lending, and saving. These interest rates, just like any other sort of price, can be high or low depending on supply and demand. No money market is completely independent of another – and all money markets are affected by interest rates.      If interest rates rise, the cost of borrowing money goes up and so does the amount of return to lenders and savers. This is good for people with money and bad for people without it.      People with money immediately try to make the most of increased returns offered by the higher interest rate. People from other countries will also invest – raising the value of the national currency and affecting international exchange rates.      People without their own money, or people who are paying a higher price for borrowing money that does not belong to them, have less to spend on other things. This reduction in spending power affects small traders and shopkeepers who may also be paying the higher costs of borrowing. Small companies may have to lay off workers, and before you know it there can be a recession.      . . . AND FALL!      If, on the other hand, interest rates fall, then there is more money in the borrowers' pockets, they have more to spend, and the economy tends to grow.      In such times, the people with money become more choosy about where they invest because they always want to get the biggest possible return for their money.      They will switch their money from saving and lending to buying shares in companies that look like making big profits because they are producing the goods that people seem to want to spend their money on.      It is just like a merry-go-round where the borrowers pay to sit on a horse that goes up and down but never catches the one in front. However, the people who own and work the merry-go-round can go from horse to horse collecting more and more money. They can also decide how long the ride should be according to how many people are queuing up for it. High or low interest rates are like long or short rides.