MONEY MAKES THE WORLD GO AROUND      In simple money terms, every country in the world has its ‘haves’ and ‘have nots’ and it is worth remembering the old saying that ‘a rich man is a poor man with lots of money’.      In today's modern money markets people with money can easily invest in any country where they feel their money can get the biggest profit, capital gain, or return.      In every country, money flows around the economy and this is why any sort of money currently being used anywhere is called a ‘currency.’      Up to now, we have looked at money in only simple terms. We know that money is basically an idea, but what is the money supply we hear so much about?

THE MONEY SUPPLY      Economists divide money into liquid and non-liquid assets. They find the distinction between liquid and non-liquid hard to make precise because ‘liquidity is a matter of degree, assets being more or less liquid, rather than simply liquid or non-liquid’. (Gulp!)

In other words, the money supply is equal to cash in the public's hands and deposits in a bank.      Banking either holds deposits as reserves or lends them back to the public. High-powered money – or the monetary base, means the quantity of reserve assets – this is defined as cash and reserves.

In the old days when cash meant gold coins and when banks held gold as reserves – the high-powered money would be gold.      Nowadays, banks hold a wide variety of assets as reserves, not simply Bank of England notes and deposits, but also Treasury stocks and bonds, as well as investments in shares in the private sector that can easily be converted back into cash.      The banks have a legally imposed reserve ratio but are also regulated by considerations of risk. If enough depositors suddenly lose confidence in a bank and all of them want to withdraw their money at the same time, a run on the bank develops and the chances are that the bank would not have enough cash available to go round and it would be forced to close its doors.

ONLY MAKE-BELIEVE      That's why confidence is all important in the banking world. If EVERYBODY who had money in a bank somewhere wanted to withdraw it, there is no way all the banks could quickly get back all the money they had invested or advanced to borrowers: they would all have to close their doors and the whole monetary system would collapse!

It is the same in every other country in the world and if another country's banking system offers higher interest rates than your own country, you may be tempted to invest your money there.      All you have to do is change your money into the currency – whatever the name is – your chosen country uses. This is done by buying that currency on the foreign exchange market.      If enough people like you want to buy that currency, its value will rise and – if you were one of the first to buy – you will not only gain from the higher interest rates on offer, you will also gain from the rise in the value of the foreign currency you now own.      In other words, you could sell your foreign currency for more than you paid for it and add that to the higher return you got from the favourable foreign interest rates.      This is why governments sometimes deliberately raise interest rates – to attract foreign investors and so increase the value of their own money in circulation, or national currency.      They also like to hold foreign currency reserves in their central banks in case the value of their own money should fall. So governments often invest in other currencies from countries with strong economies, like the dollar, the Deutschmark, and the yen.      Perhaps this is a good time to remind ourselves that money was, always has been, and still is an idea. It is something that we – as human beings – have thought up all by ourselves. You don't see other animals or plants queueing up to stick bits of plastic into walls for something they can't eat.  No, it's only because enough of us believe it is valuable that money is worth anything to us at all.

So how is one currency valued against another? Yet another idea, of course! The measuring of economic growth – or recession, and the belief in those measurements.      TWO WAYS OF MEASURING AN ECONOMY      Gross Domestic Product, or GDP, is not some unspeakably vile cardigan knitted by someone's maiden aunt, it is the declared total value, in current prices, of everything a country produces or sells in the course of a year – including the cost value of all public services, such as transport, electricity, and water.

National income is similar.  It is the declared total annual income of everyone in the country who has made a profit – or earned a wage or salary – from producing and selling their goods, services, skills, or labour.      GDP is more or less the same thing as National Income, but NEITHER shows us what any good housekeeper needs to know: how much a country actually has in the bank!      What's more, GDP can only measure the value of things that have a known price, such as weapons, coal, or shampoo that hasn't been tested on animals.      A nurse looking after someone elderly gets paid a certain amount of money, a parent looking after a sick child does not. Both are performing a similar service, but because it is impossible to put a price on the value of their love, only the nurse's wages go into the Gross Domestic Product.      Both National Income and Gross Domestic Product are just the names given to established ways of measuring a country's economic growth or decline – just as there are two ways of using a clinical thermometer. Whichever place you choose to stick it, you can find out what your temperature is, but not necessarily what is wrong with you!      Economic growth is the steady increase in output of all the things we consume, use up, invest or otherwise produce. For example, instead of eating 2 bags of crisps every day, you eat 3; instead of making 10 cans of fizzy drinks a day, a factory makes 12; and so on . . .

Therefore, to the ordinary person, it is hardly a cause for wild celebration if the GDP goes up OR down! It has no immediate effect on the real quality of life. But for a politician, it can be used to show the success, or failure, of an economic policy, and as such it is of little value to the man in the street and we might as well ignore it.      ANOTHER WAY OF MEASURING AN ECONOMY      How a country's stock exchange is doing is considered to be a more meaningful sign of health or sickness in an economy. Every stock exchange in the world publishes a share index of one sort or another and these are generally used to measure movement in ordinary share prices.      If share prices go up – the index goes up, if share prices fall – so does the index. All movements are measured in points and if the points are high it means an economy is doing well – and vice versa.      In New York they use the Dow Jones index, in Tokyo the Nikkei Dow, in Hong Kong the Hang Seng – to name but few. In Britain the most widely-reported share index is the Financial Times Stock Exchange 100-Share Index, the FT-SE or ‘Footsie’ (our financial people can be SO cute!).      Stock exchanges turn over and make enormous sums of money, and when it shows up in GDP or National Income it is referred to as invisible earnings and becomes part of a nation's capital account – which shows the flow of capital funds, loans, investments, etc. into and out of that country.      . . .YET ANOTHER WAY . . .      Then there is the balance of payments in the current account. This measures the difference between the value of imports and exports of any country. When there is a surplus it means a country is exporting – or selling – more of what it does, or makes, than importing.      When there is a deficit, a country is importing – or buying more stuff from abroad – than it exports.      If a country has a current account balance of payments surplus then it obviously has a successful economy – low inflation, low unemployment – and that the country's currency will be strong and rising in value and therefore tempting to foreign investors.      All these methods of measuring can signal the strength or weakness of a country's economy, but the daily share index probably has the most affect on the value of international currencies in the foreign exchange money markets. . . . AND ONE MORE!      The other theory of how to value different currencies relies on measuring the purchasing power of one or more currencies against another. This involves measuring retail prices – via the retail price index – the cost of goods in shops, etc. – and measuring inflation over a one year period.      The only problem is deciding on where to start measuring the 12 month period. What is a typical year? Anyway, it would seem that the people who speculate in the Forex market – or foreign exchange markets – aren't really bothered about accurate valuations even if they were reliable.      The global currency market is 32 times larger than world trade flows – there was a global turnover of 650 billion US dollars a day in April 1989. Some people are obviously making a lot of money out of foreign exchange rates!      What all this frenzied buying and selling is doing to the global money supply – and consequently the speculators own national economies – doesn't bear thinking about.      Sadly, whatever they're doing doesn't seem to worry them too much. Others, like manufacturers, exporters and suppliers of raw materials, would like to see the ERM – Exchange Rate Mechanism – bring the EC currencies closer to EMU – European Monetary Union – and start using the ECU – European Currency Unit – as soon as possible.      A single currency would benefit manufacturers and exporters, stabilise trade and prices, and hopefully reduce unemployment.      But who can tell? Whichever way you slice the economy you will find conflicting interests. So what of the future? Was Thomas Hobbes right when he said we need a really strong authority to control the innate hostility of self-interest?      Or shall we find the Utopian common wealth that Thomas More so wishfully described?

Who knows? Even Adam Smith warned against monopolies ruining the market's natural ability to regulate prices through competition.  How would he deal with the foreign currency speculators, multinationals, and big corporations we have today?