Economics 101

Because I do not have any formal economics training (beyond an introduction when I studied to become an accountant in the 1980s), there are some economic ideas which are quite difficult to get to grips with.

One of these is the idea of “value.”

If I have £1,000 in the bank where does it get its value from?

Back in the day, every penny in the bank was backed by gold (rather like Harry Potter’s  vault filled with bullion).  And before that larger amounts of money were actually gold coins.  But wars and economic failure put paid to all that.  After the second world war an agreement was reached called the Bretton Woods agreement which fixed exchange rates between countries and allowed central banks to convert US currency into gold at $35 per ounce.

The ability to convert was withdrawn in 1971 (partly because France kept using it and converting its US dollars into actual gold) and the fixed rates of exchange were terminated at the same time (initially the plan was for this to be temporary and for everything to fix again, but that has not yet happened).

So if I cannot convert my money into a lump of valuable metal, is it worth anything?

There are at least two ways of looking at this:

Exchange value

What can I get for £1,000?  I can exchange it for a large variety of different goods and services.  So it is worth at least this much.

Banking value

Another way of looking at it is that my money in the bank is money owed me by the bank.  In turn my bank has money owed to it by the bank of England.

But if we outlaw commercial debt, will my money suddenly lose its value?  Will I have to go and spend it on something (perhaps a lump of gold) which I will be able to sell later when I want to go and buy some more groceries?

The common view

Even if we know we still have the same “exchange value” how will we perceive a major change in the banking system?  Will something of the “banking value” leak into our thinking and make us more cautious?

Or am I missing something important here about how value is perceived so that abolishing bank lending (along with other commercial debt) will affect value?