Why Does a £50 Note Have Value?

Why Does a £50 Note Have Value?

It’s interesting the range of answers you get from people when asked this question.

One person said “gold“, which has nothing to do with it. There was a time when you could demand a fixed weight in gold in exchange for a Pound, but that finished on the day WWI started. Another said, “You can buy things with it” — an answer that only begs the question why that it so? “Faith” said yet a third. Not quite.

Tax liabilities give otherwise worthless paper, value. Sterling has value because the government levies £600B in tax liabilities annually and accepts only Sterling in payment — which only it issues. HMRC only accept Sterling or Sterling converted currencies to settle tax bills. In so doing, the government turns all of us into Sterling chasers. It’s how a state – any state, can turn worthless pieces of paper into valued currency.

“The modern state can make anything it chooses generally acceptable as money,” economist Abba Lerner wrote in 1947. “If the state is willing to accept the proposed money in the payment of taxes and other obligations to itself, the trick is done.”Brilliantly devious, isn’t it?

As economist Warren Mosler puts it: “When the government spends, only two things can happen to that money….. the money can be used to pay taxes, or it isn’t used to pay taxes. In which case, somebody out there still has it.” So deficit spending equals financial savings at the macro level. Government debt, then, is a form of savings for the private sector. Everywhere there is a Treasury security there is someone who owns it. For that holder, it is a part of his financial wealth, or savings.

The trouble with budget surpluses is they take money out of the economy. That puts pressure on private-sector balance sheets. Most people think that the government collects taxes and sells gilts to finance its spending. But remember, the government issues Sterling paper. It can’t run out. This sounds scary, but it’s the naked truth of a fiat currency system. The UK government faces zero solvency risk. It can always meet all of its bills . Further, think about it from the beginning: What must a government do before it collects its own money in taxes? It has to spend the money first. That’s how people get Sterling to meet the tax. So logically, spending precedes tax collection. 

As it stands, Sterling still has value within global financial system. But eventually, that value will drop to zero. It might be a year’s time or 5 or 10 years from now. But eventually, Sterling will collapse.

Protect your wealth – NOW.

[Paraphrased with Sterling instead of the Dollar from an article by Chris Mayer of The Daily Reckoning]

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