
   **  Stripping the mystery from the Money markets  **

MOST PEOPLE ONLY worry about currency exchange rates 
when they're changing money for a holiday, but over the 
last few years, they have become increasingly hard to 
ignore.  Government ministers appear on TV to inform us 
that interest rates will have to go up or down, or 
reassure us that, having spent hundreds of millions of 
pounds, our standing in the ERM is now safe.  What are 
they talking about?

Part of the move towards European integration, 
indeed, one of the main reasons for this move, is making 
sure that the value of all the European currencies stays 
at more or less the same level.  If the pound today is 
worth 5 francs, 100 pesetas, or 1,000 lira, then it 
should always be worth about 5 francs, 100 pesetas, or 
1,000 lira.  This is because, if a business is exporting 
stuff to Germany, it wants to be sure that the 10,000 
marks it gets paid is worth as much as when the price 
was agreed, otherwise it could end up making huge 
losses.  

Speculators

The problem is that the value of a currency depends 
ultimately on how much other people are willing to pay 
for it, and that, in turn depends on millions of other 
things, like the general strength of the economy, that 
no-one can really control.  When, as happened with 
sterling, speculators (basically the big banks and 
investment companies) think that the price is too high, 
they start selling the currency - forcing its price 
down.  To try to keep the price up, governments will 
increase interest rates, so investors will save their 
money in that country, or buy as much of the currency as 
they can.  

Naturally, we're the ones who have to pay for all 
of this.  If interest rates go up because of speculators 
attacking a currency, our mortgages and bank loans 
become more expensive.  When governments use their 
reserves to buy up currency, they then have to spend the 
next few years building their reserves back up, which 
means less public spending and more taxes.  And no 
matter how much of our money the government spends, they 
still have little chance of fixing the value of the 
currency.  

No-one's in charge

The problem isn't simply one of having the wrong 
government in power - no matter how 'socialist' the 
ruling party, they will still be faced with the same 
situation.  If a price for the currency is not fixed, 
then companies will go out of business, with the 
attendant loss of jobs, through losses incurred as their 
payments are changed from one currency to another.  (Not 
to mention the complications in terms of EU membership 
raised by dropping out of the ERM)  On the other hand, 
because it is not the only player in this game, the 
state simply isn't in a position to set the price of its 
money.  

Just as manufacturers try to produce the most 
profitable goods, investment companies and banks are 
drawn to the most profitable markets.  They speculate on 
currencies because they are trying to make a profit for 
their shareholders and investors, even if these are the 
same people who end up losing if a currency is devalued.  
Whatever happens, they are in the position of enforcers 
for the 'iron law of the market', and until that 'law' 
is challenged, we're going to keep going in the same old 
circles.  Capitalism, by its nature, is chaotic.  A 
rational economy requires a new system - anarchism.

Ray Cunningham

