Is the Value of Money a State of Mind? – Part Two

In part one of this article we explored some of the realities behind the true worth of coinage beyond its face value. Now we are going to examine the role of the Bank of England and find out how physical money retains its purchasing power.

For this, we do not need to speculate. The Bank of England is very open about the subject. Some years ago they published a PDF postcard entitled, ‘Banknotes and the promise to pay‘. Here they provided a succinct explanation of what exactly gives banknotes their value. To quote from them directly:

Banknotes were initially IOUs for gold deposited at the bank. People used these notes to pay for things, knowing they were backed by ‘THE PROMISE’ to pay the equivalent value in gold.

As we learnt in part one, the British Gold Standard came to an end in 1931, with the official reason given because of the Great Depression and speculative attacks on the pound. The bank continues:

So what gives modern banknotes their FACE VALUE, when they cost only a few pence to make?

In a word, TRUST.

We trust that banknotes can be exchanged for the things we want to buy. We trust ‘THE PROMISE’ that they will be accepted by others for their face value. This TRUST GIVES BANKNOTES THEIR VALUE.

What the Bank of England is saying is that trust – which unlike gold is not a tangible commodity and is instead a tenet of human psychology – is the primary quality that gives value to money. Were it not for this trust, both coins and banknotes would be rendered worthless.

The bank takes this a step further by declaring in a nine page document titled, ‘Managing the circulation of banknotes‘, that a huge proportion of this trust comes from the public having ‘confidence in the physical integrity of notes‘. Counterfeit notes are in the bank’s eyes one of the greatest threats to the trust people place in money.

It is also in this document where the bank are once more prone to sincerity:

Cash users need to accept that a piece of paper that costs a few pence to produce is worth five, ten, twenty or fifty pounds.

Let’s pick up on the admission that banknotes cost ‘a few pence to produce‘. According to this same document, the Bank of England uses a commercial printer to procure new notes. That printer is a company called ‘De La Rue‘, who describe themselves as being ‘at the forefront of new developments in the delivery of security and integrity to the Cash Supply Chain‘, as well as standing ‘firm in its fight against counterfeit and fraud‘. ‘De La Rue‘ have been printing money since 1860, and for a time even produced banknotes for the Chinese government starting in 1930.

The current crop of paper banknotes are, according to the Bank of England, produced with cotton fibre and linen rag. They say this is for durability purposes, as using wood pulp paper would mean notes wearing down more quickly and dropping out of circulation.

In 2009/10, the Bank of England procured 1.36 billion new notes from ‘De La Rue‘, at a total cost of £38 million (in face value). As with the Federal Reserve in the U.S., the bank operates a budget for the production of new banknotes. In 2016, they spent £43 million on new notes, as detailed in their latest annual report. £67.8 billion pounds worth of notes were in circulation a year ago, compared to the £74 billion in circulation as of June 2017.

The cost of individual notes was alluded to by the bank a number of years ago in a one page document named, ‘Cost of banknotes‘:

The average production cost (per note) for 05/06 and 04/05 respectively would be 2.86p and 3.69p.

674 million notes were produced in 2015/16. With production costs of £43 million, this made each note at the time worth an average of just over six pence.

The situation in America is on a slightly grander scale. The Federal Reserve’s 2017 currency budget is set at $726.6 million. This will allow for a total of 7.1 billion notes to be produced by the ‘Bureau of Engraving and Printing‘, a government agency within the treasury department. The seven billion notes created have a dollar value of $209 billion. To put that into context, the hundred dollar note costs just 15.5 cents to produce. The most expensive is the fifty dollar bill at 19.4 cents. The average cost per note comes to a little over 3 cents.

The U.S. dollar, as with British sterling, is no longer backed by gold and is instead supported by the psychological element of trust.

Another side to the creation of banknotes is how routinely they are destroyed in comparison. Latest figures from the Bank of England show that for 2016/17, £9.4 billion pounds worth of notes have so far been obliterated, which equates to 886 million actual notes. Within that same time frame, 912 million notes have been newly produced, with £15.2 billion pounds issued from current stock (1.1 billion notes).

As we know, the Bank of England has jurisdiction over determining ‘Legal Tender Status‘. The paper £5 note ceased being legal tender in May 2017, and therefore can no longer be used to make a purchase. But this does not mean that the banknotes are worthless. Whilst shops will refuse them as payment, the Bank of England operates to the understanding that any note produced by themselves will retain face value for all time. They are legally bound to swap old notes for notes that quality as legal tender. It is a similar story with the old pound coin. The coin will lose its ‘Legal Tender Status‘ in October, after which retailers will reject it as payment. But the face value of the coin will retain its value within the banking system. High street banks will still accept the coin as a deposit into your account.

Altogether, UK banknotes make up around 92% of the country’s physical money supply, with coins making up the remaining 8%. The face value of all coins currently in circulation is estimated at somewhere in the region of £7 billion – the face value of notes from the overall money supply stands at £74 billion).

Until 2016, all banknotes in the UK were only ever made from paper. This changed with the introduction of a new £5 note made out of polymer. The £10 note will also switch to polymer in September 2017, along with the £20 note in 2020. De La Rue‘ will still be tasked with printing all that the Bank of England requires.

In the Bank of England’s ‘Managing the circulation of banknotes document from 2010, they identified that the availability of ‘good-quality £5 notes to the public has declined‘, and how the issue would ‘remain under close review by the bank‘. Altering the composition of £5 notes from paper to polymer was later deemed the answer to the problem.

The changeover to polymer is promoted by the bank as being better for both the environment and security. They argue that because polymer is more durable than paper, the new fivers will last longer and will not need replacing as often (paper £5 notes were notorious for their poor quality). Alas, less energy is used for manufacturing and the costs of transporting cash is reduced. The Bank of England have also promised that when polymer notes reach the end of their life, they will be recycled into new plastic products. Given how we are led to believe that people are now more environmentally conscious, the switch to polymer notes is an easy sell to the public. Most importantly, it portrays the Bank of England as an institution that takes recycling seriously and cares for the environment.

But might there an ulterior motive to the polymer programme? Because polymer notes have increased durability (they are expected to last around 2.5 times longer than the paper £5 did), the bank will obviously not need to replace them as often. Over time, a consequence of this will be that less notes need to be produced by ‘De La Rue‘. Once paper £10 and £20 notes are pulled from circulation, banknotes in general will all have a longer life span. When considering this, bare in mind that the ratio of people now using debit cards for payment compared to cash is narrowing. Contactless technology has made shopping more convenient for consumers, and is perceived by many as a safer option than carrying wads of notes in your purse. Payments UK, the trade association for the payments industry, published an article in May 2017 stating their belief that purchases made on card will overtake cash by 2018.

Analysis carried out for UK Payment Markets 2017 forecasts that debit cards will become the most frequently used payment method in late 2018, three years earlier than previously predicted due in large part to the increasing popularity of contactless. 

By 2026, contactless is forecast to account for more than one in four (27%) of all payments  

In ten years time, Payments UK expect cash payments to make up just 21% of transactions. Assuming their analysis plays out, it would present us with the scenario of less cash circulating in the economy, with the cash that is in use being of a higher standard and thus not needing to be replaced as often. At this point, the process of moving closer to a fully cashless society would become a real proposition.

Seven years ago, the Bank of England began discussing the future developments of money. Whilst admitting that developments ‘take a number of years to become established‘, they openly cited how ‘cash alternatives such as contactless payment cards or mobile payments‘ were likely to significantly impact on how consumers pay for goods and services. An impact that ‘may only become apparent over a number of years‘. This was in 2010, many years before the popularity of contactless payments had accelerated.

Below is a video produced by The Financial Times promoting the idea of a cashless society. Martin Wolf, the company’s chief economics commentator, states that ‘cash is a dying technology‘ and that the convenience of card payments is now in the ascendancy. In essence, the mainstream media are beginning to prepare people for what is coming.


As proven, there is a huge discrepancy between what currency is worth in terms of face value and what it is worth in terms of true value e.g. the materials that make up its composition.

Ultimately, every currency in the world today is fiat currency, the value of which depends solely on the face value adorning both banknotes and coins. No longer is currency backed by a gold standard, or indeed any other form of commodity. Instead, we have exchange rates where the value of currency floats freely in the market place, currency which is backed by nothing more than the public’s confidence and trust.

As stated by the Bank of England themselves, it is trust that gives money its value, when at one time it was precious metals. Take that trust away and suddenly ‘The Promise‘ that the notes we carry will be accepted as payment is no longer guaranteed. In that scenario, it would not matter if the face value of money was £10 or £100. Once the trust is lost, so is the value. Paper money can be produced at a rate that if necessary would always exceed demand. There can always be a surplus of cash in the world. As we have seen, when one note burns, another can be created. The same cannot be said for gold and silver.

It is a perverse reality when the value of finite commodities are defined through the medium of fiat currencies. But as with any goods, this is only possible for as long as people maintain confidence in the purchasing power of the currency. It is particularly ironic how precious metals, a natural element of the Earth, are today bought and exchanged using paper money that beyond our own psychology has no material value. The quality of not taking anything at face value and instead using our own intellect to determine the truth behind the facade clearly does not apply to money.

Therefore, our definition of wealth runs no deeper than the face value adorning our currency. For as long as we possess the confidence that true value can be determined as such, money has the power to buy you whatever you both desire and can afford.

As I have come to realise, money is a deception. A fantastical expression of perceived wealth. But the pain and hardship that ensues from neither earning or possessing it is very real. The paper and coins we invest faith in is all that stands between a home and material comforts, or a life on the streets and being forced to beg for our trusted medium of exchange. That is when money as we understand it – on the basis of it’s face value – holds the greatest power of all.


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