encyclo - 8:51 pm on Nov 12, 2006 (gmt 0)

then what are they promising?

I believe they will exchange your 5 pound note for five one-pound coins.

I'm not an economist (although I have worked in the banking industry in another life) so I can't explain things particularly well, but the "money" must be a representation of real value which is present in an economy - goods, knowledge, stocks, whatever.

In particular, if you simply print extra money where no extra intrinsic value exists, the actual purchasing power of the pounds/dollars etc. will go down. This is called inflation, the effects of which are well-known. Good examples are Germany in the 1920s and 1930s, post-war Italy... in these cases the government, unable to meet its obligations, paid its bills by printing more cash. However, as the money supply rises, prices also rise, leading to situations where you needed a handcart rather than a wallet to pay for your groceries. Inflation is the counter-evidence supporting the purchasing power of the promissory note in your pocket.

For the UK, check out the Bank of England's "money supply" statistics - a stable economy requires a stable M0, or "narrow money". M0 is the amount of money in circulation outside of the Bank of England.

Now I'm going to get shot down by a passing economist who wil say I don't know what I'm talking about!

[edited by: encyclo at 2:33 am (utc) on Nov. 13, 2006]