If the traders in a market use different currencies, the relative values of these currencies is determined by comparing the market values of the goods or services each unit of a currency will buy at the time. This reflects the market expectation of what a unit of that currency will buy in the future. In a global market, some currencies are more 'popular' than others, and will therefore obtain 'better value for money' than less popular currencies. This is because traders who accept less popular currencies charge more for their goods and services to offset the risk inherent in holding an unpopular currency which may become still less popular before they have time to change it into their preferred currency. The price paid will also include a premium to cover the cost of exchange.
Thus some currencies are 'strong' (i.e. sufficiently popular to be used in international trade) and others are not. So people whose usual currency is not rated as a world trading currency must exchange enough of their unpopular currency into units of a popular currency to pay for the goods and services they buy on the global market. The relative values of the world's currencies are then determined by the 'rates of exchange' currently available when one currency is exchanged for another. This is, in general, a reflection of the relative popularity of the currencies in question and this popularity is, in turn, a reflection of the confidence that the average holder of a currency has that it will maintain (or increase) its value over time. The value of any single currency therefore varies with the psychological mood of its users and is essentially a question of confidence. Thus there are always plenty of 'confidence tricksters' around who will attempt to 'talk' the value of a currency up or down to serve their own interests at your expense.
The following paragraphs are therefore offered as a form of serum which you may use to innocculate yourself against the wiles of the enemy.
When I was last in Germany (in 1969), the pound would buy 10 DM; it now buys only a liitle more than 3. I don't recall hearing German industrialists in the intervening period complaining about the strengthening Deutsche Mark; they were happy to accept it for what it was — a universal vote of confidence in the German economy and the quality of its products. Why can the British not be equally confident and enterprising?
When British exporters to Europe complain that the price of their goods in Euros is not enough to produce a decent profit when they translate it back into the pounds with which they pay their workers, they refrain from mentioning that goods and services imported from Europe are that much cheaper when the price in Euros is translated into relatively 'less weak' pounds. So British manufacturers currently seeking a market for their products would do well to look anywhere but Europe. There is a wide world outside the EU in which English is the language of business, and where British exporters should therefore have an advantage over their EU competitors. They could ramp up their profits by buying raw materials cheaply in Europe and selling their finished goods to the rest of the world.
So I have no sympathy with the bleaters. With few exceptions, they are greedy lazy people looking for a swift and easy profit by debasing the currency, careless of the fact that devaluation shrinks the value of the wages, pensions and savings of the rest of us. Something like 70% of British business is done internally and involves no foreign exchange. Of the remaining 30%, only about half represents trade with the countries of the EU. So those government ministers and journalists who attempt to talk down the value of an already weak pound at the behest of a small but vocal minority should take a wider and wiser view. Price is only a secondary factor in making sales; customer confidence in the quality of the product and everything that goes with it (such as attention to detail, timeliness, and after-sales service) is far more important.
A strong currency benefits all the citizens of a country by way of stable prices, low interest rates, and the respect of foreigners. It would be folly to think otherwise.
An inevitable consequence of this political lunacy is a catastrophic reduction in the number of individuals successfully setting up in business. Business startups have always been risky. Even in the 'good' times, most start-ups failed within three years. The arbitrary obstacles now placed in the way of small business will not only reduce the number of startups but also increase the proportion of failures. The seed corn is being carelessly thrown away. The smaller businesses which initially employ people in ones and twos are in the long run far more important to the economy than the large corporations which lay off hundreds of workers at a time. It requires lots of small businesses to soak up the labour shed by one giant.
Without a constant growth of healthy new business, the nation's health and wealth will inevitably decline. Even large corporations do not last for ever. When profitability declines, they lay off employees or move their operations to places where labour is cheap and regulations are few. No wonder the pound is weak — and getting weaker!
This aspiration may be too idealistic, and I am not certain it would be practically possible. But I note that one often-quoted index for the value of the pound is that against 'a trade-weighted basket of currencies'. Might it not be possible for whatever constitutes the 'basket of currencies' to become a currency in its own right and be used as a mediator in all international transactions. This would simplify world trade and reduce both the costs and the risks of currency exchange. It would also help to dampen the inflationary tendencies of politicians because the level of international confidence in a 'basket-case' currency would quickly become obvious to everybody.
Some people might think the U would just be a wider application of the Euro. This would be a misunderstanding. The Euro was invented by politicians merely in order to give some illusion of unity to a European 'Union' whose peoples are far from united. The global market has already demonstrated that the Euro does not inspire confidence. The U, on the other hand, would be strictly non-political. Its value would never change. It would be a standard of comparison for all national (and therefore 'political') currencies. It would be administered by cold-blooded, disinterested administrators with computers which would output from minute to minute the moving average value in U of all other currencies traded during the preceding period.
Other essays on this site with a bearing on the currency theme are listed at the top of this essay.