27: Currency and Banks
Much has been written about currency that the principles of it are well understood, though Ricardo will provide "a brief survey" of factors that affect its quantity and value. (EN: I'm going to skip some of the self-evident bits.)
Like all other commodities, precious metals are valuable in proportion to the labor necessary to produce them and the demand of them. But unlike most other commodities it is not wanted for consumption, merely for its value as a token of exchange for other goods. And except in rare instances, it is not destroyed by its use, but remains in circulation indefinitely.
Coins of metal are value more than metal of the same weight where a state charges seignorage for issuing coins, by the amount of seignorage charged. (EN: This is often accepted as given, but it applies only to those who are willing to "buy" coins for metal, and it has been suggested that the coin is not worth more than metal, but that any loose piece of metal is devalued due to having no representation of its purity and weight. Probably splitting hairs, but it's an interesting contrast that explains the attraction of coined metal over any other piece.)
Paper money has value insofar as it can be exchanged form metal, and a coin may be worth more than its weight on the same principle - even a worn coin can be exchanged for a fixed amount of metal, according to its denomination.
Ricardo notes that "currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent" and "it is of no importance whether the issuers of this well regulated paper money be the government or a bank."
Once independent banking had been established, the State lost or ceded its sole power of issuing money. It is reasoned that a bank would be less likely to debase its currency, both in its own business interests and because its being subject to the law, than would be the state, which acts at a whim and is subject to no other authority.
However, the state did not cede or lose the ability to issue itself credit, backed by paper, without yet having the metal to redeem it. The state's power to issue money is limited only by the willingness of individuals to accept it in trade. (EN: the state may wish it so, but such desires are ultimately unenforceable.) The state's restraint in abusing currency facilitates adoption and acceptance.
Debasement of currency arises from doubt of its redemption. A note representing a pound of silver, which can be exchanged at the central bank for a pound of silver, is only deemed worth less than a pound if there is some doubt it can be redeemed - i.e., that the State has in its stores sufficient metal to redeem the currency it has issued.
However, the increase in price of goods does not necessarily represent a belief that paper money cannot be redeemed, but the scarcity of goods exchanged for metal, given the abundance of metal on which the paper money is based.
The disadvantage of paper money in borrowing is that one may loan what one does not have. That is, in order to give loan of ten pounds of physical silver, one must have the silver to give to the borrower. To grant another person a note representing ten pounds of silver, one need not have any silver presently, but merely the capacity to redeem the note in future. This carries with it the potential to create a note that will be accepted, but that one cannot redeem (intentionally or by circumstance).
There is some consideration of interest rates, particularly in that the expense of interest when one borrows to produce is ultimately reflected in higher prices to the consumer, as the revenue of product sales must cover the additional expense of borrowing. But that is not to say that interest necessarily increases prices - it increase or decreases production, as the producer must consider his profit to determine whether he can pay interest.
Also, there is some tendency to favor certain producers in the discrimination of interest rates among borrowers - in that those who are already wealthy and successful gain additional advantage, as their greater capacity to repay grants them access to more credit, at a lower rate, than smaller and less successful borrowers.
The production of a nation depends on the goods that deliver economic benefit (necessities and conveniences of life), which are not at all impacted by the amount of money in circulation. A farm produces no more crop, nor a forest more timber, because there is more or less money in circulation.
Neither is the prosperity of a people dependent on the volume of money. When there is more money in circulation, a higher price is paid for goods. When there is less money in circulation, goods cost less. Ultimately, each trader in the market gives and receives the same amount of goods, and the same economic benefit.
There is some mention of the interplay between gold and silver, as they have been used as the basis of currency, sometimes within the very same market. Because the ratio by which one is exchanged for the other fluctuates in the open market, there is some conflict among buyers and sellers when a given denomination is backed by a specific amount of one or the other and the exchange rate between the two has changed. There's a bit more history on the use of gold and/or silver over time, but this is entirely academic and largely moot.
There's also an odd reference to coins that are made of multiple metals, and the incorrect suggestion that the value of the most precious metal regulates the value of the whole coin. People may choose to ignore the value of lesser metals in the coin, but it is a subjective decision and not a "law."