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Abstract
The orthodox view on Ricardo’s monetary theory is that it inconsistently mixes a commodity-theory of money and a quantity-theory of money. One aim of the paper is at discarding this view and at suggesting another, based on Ricardo’s distinction between a position in which money “conforms” to the standard and positions in which money depreciates or appreciates because its quantity is inadequate. The paper also shows that, in spite of differences on particular points, the basic aspects of this approach are shared by other scholars, so that one may speak of an unorthodox view on Ricardo’s theory of money.
Acknowledgements
I thank Carlo Benetti, Jean Cartelier, Maria Cristina Marcuzzo, Annalisa Rosselli, and Susumu Takenaga for their comments on a first version of the paper. Kevin Hoover, Nathalie Sigot and two anonymous referees made useful suggestions on a second version. The usual disclaimer applies.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Incidentally, it appears thus meaningless to contend that Ricardo abstracts from money in his theory of value and distribution, as if a monetary economy behaved like a barter one. Assuming that the value of money is constant does not amount to assuming that money is absent.
2 A variant substitutes a change in the market rate of interest for the real-balance effect. In the line of Panico (Citation1988), an increase in the quantity of notes sinks the market rate of interest which stimulates the aggregate demand for commodities and consequently raises the general price level (for example, see Davis Citation2005; King Citation2013). In this approach, money is non-neutral in respect to aggregate output in the short run.
3 Benetti and Cartelier (Citation2020) recently suggested that, within the Classical tradition, an increase in the quantity of money might also directly induce a rise in the money prices of all commodities (except the standard), but in a non-homothetic way. This implies that money is non-neutral in respect to the system of relative prices and requires a specific theory of the determination of market prices derived from Cantillon (Citation1755).
4 For a demonstration that (a) implies (b) see Deleplace (Citation2017, 94–97) and that (a) and (b) imply (c) ibid., 245–247.
5 This equation appears for the first time in Deleplace (Citation2008, 26). An equation linking the purchasing power of money over commodities, its purchasing power over gold, and the relative price of gold in terms of commodities may be found in Marcuzzo and Rosselli (Citation1994b, 1254) and Sato (Citation2013, 56). However, the interpretation of this equation is different from that of the Money-Standard Equation (see Deleplace Citation2017, 126 n 5).
6 During the debates in 1819–1823 about the resumption of convertibility, Ricardo used this argument to advocate his “Ingot plan” of convertibility into bullion and to blame the Bank of England for having purchased huge quantities of gold in the perspective of a return to convertibility into coin.
7 “May not gold be considered as a commodity produced with such proportions of the two kinds of capital as approach nearest to the average quantity employed in the production of most commodities ? May not these proportions be so nearly equally distant from the two extremes, the one where little fixed capital is used, the other where little labour is employed, as to form a just mean between them?” (Ricardo, Citation1821, 45–46)
8 “As the standard of currency and the standard of value, gold serves two distinct purposes. As standard of currency it measures only depreciation. If the standard of the currency has an invariant value, it is also a measure of value. [But such an assumption] should not be allowed to obscure the fact that the function of gold as a monetary standard is independent of its function as a measure of value.” (Marcuzzo and Rosselli Citation1991, 49–50) “The concept of standard of value is completely different from the concept of standard of money, and it is useless in Ricardo’s monetary theory; no standard [of value] can provide the link between his theory of value and his theory of money.” (Deleplace Citation1994, 104)
9 “The conception of a standard measure of value as a medium between two extremes (§ 17 ff.) also belongs to Ricardo and […] the Standard commodity […] has been evolved from it.” (Sraffa Citation1960, 94)
10 “In the absence of the assumption that the standard is an invariable measure of value or of a theory which tells us which commodity to choose as standard, the virtues of having a monetary standard vanish and the price to pay in order to constrain the behavior of the monetary authorities become indeed high.” (Marcuzzo and Rosselli Citation1994a, 30)
11 “If the monetary situation around the year 1820 can be interpreted like this, the general fall in price observed at that time was due to the rise in the market price of gold rather than to its rise in value, though Ricardo talks always about rise in the value of gold. […] We can now conclude that, in the light of his theory of value elaborated in Principles, the variations in the value of gold discussed in his mature economic writings after 1815 were actually variations in its market price and besides unilaterally upward variations.” (Takenaga Citation2018, 182)
12 Takenaga’s suggestion that when Ricardo analysed the situation in England in 1819–1821 he unduly spoke of a rise in the value of gold in lieu of a rise in its market price is contradictory with Ricardo’s emphasis on the fact that while the value of gold rose (as a consequence of production at higher cost to answer the demand by the Bank of England for coining) its market price actually fell (as a consequence of the contraction of the note issue by the Bank of England). According to Ricardo’s estimation, the combined effect of a 5 per cent rise in the value of gold and a 5 per cent fall in its price was a rise of 10 per cent in the value of the pound sterling, as may be predicted by equation (2) above (the Money-Standard Equation).
13 It is interesting to note that, in the 19th century prior to the 1870s, international bimetallism was the ruling monetary order, with three zones respectively on a gold standard, a silver standard, and a bimetallic standard. It is even recognised today that this international monetary system provided greater price stability than the generalised gold standard by which it was succeeded. See for example Boyer-Xambeu, Deleplace, Gillard (Citation1997, Citation2013).
14 In the only place (Chapter XIII “Taxes on Gold”) in Principles where Ricardo studied in details the effects of changes in the conditions of production of gold, he explicitly considered what happened “if gold were the produce of one country only, and it were used universally for money.” (Ricardo Citation1821, 194) Supposing a tax on gold levied by the King of Spain, he described with a numerical example its effects on Spanish American colonies and on Europe, since for gold “its market value in Europe is ultimately regulated by its natural value in Spanish America.” (ibid., 195) For an analysis of this case see Deleplace (Citation2017, 201–211), and ibid., 180–191 for its extension to the effects of the discovery of a new mine or of a new extraction technique.
15 It should be observed that in the Bullion Essays of 1810–1811 Ricardo did not distinguish between these two adjustment processes, as testified by the famous image of a gold mine being discovered on the premises of the Bank of England to suggest that issuing an additional quantity of notes had the same effect as increasing the quantity of gold produced. At the time of the Bullion Essays, Ricardo had still a conception of the value of commodities (hence of gold bullion) based on cost of production and scarcity, so that increasing the quantity of gold had the same effect on the value of gold-money as increasing the quantity of notes had on the value of paper money. This confusion disappeared in Principles, where the analogy does not show up any longer.
16 In contrast with the price-specie flow mechanism, the adjustment in international trade was not for Ricardo the engine of the restoration of the exchange but the consequence of arbitrage between the market for gold bullion and the market for bills of exchange: in case of redundancy of currency, gold bullion was exported first, and the import of foreign goods followed (see Deleplace Citation2017, 303–310). This explains Ricardo’s often misunderstood claim that the export of gold did not pay for a previously existing foreign balance against England, but was the condition – itself explained by the depreciation of the currency – for imports of other commodities being greater than their exports.
17 Already in his first pamphlet The High Price of Bullion, A Proof of the Depreciation of Bank Notes, Ricardo criticised the view that after an increase in the quantity of notes the market price of bullion would eventually rise as much as all other prices. On the contrary, according to him, the additional supply of bullion was “increasing the bullion price of commodities. It is only in consequence of this fall in the value of the metallic currency, and of bullion, that the temptation to export them arises.” (Ricardo Citation1810–1811, 64; R’s emphasis) Developing this critique in Edition 3 of the pamphlet (but not later in Edition 4) he was even clearer: “The fall in the exchange, or the unfavourable balance of trade, is stated to be the cause of the excess of the market above the mint price of gold, but to me it appears to be the effect of such excess.” (ibid; R’s emphasis) This was echoed nine years later during the debate on the resumption of convertibility: “It appears to me, that the balance of payments is frequently the effect of the situation of our currency, and not the cause.” (Evidence of 4 March 1819, in Ricardo Citation1952, 395)
18 Contrary to all other agents who could obtain gold against notes from the Bank at the mint price, the Bank of England was forced to buy it dearer in the market if it wished to replenish its gold reserve. It thus provided arbitragers with counterparty in the bullion market.
19 The Ingot Plan was outlined in the Appendix to the fourth edition (1811) of The High Price of Bullion, A Proof of the Depreciation of Bank Notes, developed in Proposals for an Economical and Secure Currency (1816), reiterated in On the Principles of Political Economy, and Taxation (1817–1821) which even quoted in its 2nd and 3rd editions four full pages of Proposals, and defended with temporary success by Ricardo during the parliamentary debates on the return to cash payments (convertibility into bullion was adopted between 1819 and 1821). In his Plan for the Establishment of a National Bank, published posthumously in 1824, Ricardo advocated a note issued by a public bank and stepped back for it to convertibility into coin, but he introduced an “expedient” provision according to which the bank was compelled to sell gold bullion 1½ penny below the mint price at which it gave the coin for its note. This was a weaker version of the ingot principle, since, contrary to the Ingot Plan, holders of notes had now the choice between convertibility into coin and into bullion.
20 This explains Ricardo’s opposition not only to inconvertibility but also to the double standard of money (gold and silver), as shown in Deleplace, Depoortère, and Rieucau (Citation2013).
21 See for example: “A special place must be attributed to Ricardo as regards monetary policy, because he did not advocate either a money-base control, or a monetary policy on interest rates. His recommendation was a certain degree of flexibility, with new instruments and no discretionary policy.” (Diatkine Citation2013, 142) “All in all, in sharp contradistinction to the old interpretations, the author [Sato] shows that Ricardo was neither a simple quantity theorist nor an adherent of the rule-based policy, but in fact advocated the flexible combination of rules and discretion in monetary policy and central banking.” (Sato and Takenaga Citation2013, 8)