2 Ricardo’s battles on currency and banks
I expect to be the object of much personal attack next session [of The House of Commons] but I comfort myself with the reflection that truth will prevail at last, and justice will in the end be done to my motives and opinions.
(Letter from Paris to Osman and Harriet Ricardo, 23 November 1822; X: 349)
Not only was money what made Ricardo become an economist, but it shaped him as an economist committed to the debates of the time. As Piero Sraffa wrote in 1951 in his “Note on the Bullion Essays”:
Ricardo’s first appearance in print marked the beginning of what came to be known as the Bullion Controversy. It took the shape of an anonymous article on The Price of Gold published in the Morning Chronicle of 29 August 1809.
(Sraffa 1951c: 3)
This sentence emphasises two striking aspects of Ricardo’s first monetary writing. On the one hand, it was the first time Ricardo expressed himself publicly (albeit anonymously), although he was at the time already aged 37 and had engaged for long in extensive business transactions as a jobber and a loan contractor, that is, a financial intermediary specialised in government funds. On the other hand, this article, together with two further published letters and Ricardo’s 1810 pamphlet The High Price of Bullion, a Proof of the Depreciation of Bank Notes launched the so-called Bullion Controversy which culminated with the report of the Bullion Committee, appointed in 1810 by the House of Commons. Thus Ricardo’s first publications on money gained him immediate recognition as a major figure in the economic debates of the time.
What Sraffa calls “the Bullion Essays” of 1809‒1811 would remain the only works by Ricardo during four more years, until he published in 1815 An Essay on the Influence of a Low Price of Corn on the Profits of Stock. Again, during the interval that separated this essay from his 1817 masterpiece On the Principles of Political Economy, and Taxation, Ricardo published (in 1816) a new monetary pamphlet, Proposals for an Economical and Secure Currency, where he suggested a plan which he would later defend in Parliament. His last pamphlet, Plan for the Establishment of a National Bank, published posthumously in 1824, was also a monetary one. All in all, around one half of Ricardo’s published writings are on money, and they all aimed at influencing, in a controversial but also constructive tone, the debates of his time. Not only was Ricardo a great monetary economist but he battled a lot to criticise others’ views on currency and banks and to persuade his contemporaries of the beneficial practical consequences of his own views. He himself used the term “battle” and the war rhetoric in a letter to Hutches Trower on 28 May 1819 after his Ingot Plan had been adopted by the House of Commons:
The feeble resistance, in point of argument, of the Bank Directors, was easily overcome. I had the courage to set myself foremost in the battle, and was amply rewarded by the support of the House, which enabled me to get to the end of my speech without any great degree of fear or trepidation. I hope that during the next fortnight we shall give the death blow to the theory of an abstract pound sterling.
(VIII: 31‒2)
During the 14 years when Ricardo wrote on money, two main periods may be distinguished. The first one covers “the Bullion Essays” of 1809‒1811. The issue was then first to understand an unprecedented situation in which metallic currency had nearly disappeared, the only circulating medium being the Bank of England note that was inconvertible since 1797, and second to explain why this had resulted in a fall in the value of the pound sterling. Ricardo’s tone was mainly critical (particularly of the Bank of England), although the last writing of that period contained a scheme for a new monetary system. The second period runs from 1816 to Ricardo’s death in 1823. The end of the Napoleonic Wars opened up the possibility of a return to a normal (that is, with convertibility of the Bank of England note) monetary system, and Ricardo’s aim was at showing that one should not just revert to the pre-1797 situation, but change it substantially. He successively advocated two plans, one in 1816 that was based on the convertibility of the Bank of England note into bullion (the Ingot Plan) and one in 1823 that was based on the substitution of a public bank for the Bank of England as sole issuer of bank notes (the Plan for a national bank). Although Ricardo won in 1819 the approval of Parliament for his first plan, the return to convertibility at pre-war parity actually took place in 1821 along the pre-1797 lines, and this led Ricardo to develop his second plan, which remained unsuccessful because of his death in 1823.
The present chapter deals successively with these two periods and exposes in each Ricardo’s positions in the context of the controversy in which he took part.1
2.1 Ricardo and the Bullion Controversy (1809‒1811)
The second round of the Bullionist Controversy
After a five-year remission, the fall in the value of the pound resumed in 1809, to reach 20 per cent in March 1810 (the market price of gold being £4. 13s. 7d., as compared with the legal mint price of £3. 17s. 10½d.). This was the time of the “Bullion Controversy”, launched by Ricardo and marked by the Bullion Report laid before the House of Commons on 8 June 1810. This report explained the fall in the value of the pound by the excess issue of Bank of England notes and suggested contraction of the issue and return to convertibility as remedies. This suggestion was turned down by Parliament, and the matter remained unsettled, although the fall in the value of the pound was aggravated (with a maximum of 50 per cent in November 1813).
The Bullion Report
As mentioned above, the Bullion Controversy – the second round that marked the climax of the Bullionist Controversy – started with the publication of Ricardo’s letter in the Morning Chronicle of 29 August 1809 (reproduced in Ricardo 1809). The responsibility of Ricardo in the launching of this controversy has been acknowledged not only by Sraffa: it was recognised by major participants in the debate. Francis Horner, who would be the chairman of the Bullion Committee, wrote on 16 July 1810 a letter to the editor of the Edinburgh Review which read:
I will do a short article for you this time, to do justice to Mr Ricardo and Mr Mushet, who called the public attention to this very important subject at the end of last year.
(quoted in Sraffa 1951c: 9‒10)
Charles Bosanquet, whose pamphlet “was regarded at the time as the most effective of the criticisms published on the Bullion Report” (ibid: 10), attacked
Mr Ricardo’s work, not only as having been the immediate cause of the inquiry which has since taken place, under the authority of the house of commons, but as a syllabus of the Report which has been presented by the Committee.
(ibid)
After two more letters to the Morning Chronicle, Ricardo expanded his views in his first book, published on 3 January 1810. The title of this pamphlet – The High Price of Bullion, a Proof of the Depreciation of Bank Notes – summed-up Ricardo’s main argument: the Bank of England note was depreciated, as proved by the high price of gold bullion and the low exchange of the pound, and this depreciation was entirely due to its excess issue. On 1 February, Francis Horner delivered before the House of Commons a speech calling attention to the necessity of inquiring about these phenomena. On 19 February a committee composed of 22 members of the House of Commons was appointed, and until May it took evidence from numerous specialists. Its report was co-authored by Francis Horner, William Huskisson, and Henry Thornton; it stressed the excess note issue by the Bank of England and recommended the resumption of note convertibility within two years. The Bullion Report was laid before the House of Commons on 8 June 1810 and described in a private letter by the chairman of the committee, Francis Horner, as follows:
The Report is in truth very clumsily and prolixly drawn; stating nothing but very old doctrines on the subject it treats of, and stating them in a more imperfect form than they have frequently appeared in before. It is a motley composition by Huskisson, Thornton, and myself; each having written parts which are tacked together without any care to give them an uniform style or a very exact connection. One great merit the Report, however, possesses; that it declares, in very plain and pointed terms, both the true doctrine and the existence of a great evil growing out of the neglect of that doctrine. By keeping up the discussion, which I mean to do, and by forcing it on the attention of Parliament, we shall in time (I trust) effect the restoration of the old and only safe system.
(quoted in Cannan 1919: xxii)
The publication of the Bullion Report on 13 August 1810 initiated three favourable new letters of Ricardo to the Morning Chronicle, and many pamphlets, either supporting the report – such as William Huskisson’s The Question Concerning the Depreciation of our Currency Stated and Examined – or attacking it – such as Charles Bosanquet’s Practical Observations on the Report of the Bullion Committee, criticised by Ricardo in his Reply to Mr. Bosanquet’s Practical Observations on the Bullion Report. In February 1811 Robert Malthus published in the Edinburgh Review an article discussing six of these pamphlets, including those of Huskisson, Bosanquet, and Ricardo; he defended a moderate bullionist position (Malthus 1811). In April a fourth edition of Ricardo’s High Price was published, with an “Appendix” containing observations on Malthus’s article and an outline of a plan for note convertibility into bullion instead of specie (to be later developed in his Proposals for an Economical and Secure Currency of 1816).
After the Bullion Report had been laid before the House of Commons, it took Francis Horner nearly one year to obtain a debate on it in a plenary session of the House. The resolutions discussed from 6 to 15 May 1811 summed-up the bullionist and anti-bullionist positions. Horner moved sixteen resolutions embodying the conclusions of the report; two of them were particularly important. The 14th stated a note-issuing rule to be applied as long as inconvertibility was maintained:
During the continuance of the suspension of Cash Payments, it is the duty of the Directors of the Bank of England to advert to the state of the Foreign Exchanges, as well as to the price of Bullion, with a view to regulate the amount of their Issues.
(Cannan 1919, Second Part: 9)
Horner’s 16th resolution read as follows:
In order to revert gradually to this Security [provided by convertibility] and to enforce meanwhile a due Limitation of the Paper of the Bank of England as well as of all the other Bank Paper of the Country, it is expedient to amend the Act which suspends the Cash Payments of the Bank, by altering the time, till which the Suspension shall continue, from Six Months after the Ratification of a Definitive Treaty of Peace, to that of Two Years from the present Time.
(ibid: 10)
This was a complete change of view from what had been repeated by the successive Restriction Acts, because the resumption of convertibility would now occur whether after two years the war was at an end or not.
Another Member of Parliament, Nicholas Vansittart,2 moved seventeen counter-resolutions. The third read as follows:
The Promissory Notes of the said Company [the Bank of England] have hitherto been, and are at this time, held in public estimation to be equivalent to the legal Coin of the Realm, and generally accepted as such in all pecuniary transactions to which such Coin is lawfully applicable.
(ibid: 11‒12)
This amounted to rejecting the idea that the Bank of England note was depreciated.3 Consequently, the high price of bullion and the low exchange of the pound were entirely to be explained by the adverse foreign balance, as stated by the 15th counter-resolution:
The situation of this Kingdom, in respect of its political and commercial relations with foreign Countries, as above stated, is sufficient, without any change in the internal value of its Currency, to account for the unfavourable state of the foreign Exchanges, and for the high price of Bullion.
(ibid: 19)
Vansittart’s 17th counter-resolution repeated the term fixed by the last Restriction Act for the resumption of convertibility, that is, “six months after the conclusion of a Definitive Treaty of Peace” (ibid).
Although only one dissenting voice was heard among the 22 members of the Bullion Committee during the plenary debate in the House of Commons, Horner’s 15 first resolutions were rejected by the 226 Members of the House by a majority of two-thirds, the last one (on the resumption of convertibility) by a majority of four-fifths. This negative vote was confirmed by the adoption of Vansittart’s counter-resolutions by a majority of two-thirds. This was a defeat for the Bullionists, both on the diagnosis – the depreciation of the Bank of England note due to its overissue – and the remedies – the note-issuing rule and the resumption of convertibility. Eight more years would be needed to resurrect the debate in Parliament.
Before moving to that third round of the Bullionist Controversy, we should pay attention to the arguments of the two major authoritative figures supporting the Bullion Report, Henry Thornton and David Ricardo. In spite of their defeat in 1811, they would have a lasting influence on monetary theory and policy.
Another Thornton?
Thornton delivered two speeches during the 1811 debate in Parliament, one supporting Horner’s resolutions, the other criticising Vansittart’s counter-resolutions. At the beginning of the first, Thornton emphasised that “the main point at this moment in issue” was not the resumption of cash payments but the note-issuing rule to be adopted by the Bank of England:
That main point was, not whether the Bank should open at any particular time, or any change be made as to the law in this respect, which would be a second consideration; but whether with a view to facilitate such opening if it should be prescribed, or with a view to secure the due maintenance of our standard during the long continuance of the restriction of cash payments, if the continuance should be deemed advisable, it was or was not expedient that the Bank should regulate the issues of its paper with a reference to the price of Bullion, and the state of the Exchanges. The Bank and the Bullion Committee were at variance on this leading and essential point.
(Thornton 1811: 327)
As testified by this quotation, the note-issuing rule advocated by Thornton should apply in convertibility and inconvertibility as well, and in both cases implied the rejection of discretionary monetary policies.
In his second speech, Thornton refuted the interpretation of Locke given by the Governor of the Bank of England, according to which the export of bullion was always a consequence of an adverse balance of trade, a circumstance on which the Bank of England could have no influence. Thornton underlined that “Mr. Locke, therefore, refers to either of two causes the disappearance of coin” (ibid: 352), the other cause being that “two kinds of circulating medium, if of different value, cannot long continue to pass interchangeably” (ibid), a principle that also applied to the coexistence of specie and depreciated bank notes and pointed to the responsibility of the Bank of England – whose excess issue was the cause of that depreciation – in the export of bullion. And Thornton added:
Still, however, the language of Mr. Locke was certainly inaccurate, when he said, that the ‘coming and going of our treasure depends wholly on the balance of our trade,’ and served to countenance that dangerous doctrine which now prevailed. According to this doctrine, the fact of the disappearance of our guineas attended with the highest imaginable price of gold, was no indication of an excess of paper or of a depreciation of it, but was simply an evidence of an unfavourable balance of trade; and the only remedy was generally to promote national industry and oeconomy. It might, indeed, be imagined by some, that according to this view of the subject, even additional issues of paper would operate as a remedy; for it might be said that an increased emission of it tended to encourage manufactures, an augmented quantity of manufactures supplied the means of enlarging our exports, and more extended exports improved the balance of trade; and thus an increased issue of paper might be assumed to be the means of rectifying the exchange, instead of prejudicing it. […] It was an error to which he himself [Thornton] had once inclined, but he had stood corrected after a fuller consideration of the subject. […] The utmost admission which he was disposed to make was, that in proceeding to limit our paper with a view to the improvement of the exchange, we ought to avoid that severity of pressure by which manufacturing industry might be seriously interrupted.
(ibid: 352‒3)
The contraction of the note issue was then (in 1811) the appropriate remedy, as it should already have been in 1802, contrary to what Thornton maintained at the time – “an error to which he himself had once inclined”:
Our coin had for the most part left us in 1801. The state of our trade and foreign expenditure seemed not likely to improve materially. The exchange could not be corrected, as heretofore, by the transmission of specie. The cautious limitation of our paper was, therefore, a principle to which every consideration of prudence should lead us to resort.
(ibid: 354)
This “error” – having overlooked in 1802 the consequences of the fact that coins were no longer present in domestic circulation – was thus not to have rejected the bullionist argument that the exportation of gold (when possible) was the solution to a disequilibrium – instead of its cause – but to have believed that, in the circumstances of the time (the want of specie in domestic circulation), this solution could still work. It was not a theoretical error – Paper Credit explicitly mentioned in 1802 that a contraction of the note issue was necessary when the disequilibrium was caused by its excess – but a factual one.
To conclude on Thornton, the nature of the monetary system – convertibility or inconvertibility – does not seem to be the right key to evaluate the consistency of his positions in 1802 and 1811. In the first as in the second rounds of the Bullionist controversy, the question of the return to convertibility was for Thornton of secondary importance. Central in his positions was his analysis of the causes of and remedies to monetary disequilibrium. As to the former, Thornton affirmed that they might be two, exogenous or endogenous to the monetary system, and as to the latter he advocated discretion or the note-issuing rule, according to the particular cause of disequilibrium.
David Ricardo opposed the first statement: for him there could be only one cause of monetary disequilibrium, an excess issue of notes. For general reasons, he thus defended the same note-issuing rule as that advocated by Thornton in the circumstances of the time: a contraction motivated by the high price of bullion and the low exchange of the pound. Hence both authors converged in the defence of the Bullion Report.
The main writing by Ricardo during that period was The High Price of Bullion, a Proof of the Depreciation of Bank Notes, published in early January 1810 and republished three times, the fourth edition of April 1811 being complemented with an Appendix. Together with three letters previously published in the Morning Chronicle in 1809, this pamphlet launched the debate that led to the Bullion Report. Three other letters published in the same newspaper in 1810, and the pamphlet Reply to Mr. Bosanquet’s Practical Observations on the Report of the Bullion Committee, of January 1811, were a defence of that report.4
The focus of the Bullion Controversy was on the causes of the fall in the value of the pound. The starting point of Ricardo was the established fact of a high price of gold bullion in pound sterling, that is, a market price above the legal price of gold in coin (£3. 17s. 10½d. an ounce of standard gold). In other words, the current value of the pound in terms of gold taken as the standard was below its legal one. What did that fact reflect? In Ricardo’s terms, of what was it “a proof”? The market price of bullion being a money price, its high level could mean that gold was “high” or that money was “low”. In the first case, it was a proof of something happening on the side of gold and affecting the relation between the supply of and the demand for gold in the market, independently of money. In the second case, it was a proof of something happening on the side of money: its depreciation, measured by the spread between the market price of gold bullion and the legal price of gold in coin. Then the first task of Ricardo was to distinguish between these two cases. According to Ricardo, the distinction between them was usually obscured by confusion between the value and the price of gold:
The error of this [Thornton’s] reasoning proceeds from not distinguishing between an increase in the value of gold, and an increase in its money price.
(High Price; III: 60)
This confusion would always be a matter of recurrent complaint by Ricardo, together with the related confusion between a fall in the value of money and its depreciation, and he tried to dispel both in his later writings (see Chapter 4 below).
The distinction between two possible causes of the high price of gold bullion was at the heart of the Bullion Controversy and of Ricardo’s contributions to it. First Ricardo rejected the explanation by an adverse foreign balance; second he explained the high price of bullion by the depreciation of the inconvertible bank notes. He finally suggested remedies.
Ricardo’s rejection of the explanation by an adverse foreign balance
In the case of a diagnosis that gold was “high”, one had to look for the (real) factors affecting the relation between the supply of and the demand for it. Here another established fact should be considered: the fall in the exchange rate of the pound. A great part of the Reply to Bosanquet was devoted to a discussion of the amount of this fall. In contrast with the internal depreciation of the currency, which might be precisely measured by the spread between two observable magnitudes (the market price of gold bullion and the legal price of gold in coin), the external depreciation (the amount by which the exchange was “against” England) was harder to compute, because it was measured by the spread between an observed magnitude (the quoted exchange rate of the pound in terms of a chosen foreign currency) and a computed one (the par of exchange on the coins). In the case of the exchange with Hamburg – the other important centre in Europe, in addition to Paris – the computation of the par was all the more complicated since the pound was on a de facto gold standard and the Mark banco was on a de jure silver standard (see Appendix 1 above).
The fall in the exchange rate of the pound disqualified any factor operating at the world level (for example, a decline in gold production), since in that case the exchange rate would have been left unchanged. In the absence of an observed increase in the domestic demand for gold, there remained one candidate only: the demand for export, generated by an adverse foreign balance of England. This had been well-known for long: in such a case (whatever the reason of the adverse balance), the demand for bills of exchange denominated in foreign currencies was higher than the demand for bills denominated in pounds, and the exchange rate of the pound declined. When it reached the export bullion point, gold was demanded in London for export and its price moved upward.
The first question raised by Ricardo was thus: did the adverse foreign balance, independently of any monetary disorder, account for the high price of bullion? Thornton in his 1802 book had recognised this possibility, which, according to him, explained the crisis of 1793‒1797 and the fall of the exchange in 1800‒1802. Was it happening again? The answer by Ricardo, as early as his first 1809 article and in all his subsequent writings, was that not only did this not happen in the circumstances of the time, but it could never happen. An adverse foreign balance was necessarily a consequence of the depreciation of the currency, never its cause.5
The reason for that was the following. In normal conditions (that is, a monetary system with metallic coins and convertible bank notes, as before 1797), the fall of the exchange rate would stop at the export bullion point, computed on the basis of the legal price of gold (obtained from the Bank of England against notes) and the cost of its transportation abroad – this was the so-called “gold-points mechanism”. The export of gold would then correct the balance, since gold was a commodity like any other, and its export would continue until it stopped the fall of the exchange rate.6 But, in the conditions of the time, when bank notes had ceased to be convertible and consequently gold could not be obtained from the Bank of England at the legal price, exportable gold was only to be found in the market, and the cost of its export now also included the spread between the market price of gold bullion and the legal price of gold in coin, that is, the depreciation of the currency. The gold-points mechanism still operated (as in normal conditions), but the depreciation of the currency opened a greater margin of fall of the exchange rate:
While the circulating medium consists, therefore, of coin undebased, or of paper-money immediately exchangeable for undebased coin, the exchange can never be more above, or more below, par, than the expenses attending the transportation of the precious metals. But when it consists of a depreciated paper-money, it necessarily will fall according to the degree of the depreciation.
(ibid: 72)
The conclusion was clear-cut: the fall in the exchange rate of the pound was the consequence of the high price of gold bullion, not its cause. This disqualified the explanation of the fall in the value of the pound by autonomous real factors causing an adverse foreign balance; on the contrary the balance (gold excluded) was against England because her currency was depreciated. The explanation had to be found on the side of money.
Ricardo’s explanation by the depreciation of inconvertible paper money
Turning to money, a second question arose: which money was responsible for the high price of gold bullion? It could be metallic money (specie) or paper money (bank notes). In the first case, the state of the gold and/or silver coinage was at fault. Such a possibility had been debated at the end of the seventeenth century (at the time of the 1696 silver recoinage) and again in the 1760s (leading to the gold recoinage of 1774). Was it happening again? In the second case, bank notes were depreciated, and their excess issue was at fault. The suspension of convertibility and the behaviour of the issuing banks (the Bank of England and country banks) were then placed centre stage.
On this question Ricardo’s answer was again clear-cut: although he admitted that the state of the coinage could in general be responsible for the depreciation of the currency (this was the reason why Ricardo would advocate the complete substitution of bank notes for metallic coins), he denied it was the case in the conditions of the time. The general case was the following:
An excess in the market above the mint price of gold or silver bullion, may, whilst the coins of both metals are legal tender, and there is no prohibition against the coinage of either metal, be caused by a variation in the relative value of those metals; but an excess of the market above the mint price proceeding from this cause will be at once perceived by its affecting only the price of one of the metals. Thus gold would be at or below, while silver was above, its mint price, or silver at or below its mint price, whilst gold was above.
(ibid: 77)
This general possibility of the market price of one metal being above its legal one (signalling a depreciation of the currency in terms of that metal) explained why Ricardo was against bimetallism (ibid: 65‒6). But, as shown in the quotation, it required specific conditions to be verified. Two possible situations consistent with a high price of gold bullion might be considered. The first one, with coins of both metals being undebased (that is, their actual intrinsic content in each precious metal being the legal one), happened when, for whatever reason, the market ratio between the price of gold and the price of silver rose above the legal ratio. Nobody would then bring gold to the mint to be coined, because it was more advantageous to sell it in the market; as a consequence silver became the de facto standard. This situation, however, was contradicted by the conditions of the time, where the mint was closed to private agents for silver and the observed market price was above the legal one for both metals (and not only gold). This latter observation was consistent with a second situation, in which coins of one metal (or both) were debased;7 but this possibility was contradicted by the fact that debased coins were then restricted legal tender (up to £25). In the end, the depreciation of the currency could not be explained by the state of the coinage.
Therefore, as stated in the title of Ricardo’s 1810 pamphlet, “the high price of bullion” was entirely “a proof of the depreciation of bank notes”. More precisely, the Bank of England, no longer constrained by the convertibility of its notes, had overissued. It alone was at fault, because the circulation of its notes regulated that of the country banks:
The writer [Ricardo] proposes, from the admitted principles of political economy, to advance reasons, which, in his opinion, prove, that the paper-currency of this country has long been, and now is, at a considerable discount, proceeding from a superabundance in its quantity, and not from any want of confidence in the Bank of England, or from any doubts of their ability to fulfil their engagements.
(ibid: 51)
One should observe that, according to Ricardo, the ultimate cause of the observed monetary disorders was not the loss of confidence in the Bank of England note (a subjective element), but the excess of its quantity issued (an objective one). In the absence of convertibility, the issuing of notes could not be regulated; there was still a standard of the currency (gold) but it could not play its role of regulator of the quantity of money – hence of its value. This statement would be central in Ricardo’s later monetary theory.
Ricardo’s remedies
Having diagnosed that the disease of the pound was a monetary one, caused by an excess issue of Bank of England notes permitted by inconvertibility, Ricardo deduced the appropriate remedy: an immediate contraction of the note issue by the Bank of England:
The remedy which I propose for all the evils in our currency, is that the Bank [of England] should gradually decrease the amount of their notes in circulation until they shall have rendered the remainder of equal value with the coins which they represent, or, in other words, till the prices of gold and silver bullion shall be brought down to their mint price.
(ibid: 94)
This reduction in the market price of bullion would then allow resuming convertibility, without jeopardising the security of the Bank of England. The argument put forward by the opponents to such resumption, namely that it should be delayed until the foreign balance ceased to be against England, was then put upside down. As Ricardo had already written ironically in one of his 1809 letters:
What becomes then of the argument which has so often been urged in Parliament, that whilst the rate of exchange continued against us, it would not be safe for the Bank to pay in specie; when it is evident that their not paying in specie is the cause of the present low exchange.
(III: 20‒1)
These conclusions were in agreement with the Bullion Report. But Ricardo went further: the return to convertibility should not be done along pre-1797 lines; the monetary system had to be adapted to increase its security against future disorders. This was the aim of a plan sketched out as early as 1811 (in the Appendix to the fourth edition of High Price) and which would be at the heart of all his later monetary proposals.
2.2 Ricardo and the resumption of convertibility (1816‒1823)
The third round of the Bullionist Controversy
After the end of the war in 1815, a monetary reform took place in England in 1816 with the legal adoption of the gold standard. Until then England was legally on a bimetallic standard (gold and silver), although the golden guinea had been de facto the reference in domestic payments since the 1717 reform. The 1816 reform introduced a new golden coin (the sovereign) and made silver coins a token currency.
The return to convertibility seemed, however, still hazardous. In Proposals for an Economical and Secure Currency, Ricardo nevertheless published the same year a plan for a new monetary system, along the lines sketched in 1811. This Ingot Plan had two main aspects: on the one hand Bank of England notes were to be convertible into bullion and no longer into specie; on the other hand, the note issue should be regulated by the Bank of England according to the observed market price of bullion, the quantity of notes being expanded when this price was below the legal price at which notes could be obtained from the Bank against bullion, and contracted when this price was above the legal price at which bullion could be obtained from the Bank against notes.
The debates on the monetary system resumed in early 1819, two secret committees, one in the House of Commons and one in the House of Lords, being appointed “to consider the State of the Bank of England, with reference to the Expediency of the Resumption of Cash Payments at the period fixed by law, and into such other matters as are connected therewith” (quoted in Sraffa 1952b: 350). The committees took evidence from 24 witnesses between 8 February and 1 May; they issued their final reports on 6 and 7 May. On 26 May 1819, the House of Commons adopted the nine resolutions embodied in the report of its committee.
Four main questions
Four main interrelated questions were raised during these debates. First, should bank notes be made convertible again or should inconvertibility be prolonged? Second, if the resumption of note convertibility was decided, should it be into gold only or into gold and silver? Third, at which level should the legal price of the standard be fixed, the pre-1797 one or a higher one, to account for the past depreciation of the pound? And fourth, should notes be made convertible again into specie, or, according to Ricardo’s Ingot Plan, into bullion?
Only a small minority defended the maintenance of inconvertibility. As seen above, the debate between Bullionists and Anti-Bullionists at the time of the Bullion Report had been about the timing of the resumption, not its desirability. For example, Nicholas Vansittart, who in 1811 had defended the maintenance of the suspension until six months after the end of the war, was now, as Chancellor of the Exchequer, in favour of the resumption, more than three years having elapsed since Waterloo. The main impetus for advocating the maintenance of inconvertibility came from the disruptions provoked by the return to a peacetime economy. The two main sectors that suffered from this movement were those that had benefited from the war: agriculture, where high prices of the products had been sustained by the reduction of imports generated by the impediments to transportation by sea, and metalworking industries, which had boomed with the needs of the war. Since these post-war adjustments occurred simultaneously with the general deflation and the consequent contraction of the note issue, the blame was put on money by interests vested in these sectors. The Birmingham School, so designated after the city that was the centre of metalworking industries, was mainly represented by Thomas Attwood, who would develop until the 1840s a doctrine favourable to the management of an inconvertible currency (see Diatkine 1994), and his brother Matthias Attwood, who opposed the resumption in Parliament. The question of whether Thomas Attwood anticipated modern analysis of inconvertible money or was simply a crude inflationist has been much debated in the literature (see Fetter 1965).
On the question of the standard, the majority was also in favour of a single one, most of the discussion being on whether it should be gold or silver. For example, Ricardo had favoured silver in his 1816 Proposals because of its use as standard by most foreign countries, but he changed his view in favour of gold in 1819, because of the effects of machinery on the production of silver, hence on its value. The double standard (gold and silver) was, however, supported by one of the most powerful financiers in Europe, Alexander Baring.8 Before both committees he defended resumption at pre-war parity and Ricardo’s convertibility into bullion, but he dissented on the standard, arguing that:
Great Advantages would result to Commerce, and great general Facility in procuring a sufficient Abundance of the precious Metals, by not excluding either, and more especially not that Metal which forms the Standard of Value in almost every other Part of the World [silver].
(House of Lords 1819: 132)
Baring’s suggestion had, however, no echo in the final reports of the committees. With the general deflation spreading, Baring put it again forward on 8 February 1821 in the House of Commons when a petition of the citizens of Birmingham was discussed. Having observed that “A very considerable part of the distress, he was convinced, arose from the nature of the currency” (Hansard 1820‒1830, series 2, IV: 532), he asked for a committee to investigate the question and suggested:
The expediency of giving to the Bank the option of paying either in gold or silver, that the value of the two precious metals might be rendered more equal, and the present pound sterling, which was somewhat too high, relaxed. He wished to relax a cord which was at present stretched somewhat too tightly.
(ibid: 535)
This quotation shows that Baring had by then changed his mind about the advisability of the return to pre-war parity for the pound, and he now linked his double-standard proposal with an argument in favour of devaluation. But again he did not succeed: on 9 April 1821, his proposition to appoint a Select Committee to reconsider the 1819 Resumption of Cash Payments was defeated 141 to 27.9
Deflation versus devaluation
As was already clear in the discussions about the maintenance of inconvertibility or the question of the double standard, what was mainly at stake in the debate on the parity between the pound and gold was the alternative between deflation and devaluation. Advocates of deflation wished to re-establish the monetary system as it was before 1797, the only difference being the substitution of a de jure to a de facto gold standard. But in their eyes this implied the fulfilment of two conditions: a contraction of note circulation, in order to lower the market price of gold bullion to the pre-war mint price of £3. 17s. 10½d. per ounce standard; and the reconstitution of the gold reserves of the Bank of England, to respond to any possible drain on them. Both conditions were liable to increase the difficulties of a return to a peacetime economy, the former by creating liquidity crunches, the latter by exerting an upward pressure on the value of gold in terms of commodities (because of the demand by the Bank of England), hence aggravating deflation. The option of devaluation was symmetrical with that of deflation: by acknowledging that the twenty-year period of inconvertibility had produced consequences which could not easily be dispensed of, it made the resumption of convertibility easier. A mint price above £3. 17s. 10½d. implied less contraction of the note circulation and lower reserves of the Bank of England, but it hurt the interests of the creditors by diminishing the value of debts in terms of gold.
Ricardo had for long warned against the evils of depreciation and complained that they were underestimated:
No relief is ever afforded to those who suffer from a fall in the value of money, but every heart sympathizes with those who are losers by its rise.
(Letter to McCulloch, 9 June 1816; VII: 38)
One of these evils was a distributional effect, which favoured accumulation at the expense of the largest part of the population:
Depreciation of money may be beneficial because it generally favours that class who are disposed to accumulate,– but I should say that it augmented riches by diminishing happiness, that it was advantageous only by occasioning a great pressure on the labouring classes and on those who lived on fixed incomes.
(Letter to Malthus, 27 June 1815; VI: 233)
During the debates around the resumption of convertibility, the discussion crystallised on the advantages derived by “the public creditor” (the holders of public debt) from the stabilisation of the pound at the pre-war parity. Ricardo maintained that his present gain was not greater than the loss he had suffered when the currency was depreciated. He declared before the House of Commons on 26 February 1823:
It would be found that the stockholder had had nothing more than was just; and that if the interest which he had been paid in depreciated currency, upon capital which when lent had not been depreciated, were to be set against the interest which he was receiving in undepreciated currency now, upon capital which when lent had been depreciated, then, not only would the loss in the one case compensate all that had been hitherto paid in the other, but would actually be equal to a perpetual annuity to that annual amount, which he was at present receiving.
(V: 252)
Among the creditors was the Bank of England; as Ricardo put it before the House of Commons on 24 May 1819:
They [the Bank of England] had no real interest in the depreciation of the currency; it would be rather their interest to raise it, even to double the value. They were in the situation of creditors, not of debtors; their whole capital being in money or other securities representing money.
(V: 13)
As always with the alternative between deflation and devaluation, the outcome depended on the balance of power between creditors and debtors. This conflict of interest was, however, softened by the fact that, although this was not the result of a deliberate policy of the Bank of England, the post-war stagnation in trade and the consequent general fall of prices had reduced the demand for Bank of England notes hence their quantity in circulation. The amount of further deflation needed to resume convertibility at pre-war parity was consequently smaller and made acceptable. The position held by Ricardo on this question was an illustration of the pragmatism with which he approached it. Being heard by the Commons’ Committee on 4 March 1819, he declared that the currency would have to be raised 5 or 6 per cent in value; this figure became 4 per cent on 24 March before the Lords’ Committee, and finally 3 per cent on 24 May in his speech in the plenary session of the House of Commons. There was no fickleness in these changes: they simply reflected the fall in the market price of gold bullion,10 hence the size of the remaining adjustment necessary to make it conform to the pre-war mint price. Ricardo insisted that he only recommended such adjustment because it was actually small. Had the required deflation been greater he would have favoured devaluation. On 8 February 1821 he declared in the House of Commons:
The question, then [in 1819], before the House was, whether it was advisable to return to the old standard, or to take the existing market rate, which was then about 4 per cent above that standard as the measure of value in future. But his hon. friend had argued on this subject as if bullion had been at that time, as it formerly was, at 5l. or 5l. 10s., an ounce. If, instead of being at 4l. 1s. bullion had been much higher, he should not have proposed a recurrence to the mint standard. What he was anxious about, was not to restore the old, but to establish a fixed standard; for, however desirable it might be to a body of merchants or bankers to possess the power of raising or lowering a fourth or fifth the value of the currency, and to make 3l. 17s. 10½d. at one time, equivalent to 5l. at another, it was a power destructive of every engagement, and finally ruinous to every interest. He was not anxious to restore the old standard; but the market price of bullion being then only 4l. 1s., he did not think it necessary to deviate from the ancient standard.
(V: 73)11
Convertibility into bullion versus convertibility into specie
Ricardo was all the more inclined to neglect the deflationary consequences of resumption at pre-war parity since he himself advocated a plan that would allow dispensing with an increase in the gold reserves held by the Bank of England, hence with the upward pressure on the relative value of gold. This plan raised the last question debated, that of the kind of note convertibility, into specie (as before 1797) or into bullion (as in Ricardo’s Ingot Plan). The House of Commons adopted a resolution compelling the Bank of England to deliver standard bullion for its notes:
The Bank [of England] shall be liable to deliver, on demand, Gold of standard fineness, having been assayed and stamped at His Majesty’s mint, a quantity of not less than sixty ounces being required in exchange for such an amount of Notes of the Bank as shall be equal to the value of the Gold so required.
(V: 7‒8)
A calendar was set to implement a gradual return to note convertibility at decreasing rates – it started on 1 February 1820 to end up on 1 May 1821 at the pre-1797 rate of £3. 17s. 10½d. per ounce of standard gold. In spite of the Bank’s objection that this resolution “would have the effect of fettering the Bank so as to cause an inconvenient reduction of the currency” (V: 8), and although the return to convertibility into coin was announced for 1 May 1823, this three-year implementation of convertibility into bullion – with the prospect that, if it worked, it could be made permanent – was a success for Ricardo, which he described in a letter to Trower of 8 July 1819 as “the triumph of science and truth in the great councils of the Nation” (VIII: 44). Before starting his speech on the day of the general debate in the House of Commons (24 May 1819), “Mr. Ricardo rose, amidst loud invitations” (V: 9n), and at the end “The hon. member sat down amidst loud and general cheering from all sides of the House” (ibid: 17). Sraffa quotes McCulloch who also wrote that “he [Ricardo] did not rise until he was loudly called upon from all sides of the House” (Sraffa 1952a: xx). In his diary John Mallet wrote after the debate that “the phenomena of that night was Ricardo” and reported that in a private party a few days afterwards, the Duke of Wellington had “remained in conversation with him [Ricardo] for 20 minutes” (quoted by Sraffa; V: 17n). Ricardo became famous: The New Times of 15 May 1819 wrote that “the proposed Ingots have already obtained a name. They are called Ricardoes from their inventor, as the gold Napoleons were named from Bonaparte” (quoted in Sraffa 1952b: 368), and on 15 June 1819 the same newspaper observed that “Mr Ricardo’s ingots were the fashionable novelties of the day, like the automaton chess player, or the fair Circassian” (ibid). Fashionable but not always understood: commenting on the reactions to the adoption of bullion convertibility, Bonar (1923: 292) writes: “Sheffield hears that there is a general bewilderment, especially in the West of England; for himself he thinks that not one person in ten thousand will comprehend the new measure.”12
Unfortunately, this “triumph” did not last. During the 1819 legislative process an amendment had been introduced according to which, starting on 1 May 1822, the Bank of England would have the choice to pay its notes in coin or bullion (V: 8 n1). Knowing the hostility of the Bank of England to note convertibility into bullion, this implied to shorten the Ingot Plan experiment by one year. When the date of the return to pre-war parity (1 May 1821) came, a new act decided to anticipate this possibility of choice. Finally, Ricardo’s plan was legal only from 1 February 1820 until 1 May 1821; this was purely formal, since during that period the market price of gold was below the legal price, so that only 13 “Ricardoes” were demanded as collectors’ pieces out of the 2028 delivered in 1820 by the mint to the Bank of England (Sraffa 1952b: 368‒70).
After the resumption of cash payments there were still debates about the responsibility of Ricardo’s plan in the deflation observed in the following years, but the monetary system retained the main characteristics of the pre-1797 system: on the one hand a mixed circulation of coins issued by the mint and notes issued by the Bank of England (in the London area) and convertible into gold coins or issued by country banks (outside the London area) and convertible into Bank of England notes; on the other hand a pivotal position of the Bank of England in the system, although not associated with any explicit rule or doctrine related to its note-issuing behaviour. The 1825 monetary crisis shook confidence into that system but nearly 20 more years would elapse before another monetary controversy, this time between the Currency School and the Banking School, led to the Bank Charter Act of 1844, which settled an institutional framework for the gold-standard monetary system and associated central-banking rules that would remain operative in Britain until World War I.
The debates around the return to convertibility led Ricardo to design two plans, contained in two pamphlets written in 1816 and 1823 respectively (the latter being published posthumously in 1824). The link between these two writings is chapter XXVII, “On Currency and Banks” of On the Principles of Political Economy, and Taxation, which, in its second (1819) and third (1821) editions, quoted extensively the 1816 essay (Proposals), and, as early as the first edition (1817), put forward the idea, mentioned in Proposals and developed in the 1823 essay, of an independent public bank.13
The Ingot Plan (1816)
The pamphlet Proposals for an Economical and Secure Currency was published in 1816; it contains what is known in the literature as the Ingot Plan. It introduced two main novelties for Bank of England notes: they were to be convertible into bullion (stamped ingots valued at the legal price of gold but deprived of legal tender in domestic circulation, hence the name Ingot Plan) instead of specie (as before 1797), and their quantity issued was to vary inversely with the sign of the spread between the market price of gold bullion and the legal price at which it could be obtained (against notes) from the Bank of England. As for the notes issued by country banks, Ricardo suggested to make them convertible either into bullion or into Bank of England notes that would be legal tender.
The note-issuing rule constituted a radical change with the liberty left until then to the Bank of England directors to decide at will upon an expansion or a contraction in the note circulation. This liberty was unrestrained since the suspension of convertibility, but, according to Ricardo, it was already dangerous when (before 1797) they knew that notes issued in excess could be returned to them. The reason was that, as for any banker, they were only interested in the quality of the bills they discounted, but, disregarding the market price of gold or the exchange rate, they were not in a position to vary the overall note circulation in an appropriate way:
Though I am fully assured, that it is both against the interest and the wish of the Bank [of England] to exercise this power to the detriment of the public, yet, when I contemplate the evil consequences which might ensue from a sudden and great reduction of the circulation, as well as from a great addition to it, I cannot but deprecate the facility with which the State has armed the Bank with so formidable a prerogative.
(Proposals; IV: 69; Principles; I: 359‒60)
The management principle of the note issue suggested by Ricardo was to eliminate these “evil consequences”. As for the first provision of the plan – the ingot principle, that is, note convertibility into bullion – it introduced a revolutionary change in the monetary system: the circulation would be composed of bank notes only, and the elimination of metallic coins amounted to demonetise gold as domestic means of payment. Gold remained solely the standard regulating the value of money in a more economical but above all more secure way:
To secure the public against any other variations in the value of the currency than those to which the standard itself is subject, and, at the same time, to carry on the circulation with a medium the least expensive, is to attain the most perfect state to which a currency can be brought.
(Proposals; IV: 66; Principles; I: 356‒7)
That the object of the plan was to substitute (convertible) paper money for specie was stated by Ricardo in the sentence following immediately the four pages of Proposals inserted in Principles:
A 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.
(Principles; I: 361)
When the debates on the return to convertibility resumed in 1819, Ricardo defended his Ingot Plan successfully in the House of Commons (where he had been elected), which adopted it as the basis of the return to convertibility. As seen above, this plan was finally abandoned when convertibility at pre-war parity was resumed on 1 May 1821. In spite of his plan having been dropped, Ricardo was accused, inside and outside Parliament, of being responsible for the deflation which followed the resumption of cash payments. In a controversy with Charles Western which covered two Parliamentary sessions (it started on 12 June 1822 and ended up on 11 June 1823), Ricardo maintained that the resumption of cash payments could only explain an increase in the value of money up to 10 per cent, one half as a consequence of the return to the pre-1797 mint price of gold, the other half as a consequence of an increase in the world value of gold, provoked by the purchases of the Bank of England in the perspective of a return to convertibility into coin. In Ricardo’s view, his Ingot Plan could not be held responsible for that outcome, since, by economising on the gold reserves of the Bank of England, convertibility into bullion, if prolonged indefinitely, would have avoided half of the deflation having a monetary origin.
There was more: Ricardo was convinced that his plan had been torpedoed by the Bank of England, which, from the very beginning, had opposed it. Another plan was found in his papers after his death on 11 September 1823; it developed an idea already present in Proposals and in Principles: the transfer of the note issue from the Bank of England to an independent public bank (for a comparison between the two plans, see below Chapter 9).
The Plan for a national bank (1823)
Besides the Ingot Plan, a large part of the 1816 pamphlet had been devoted to a critique of the excessive profits made by the Bank of England in its lending activity to the Government (an activity which had been the initial reason of its establishment in 1694). This cost incurred by the management of the National Debt was an inconvenience that added up to the incompetence of the Bank of England in the management of the note issue. Both defects could be eradicated if the monopoly of the note issue were transferred from the Bank of England to a public bank, whose independent commissioners would also manage the National Debt.
This idea appeared in a letter to Malthus of 10 September 1815:
I cannot help considering the issuing of paper money as a privilege which belongs exclusively to the state. – I regard it as a sort of seignorage, and I am convinced, if the principles of currency were rightly understood, that Commissioners might be appointed independent of all ministerial controul who should be the sole issuers of paper money.
(VI: 268)
It was introduced publicly in Proposals and in the first edition of Principles (1817), and preserved for the two later editions in addition to the Ingot Plan. It was only when it became clear in 1821 that the Bank of England had torpedoed the Ingot Plan that Ricardo developed his other idea in a proper plan.
The Plan for the Establishment of a National Bank was written by Ricardo in July and August 1823, shortly before his death, and was published by his brother Moses Ricardo in February 1824. It had been anticipated in Chapter XXVII of Principles, where the proposal of an independent public bank included the ingot and management principles, which in this case were transferred from the existing Bank of England note to a new public note. Its advantage was to do away with the interest paid by the State on the money borrowed from the Bank of England, and consequently to save individuals the taxes necessary to pay for that charge of interest. Ricardo discarded two objections which could be raised to that proposal. The first objection was that a public note issue would soon become beyond control. Ricardo responded as follows:
Under an arbitrary Government, this objection would have great force; but, in a free country, with an enlightened legislature, the power of issuing paper money, under the requisite checks of convertibility at the will of the holder, might be safely lodged in the hands of commissioners appointed for that special purpose, and they might be made totally independent of the control of ministers.
(Principles; I: 362)
The second objection was that, by removing the possibility of issuing notes through the discounting of bills, the proposal would reduce the availability of borrowed funds to merchants and slow down their activity. Ricardo was here straightforward: referring to his theory of value and rent, he maintained that the rate of interest at which the Bank of England lent to some of the merchants had no influence on the overall accumulation of capital, which would remain the same under the proposed banking system:
In another part of this work, I have endeavoured to shew, that the real value of a commodity is regulated, not by the accidental advantages which may be enjoyed by some of its producers, but by the real difficulties encountered by that producer who is least favoured. It is so with respect to the interest for money; it is not regulated by the rate at which the Bank will lend, whether it be 5, 4, or 3 per cent, but by the rate of profits which can be made by the employment of capital, and which is totally independent of the quantity, or of the value of money.
(ibid: 363)
In his 1823 plan, Ricardo again advocated that the issuing of notes and discount lending, linked in the Bank of England, could and should be separated. He stated that:
Five Commissioners shall be appointed, in whom the full power of issuing all the paper money of the country shall be exclusively vested.
(Plan for a National Bank; IV: 285)
This had three consequences. First, the Bank of England would remain solely a discount bank, like any other. Second, since the new bank got the monopoly of the note issue for the whole country – and not only for the London area, as was the case previously for the Bank of England – country banks were also deprived of their issuing power. Third, after his Ingot Plan had been abandoned in 1821, Ricardo stepped back to a mixed monetary system (coins and notes) and to note convertibility into specie; he nevertheless suggested obliging the new bank to sell gold bullion at a fixed price, which amounted to separate convertibility for domestic and foreign payments. Moreover, Ricardo stood firmly on the management principle of varying the note issue with the observed market price of gold bullion (“Regulating their issues by the price of gold, the commissioners could never err”; ibid: 293). This variation would be obtained through purchases or sales by the bank, either on the gold-bullion market or on the Government-securities market.14 The bank was, however, forbidden to lend directly to the State:
I propose also to prevent all intercourse between these Commissioners and ministers, by forbidding every species of money transaction between them. The Commissioners should never, on any pretence, lend money to Government, nor be in the slightest degree under its control or influence.
(ibid: 282)
Published by his brother Moses five months after Ricardo’s death, the plan did not arouse much attention, then or in 1838 when another of his brothers, Samson, republished it as an appendix to a pamphlet.
2.3 Conclusion: the legacy of Ricardo’s monetary battles
The usual – albeit incorrect – assimilation of Ricardo with monetary orthodoxy manifests itself by an overemphasis, in much of the literature since, on what that doctrine inherited from him. One may here mention the supposed link with the Currency School, through which Ricardo’s orthodoxy is usually acknowledged. Although this current of thought used the posthumous patronage of Ricardo, the orthodox model of central banking it implemented was in fact at odds with his explicit principles, and Ricardo’s most important monetary proposals – note convertibility into bullion, management and public monopoly of the note issue – did not find their way until the twentieth century.
The division of the Bank of England in an Issue department and a Banking department, which was embodied in the Bank Charter Act of 1844, is often presented as deriving from Ricardo’s conception of central banking. This is misleading for two reasons. First, this division maintained the note issue in the hands of (to use Ricardo’s words) “a company of merchants” (the Bank of England), instead of nationalising it. Second, it did put an end to the liberty of the Bank’s directors to vary the issue at will, but replaced it by a rule that linked the change in the quantity of notes issued to the variation of the metallic reserves of the Issue department. This was at odds with Ricardo’s statement that the note issue should be managed,15 irrespective of the amount of the metallic reserves of the issuer and of the absolute volume of the existing circulation, but solely in reference to the market price of the standard.16
This discrepancy between Ricardo’s proposed regulation of the note issue and the “Currency Principle” was not just the outcome of circumstances. It was rooted in different conceptions of the monetary system. The Currency School maintained a mixed monetary system (where domestic circulation was composed of full-bodied gold coins, bank notes convertible into gold coins, and token silver currency) that contrasted with Ricardo’s proposal of an exclusive circulation of paper convertible into gold bullion. It also applied the two main aspects of Hume’s price-specie flow mechanism: its automaticity and the interdependence between domestic circulation and international payments. The metallic reserve of the Bank of England which constrained the note issue varied with the foreign balance, which in turn depended on the volume of domestic circulation; this automatic adjustment – which was unable to prevent the crises of 1847, 1857, and 1866, when the Bank Charter Act had to be suspended – contrasted with Ricardo’s attempt, thanks to convertibility into bullion, to separate domestic note circulation and international bullion payments (see Chapter 8 below).
Ricardo’s concept of convertibility de facto restricted to foreign payments, as it was embodied in the ingot principle, was his belated but lasting legacy. Later known as the gold-exchange standard, it was resurrected as a practical device by Alfred Marshall in 1887 and by Alexander Lindsay in 1892, with explicit reference in both cases to Ricardo. Marshall (1887: 204) stressed that “the currency scheme which I wish to submit for consideration differs from his [Ricardo’s 1816 Proposals] only by being bimetallic instead of monometallic” (for a comparison between Ricardo’s Ingot Plan and Marshall’s bimetallic scheme, see Deleplace 2013b). As for the pamphlet published by Lindsay in 1892, it was entitled Ricardo’s Exchange Remedy (see Chapter 8 below). In 1913 Keynes observed approvingly that “in the last ten years the gold-exchange standard has become the prevailing monetary system of Asia” (Keynes 1913: 25). As is well known, this system was extended to other countries in interwar years, and later institutionalised, with qualifications, at Bretton Woods.
Appendix 2 offers a sample of the attacks mounted at Ricardo during his battles on currency and banks, and lists the weapons he used: his monetary works, whether published, written for publication, left as notes, sent in correspondence, or reported as speeches. These writings constitute the basis on which Part II of the present book proposes a reconstruction of Ricardo’s theory of money.
Appendix 2: Attacks and weapons
During the debates in which he took part Ricardo aroused contrasted opinions. Everyone praised the clearness of his mind and his gentle manners; his death was lamented in the Morning Chronicle as “a great national calamity” (Gilbert 1987: 22). However, he was often criticised for being too much of “a philosopher” and attacked as “an oracle”. To illustrate the battles he fought on currency and banks, a selection of opinions expressed by his contemporaries is given below, with some of the answers he gave to them. For another example of the attacks made upon him, see below Appendix 4. Biographical information may be found in Moses Ricardo (1824), Sraffa (1952a, 1955a, 1955b), Weatherall (1976), Henderson (1997). Since Ricardo considered himself as a feeble orator, he mostly relied on writing to defend himself. A list of his contributions on money is also given below; with the exception of five letters, they are published in the Sraffa edition of The Works and Correspondence of David Ricardo.
1. Attacks: critical opinions on Ricardo
The basic critique addressed to Ricardo in his lifetime was to be a “theorist”, as Mallet’s diary on 7 May 1821 reported him having said about the members of the Agricultural Committee:
Ricardo says that they look upon him as a mere Theorist, but that they are very civil and allow him to take his own course with a view of establishing his principles by evidence.
(quoted in Sraffa 1952a: xxv)
This mixture of critique and respect is illustrated by the following excerpt of the same diary on 14 January 1820:
It is impossible to be in company with Ricardo and not to admire his placid temper, the candour of his disposition, his patience and attention, and the clearness of his mind; but he is as the French would express it “herissé de principes” he meets you upon every subject that he has studied with a mind made up, and opinions in the nature of mathematical truths. He spoke of Parliamentary reform and vote by Ballot as a man who would bring such things about, and destroy the existing system tomorrow, if it were in his power, and without the slightest doubt as to the result. And yet there was not one person at Table, several of them Individuals whose opinion he highly valued, who would have agreed with him. It is this very quality of the man’s mind; his entire disregard of experience and practice, which makes me doubtful of his opinions on political oeconomy.
(quoted by Sraffa, VIII: 152n)
One of Ricardo’s opponents in Parliament, Lord Brougham – the man who dubbed him “an oracle” (see below) – expressed the same sentiment in a speech of 30 May 1820 with the following image:
His hon. friend, the member for Portarlington [Ricardo], had argued as if he had dropped from another planet.
(V: 56)
And in a sketch of Ricardo in Parliament written sixteen years after his death he observed:
His views were often, indeed, abundantly theoretical, sometimes too refined for his audience, occasionally extravagant from his propensity to follow a right principle into all its consequences, without duly taking into account in practice the condition of things to which he was applying it.
(quoted in Sraffa 1952a: xxxiii)
In a speech of 8 February 1821, another Member of Parliament, Alexander Baring, criticised Ricardo’s monetary views “although the establishment of such a standard might be more agreeable to the views of the Royal Society, or other abstract philosophers, who would regulate weights and measures by the vibrations of the pendulum” (V: 77) and on 7 May 1822 Sir T. Lethbridge trusted the House would not be led away by “the abominable theories of political economists” (ibid: 169). In a letter to Thomas Smith, John Wishaw summed-up how Ricardo was received in the House of Commons: “I think, indeed, that, considering the audience whom he addressed, he spoke too much as a theorist, and in a manner likely to be misrepresented” (V: 128 n1).
Although he was a shy person – “I do not know whether you know it, but I am very shy, which I, sometimes, perhaps generally, hide under as bold an exterior as I can assume” (Letter to Maria Edgeworth, 13 December 1822; IX: 235) – Ricardo nevertheless maintained firmly that his approach to the problems was appropriate. Answering Baring he declared before the House on 9 April 1821:
His hon. friend’s theories thus changed very often; his own were unchanged, though he had been represented as moving with the vibrations of a pendulum, and entertaining views of placing the currency in a degree of perfection not suited to our situation.
(V: 106‒7)
His belief in theory was not different in public from what he boldly affirmed in his correspondence with his friend Malthus, as in a letter of 7 October 1815:
I should be more pleased that we did not so materially differ. If I am too theoretical which I really believe is the case, – you I think are too practical. There are so many combinations, – so many operating causes in Political Economy, that there is great danger in appealing to experience in favor of a particular doctrine, unless we are sure that all the causes of variation are seen and their effects duly estimated.
(VI: 295)
Beyond his personal case, what was in dispute with his opponents in Parliament was what Ricardo called “the science of political economy”, as in several speeches in 1823:
Mr. Ricardo said, he remembered, that at the termination of the last session, he had frequently to repel the attacks which were made upon the science of political economy.
(21 February 1823; V: 248)
The hon. member for Weymouth had observed, that the petitioners knew nothing about political economy, the principles of which seemed to change every two or three years. Now, the principles of true political economy never changed; and those who did not understand that science had better say nothing about it.
(21 May 1823; V: 296)
An hon. member for Bristol had talked about political economy; but the words ‘political economy’ had, of late, become terms of ridicule and reproach. They were used as a substitute for an argument.
(9 June 1823; V: 307)
This general atmosphere against Political Economy concentrated on Ricardo, as it appeared when after his death some friends raised funds for projected lectures on political economy in his honour. In a letter of 10 January 1824 to McCulloch – who would deliver the lectures – James Mill told the story:
You can have little notion of the dread of publicity which hangs over many of us: and of the aversion to Political Economy which yet is here almost universal. Take this as an example: When Hume who has a project of his own for a bust and tablet to Ricardo in West. Abbey, asked subscription from Hudson Gurney M.P., he said he would give £50 if needed to the bust, but not one farthing to the lectures. Think of the terrae filius! And Huskisson, when applied to, in like manner, by Hume, slunk away, saying, he was by no means convinced of the utility of such lectures; and besides, in his public situation, he was not yet prepared to like having his name published, as that of a Political Economist. Oh, you coward! said Hume to him. And he replied I must confess it is the right name.
(quoted in Porta (ed.) 1992b: 58; Joseph Hume, Hudson Gurney, and William Huskisson were Members of Parliament)
In addition to the general critique of being a “theorist”, Ricardo was also attacked on particular subjects on which he stood at odds with most of his fellow MPs. In a letter to McCulloch of 13 June 1820 he confessed about his position in favour of free trade:
I am treated as an ultra reformer and a visionary on commercial subjects by both Agriculturists and Manufacturers.
(VIII: 197)
He also felt isolated on his proposal of repaying the National Debt by a once-for-all tax on property, as he told Trower in a letter of 28 December 1819:
There must be I think an end of loans; we cannot go on adding to a debt of 800 millions. A great deal more has been said than I intended there should be of an incidental observation of mine respecting the payment of the debt, as it usually happens I am attacked by the most opposite parties.
(ibid: 147)
This iconoclast proposal raised a condescending reaction by two MPs used to criticise Ricardo’s theoretical inclination:
There was however one point on which he had wished so great an oracle, as he must ever consider him on such subjects, had not pronounced the decided opinion he had.
(Lord Brougham, 24 December 1819; V: 40)
To begin with the plan of paying off a part of the debt, by a new disposition of the property of the country, he [Baring] must be allowed to say, that it was the plan of a man who might calculate well and read deeply, but who had not studied mankind. It was ingenious in theory, and obvious enough; but not very sound for practice. He did not pretend to any thing like the reach of intellect possessed by his hon. friend, but he thought his hon. friend sometimes over-reached himself, and lost sight of man, and of all practical conclusions.
(Alexander Baring, 6 March 1823; V: 270)
It was of course on money that the most violent attacks occurred, all the more so since Ricardo’s Ingot Plan had provided the basis of Peel’s bill of 1819. In his 1839 sketch of Ricardo in Parliament, Lord Brougham recollected:
He always greatly undervalued the amount of the depreciation in the currency upon prices generally, estimating it solely by the difference between the Mint price and the Market price of gold; and so confidently did he believe in his speculative estimate, that his practical plan for restoring the currency was grounded upon it. But while such were his errors, and those of a kind to excite very strong feelings in certain large and important classes in the House of Commons, he was uniformly and universally respected for the sterling qualities of his capacity and his character, which were acknowledged by all.
(quoted in Sraffa 1952a: xxxiii)
Another MP, Edmond Wodehouse complained on 12 June 1823 that Ministers:
[W]ere too ready to listen to the suggestions of the hon. member for Portarlington (Mr. Ricardo), whose conclusions on this head [the currency] appeared to him to be utterly incomprehensible. […] To believe that he had a clear perception on the subject of money, was utterly impossible.
(V: 321‒2)
Ricardo suffered from these attacks, especially when he felt that his views were misrepresented. He nevertheless believed that finally justice would be done to him, as shown by the following letter of 16 December 1822 to Malthus:
I am sorry to find the agricultural distress continue – I was in hopes that it would have subsided before this time. I suppose we shall hear much on this subject next session of Parliament and that I shall be a mark for all the country gentlemen. There is not an opinion I have given on this subject which I desire to recall – I only regret that my adversaries do not do me justice, and that they put sentiments in my mouth which I never uttered. Dr. Copplestone in his article in the Quarterly Review charges me with maintaining the absurd doctrine that the price of gold bullion is a sure test of the value of bullion and currency. A Mr. Paget has addressed a (printed) letter to me in which I am accused of holding the same opinion, and every body knows how pertinaciously Cobbet persists in saying that I have always done so. I must fight my cause as well as I can, I know it is an honest one (in spite of Mr. Western’s insinuations) and if it be also founded in truth, and on correct views, justice will be finally done to me.
(IX: 249‒50)
2. Weapons: Ricardo’s contributions on money (with the volume and pagination in Works)
The Bullion Essays (1809‒1811)
The Price of Gold. Three contributions to the Morning Chronicle, 1809 (III: 13‒46)
The High Price of Bullion, a Proof of the Depreciation of Bank Notes, 1810‒1811 (III: 47‒127)
Three letters to the Morning Chronicle on the Bullion Report, 1810 (III: 129‒53)
Reply to Mr. Bosanquet’s ‘Practical Observations on the Report of the Bullion Committee’, 1811 (III: 155‒256)
Notes from manuscripts of 1810‒1811
Notes on Bentham’s ‘Sur les Prix’, 1810‒1811 (III: 267‒341)
Notes on the Bullion Report and Evidence, 1810 (III: 347‒78)
Notes on Trotter’s Principles of Currency and Exchanges, 1810 (III: 381‒403)
Observations on Trower’s notes on Trotter, 1811 (III: 407‒9)
Observations on Vansittart’s propositions respecting money, bullion and exchanges, 1811 (III: 415‒23)
Proposals for an Economical and Secure Currency, 1816 (IV: 49‒141)
On the Principles of Political Economy, and Taxation, 1817‒1821 (I: 1‒442)
The 1819‒1823 papers
This corpus is composed of (a) parts of pamphlets and papers written by Ricardo for publication, whether they were actually published – such as On Protection to Agriculture (1822) or some speeches in Parliament – or not – such as a draft of a letter to a newspaper; (b) manuscript notes; (c) reports of speeches in Parliament and of evidence before committees of Parliament.
Papers written by Ricardo for publication:
On Protection to Agriculture, April 1822, Section V “On the Effects produced on the Price of Corn by Mr. Peel’s Bill for restoring the Ancient Standard” (IV: 222‒35) and “Conclusion” (ibid: 261‒6)
Draft of a letter to a newspaper on the effects of Peel’s bill, December 1821 (V: 515‒21)
Speech in Parliament on Bank of England – Resumption of Cash Payments, 24 May 1819; transcript for Hansard prepared by Ricardo (V: 9‒17)17
Speech in Parliament on Mr. Western’s motion respecting the altered state of the currency, 10 July 1822; original transcript in Ricardo’s handwriting (V: 231‒45)18
Speech in Parliament on Mr. Western’s motion concerning the resumption of cash payments, 11 June 1823; transcript for Hansard prepared by Ricardo (V: 309‒21)19
Plan for the Establishment of a National Bank, July–August 1823, published posthumously in February 1824 (IV: 275‒300)
Manuscript notes:
Notes on Blake’s Observations on the Effects Produced by the Expenditure of Government during the Restriction of Cash Payments, March 1823 (IV: 327‒56)
“Absolute Value and Exchangeable Value”, August–September 1823 (IV: 361‒412)
Reports of Ricardo’s declarations:
Major speeches in Parliament on the subject (other than the three mentioned above):
Petition of the Merchants of London Respecting Commercial Distress, 24 December 1819 (V: 37‒41)
Commercial Restrictions – Petition of the Merchants of London, 8 May 1820 (V: 42‒6)
Loan – Ways and Means, 9 June 1820 (V: 58‒62)
Supply – Bank of Ireland, 2 February 1821 (V: 70)
Trade of Birmingham – Petition of the Merchants, 8 February 1821 (V: 71‒8)
Bank Cash Payments Bill, 9 April 1821 (V: 105‒8)
Motion for a committee on the agricultural distress, 18 February 1822 (V: 129‒38)
Banks of England, and of Ireland, 8 March 1822 (V: 143‒4)
Agricultural distress and the financial and other measures for its relief, 29 April 1822 (V: 155‒9)
Agricultural Distress Report, 7 May 1822 (V: 162‒76)
Absentees, 16 May 1822 (V: 186‒8)
Mr. Western’s motion concerning the resumption of cash payments, 12 June 1822 (V: 198‒218)
The budget, 1 July 1822 (V: 220‒3)
Agricultural distress – Surrey petition, 26 February 1823 (V: 251‒5)
Evidence before committees of Parliament:
Minutes of evidence taken before the Select Committee on the Usury Laws, 30 April 1818 (V: 337‒47)
Minutes of evidence taken before the Secret Committee on the Expediency of the Bank resuming Cash Payments – House of Commons, 4, 19 March 1819 (V: 371‒415)
Minutes of evidence taken before the Lords Committees appointed a Secret Committee to enquire into the State of the Bank of England, with Reference to the Expediency of the Resumption of Cash Payments at the Period now fixed by Law, 24, 26 March 1819 (V: 416‒57)
Speech outside Parliament:
Meeting at Hereford in Honour of Joseph Hume, 7 December 1821 (V: 471‒4)
Letters, 1810‒1823 (with reference to subjects in relation to money)
To Francis Horner, 5 February 1810 (VI: 1‒7) (On the causes of depreciation)
To Horner, 6 February 1810 (VI: 8‒10) (On the par with Hamburg)
To Sir Philip Francis, 24 April 1810 (VI: 10‒13) (On Country Banks’ notes)
To James Mill, 1 January 1811 (VI: 14‒18) (On Bentham’s “Sur les prix” about the limit to circulation)
To Thomas Robert Malthus, 18 June 1811 (VI: 23‒8) (On the absence of difference between bullion and other commodities, and on the significance of redundancy)
To Malthus, 17 July 1811 (VI: 35‒40) (On redundancy and international adjustment)
To Spencer Perceval, 27 July 1811 (VI: 43‒5) (On the Ingot Plan)
To Mill, 26 September 1811 (VI: 51‒6) (On the necessity of a standard)
To Malthus, 22 October 1811 (VI: 63‒5) (On excess of currency and its exportation)
To George Tierney, 11 December 1811 (VI: 67‒71) (On arresting depreciation and returning to the standard with a decreasing scale)
To Malthus, 22 December 1811 (VI: 72‒6) (On redundancy and international adjustment)
To Horner, 4 January 1812 (VI: 78‒81) (On the determination of exchange)
To Malthus, 17 December 1812 (VI: 87‒8) (idem)
To Leonard Horner, 6 December 1812 (Depoortère 2015) (depreciation of the coin as distinct from its deterioration; difficulty of calculating the par of exchange; necessity to discard small notes when calculating the increase in circulation)
To Malthus, 25 February 1813 (VI: 88‒9) (On the determination of exchange)
To Malthus, 22 March 1813 (VI: 90‒1) (On bullion merchants)
To Malthus, 30 December 1813 (VI: 97‒9) (On the calculation of the pars of exchange with Amsterdam and Hamburg)
To Malthus, 1 January 1814 (VI: 100‒1) (idem)
To Malthus, 26 June 1814 (VI: 107‒9) (Demand only limited by production; international trade is barter)
To Jean-Baptiste Say, 24 December 1814 (VI: 165‒6) (On the Ingot Plan and the theory of money)
To Malthus, 13 January 1815 (VI: 169‒71) (On the level of prices of the mass of commodities)
To Malthus, 27 March 1815 (VI: 202‒6) (On money as a commodity)
To Malthus, 4 April 1815 (VI: 209‒11) (idem)
To Malthus, 21 April 1815 (VI: 219‒21) (On adjustment in the production of corn)
To Malthus, 27 June 1815 (VI: 232‒4) (On two causes of rise in money prices)
To Say, 18 August 1815 (VI: 246‒9) (Money not a good measure of value)
To Malthus, 10 September 1815 (VI: 267‒9) (On a public bank)
From Malthus to Ricardo, 1 October 1815 (VI: 288‒92) (On disagreement with Proposals, because of the instability of an exclusive paper circulation)
To Malthus, 7 October 1815 (VI: 292‒5) (On the aim of Proposals)
From Malthus to Ricardo, 15 October 1815 (VI: 298‒9) (On disagreement with Proposals, because of the instability of an exclusive paper circulation)
To Malthus, 17 October 1815 (VI: 300‒2) (Answer to Malthus’s critique of Proposals)
To Mill, 24 October 1815 (VI: 310‒4) (On the topics covered by Proposals)
From Hutches Trower to Ricardo, 26 November 1815 (VI: 325‒8) (On the cause of the fall in the price of bullion)
To Trower, 25 December 1815 (VI: 343‒5) (On MS of Proposals)
To Mill, 30 December 1815 (VI: 347‒9) (On the projected Principles)
From Malthus to Ricardo, 9 February 1816 (VII: 20‒1) (On the variability induced by convertibility into bullion)
To Malthus, 23 February 1816 (VII: 23‒5) (The most important topic of Political Economy; the sale of Proposals; Bank of England profits)
To John Ramsey McCulloch, 9 June 1816 (VII: 37‒8) (On the fall in precious metals and the rise in paper)
To John Broadley, 14 June 1816 (VII: 41‒4) (A lecture on money and exchange)
To Mill, 8 September 1816 (VII: 65‒7) (On slow adjustment in prices when there is a big change in the structure of demand)
To Malthus, 24 January 1817 (VII: 119‒21) (On “permanent” vs “temporary”)
To John Sinclair, 4 May 1817 (VII: 151) (On paper circulation)
To Pascoe Grenfell, 27 August 1817 (Heertje 1991: 520‒2) (On the rate of interest)
To Malthus, 21 October 1817 (VII: 199‒203) (idem)
To Malthus, 30 January 1818 (VII: 250‒2) (On the influence of supply and demand on prices)
To Trower, 18 September 1818 (VII: 296‒300) (On the difference between value and price)
To Mill, 22 December 1818 (VII: 371‒3) (On the last portion of capital)
To Mill, 28 December 1818 (VII: 376‒83) (On the causes of exchange value in Smith)
To McCulloch, 3 January 1819 (VIII: 1‒4) (On metal to choose as standard; on the last portion of capital)
To McCulloch, 7 April 1819 (VIII: 20‒3) (On the alarm of Bank directors)
To Thomas Smith, 27 April 1819 (Heertje and Weatherall 1978: 569‒71) (On the distress of the economy)
To McCulloch, 8 May 1819 (VIII: 26‒8) (On Ingot Plan)
To Trower, 28 May 1819 (VIII: 31‒3) (On victory for the Ingot Plan)
To Trower, 1 June 1819 (VIII: 33‒5) (Specie payments restrain the circulation)
From McCulloch to Ricardo, 30 May 1819 (VIII: 35‒8) (On victory for the Ingot Plan)
To McCulloch, 22 June 1819 (VIII: 38‒41) (On Ingot Plan made permanent; on bills of exchange)
To Trower, 8 July 1819 (VIII: 44‒7) (On the triumph of science)
To Malthus, 21 September 1819 (VIII: 72‒5) (Money a variable commodity)
To Trower, 25 September 1819 (VIII: 77‒81) (On victory for the Ingot Plan)
To McCulloch, 2 October 1819 (VIII: 85‒94) (On the exchange rate)
To James Brown, 13 October 1819 (VIII: 100‒4) (On money as an equivalent)
To McCulloch, 18 December 1819 (VIII: 140‒3) (On the par of exchange and gold points; on value)
To Trower, 28 January 1820 (VIII: 152‒6) (On the effect of taxation on prices)
To McCulloch 2 May 1820 (VIII: 178‒83) (On the invariable standard; two causes of value)
To John Sinclair, 11 May 1820 (VIII: 186‒7) (On paper money only)
To McCulloch, 13 June 1820 (VIII: 191‒7) (On standard as medium between extremes; two causes of value; last portion of capital)
To Malthus, 9 October 1820 (VIII: 276‒80) (On value fixed by sellers; object of political economy; two causes of value)
To Mill, 16 November 1820 (VIII: 294‒7) (Critique of Bentham’s annuity notes)
To McCulloch, 25 January 1821 (VIII: 342‒5) (On the standard as a means between extremes)
To Trower, 2 March 1821 (VIII: 348‒51) (Discussions with Malthus; no rise in the value of money higher than 10 per cent)
To McCulloch, 30 June 1821 (VIII: 396‒400) (On the temptation of altering the standard; on the effects of depreciation; movements of capital when profit rates diverge)
To Malthus, 9 July 1821 (IX: 14‒18) (Giving up the Ingot Plan)
To John Wheatley, 18 September 1821 (IX: 71‒4) (On the effects of resumption; devaluation)
To Malthus, 28 September 1821 (IX: 80‒6) (On the level of prices; differences in the rates of profit across countries)
To Trower, 11 December 1821 (IX: 120‒4) (On Peel’s bill; “oracle”)
To Mill, 18 December 1821 (IX: 125‒33) (On the behaviour of the Bank of England; gold points)
To McCulloch, 3 January 1822 (IX: 138‒42) (On purchases of gold by the Bank of England; Ingot Plan a permanent system)
To Trower, 25 January 1822 (IX: 151‒5) (On the cause of low price of corn)
To McCulloch, 8 February 1822 (IX: 156‒9) (On the cause of agricultural distress)
To Trower, 20 February 1822 (IX: 165‒7) (idem)
To Trower, 5 March 1822 (IX: 174‒7) (Ricardo not understood; “Ingot plan of payment”)
To McCulloch, 19 March 1822 (IX: 177‒9) (On value not entirely explained by labour)
To Trower, 9 June 1822 (IX: 201‒2) (On the amount of circulation)
To Maria Edgeworh, 13 December 1822 (IX: 233‒40) (On greatest happiness; price)
To Malthus, 16 December 1822 (IX: 247‒51) (On attacks at Ricardo on the price of bullion)
To Grenfell, 19 January 1823 (Deleplace, Depoortère and Rieucau 2013: 4‒7) (Critique of the double standard)
To Trower, 30 January 1823 (IX: 266‒70) (Ricardo a reformer; double standard)
To Francis Finch, 24 February 1823 (Heertje, Weatherall and Polak 1985: 1091‒2) (On the exportation of capital)
To McCulloch, 25 March 1823 (IX: 275‒7) (On the definition of depreciation and actual depreciation)
To Malthus, 29 April 1823 (IX: 280‒4) (On different rates of profit across countries)
To McCulloch, 3 May 1823 (IX: 284‒7) (On movements of gold)
To Malthus, 28 May 1823 (IX: 297‒300) (On the definition of absolute value, in particular conditions)
To Malthus, 13 July 1823 (IX: 303‒6) (On the measure of value)
To Trower, 24 July 1823 (IX: 311‒5) (idem)
To Trower, 24 July 1823 (IX: 318‒9) (idem)
To Malthus, 3 August 1823 (IX: 320‒6) (On the measure of value; Plan for a National Bank)
To Mill, 7 August 1823 (IX: 326‒30) (idem)
To McCulloch 8 August 1823 (IX: 330‒1) (idem)
To Malthus, 15 August 1823 (IX: 345‒52) (On the measure of value; method of critique; labour value; international trade)
To McCulloch, 15 August 1823 (IX: 353‒7) (On the measure of value)
To McCulloch, 21 August 1823 (IX: 358‒62) (On the measure of value; causes of value)
To Malthus, 31 August 1823 (IX: 380‒2) (On the measure of value)
To Mill, 5 September 1823 (IX: 385‒8) (idem)
Notes
1 This chapter develops Deleplace (2015a and 2015b). On the historical context of Ricardo’s contributions to the monetary debates, see Sraffa (1951c, 1951e, 1952a, 1952b) and Davis (2005). Although Ricardo himself used the word “battle”, I have borrowed the title of the chapter from the far-reaching book by the late Gilles Dostaler Keynes and his Battles (Dostaler 2007).
2 He would be later Chancellor of the Exchequer from 1812 to 1822.
3 Volume III of Ricardo’s Works (pp. 415‒23) contains observations in manuscript form on Vansittart’s ten first Resolutions. On the third Ricardo wrote:
The Promissory Notes of the Bank of England cannot justly be said to be at ‘this time held to be equivalent to the legal coin of the Realm’ when the coin is bought at a premium of 6 and 7 pct, – and when it is prevented from openly rising to 15 or 18 pct (its real and intrinsic value above paper) by the terror of the law which deters all men of character from engaging in a traffic which is disreputable and illegal. Whilst the law can be enforced the currency may be depreciated 50 pct, and yet the coin and paper may preserve the same value as currency.
(III: 415‒16)
4 Vol. III of Works also contains notes from Ricardo’s manuscripts of 1810‒1811, mainly on the Bullion Report and contributors to the controversy, except for a manuscript in French by Jeremy Bentham, Sur les prix (on Ricardo’s critique of this manuscript see Deleplace and Sigot 2012).
5 Referring to Thornton (1802), Malthus criticised this statement in his review of High Price for the Edinburgh Review, to which Ricardo answered in the Appendix to the fourth edition. Paradoxically, this marked the beginning of their acquaintance and friendship; see Sraffa (1951c: 11‒12).
6 Ricardo emphasised that it was inappropriate in that case to speak of an “adverse” balance of trade, since the export of gold paid for the import of foreign commodities which were useful to the country:
In return for the gold exported, commodities would be imported; and though what is usually termed the balance of trade would be against the country exporting money or bullion, it would be evident that she was carrying on a most advantageous trade, exporting that which was no way useful to her, for commodities which might be employed in the extension of her manufactures, and the increase of her wealth.
(High Price; III: 54)
7 The role of debased silver coins was highlighted by a reply to Ricardo’s 1809 unsigned article in the Morning Chronicle. This reply was signed “A Friend to Bank Notes, but no Bank Director”, who happened to be one of Ricardo’s friends, Hutches Trower; see Sraffa (1951c: 4).
8 Alexander Baring was the second son of Sir Francis Baring (see Chapter 1 above) and a partner in the merchant bank Baring Brothers & Co.
9 The proposal of a double standard resurfaced in 1823, again without any success. Ricardo was also involved in the opposition to it. See Chapter 6 below.
10 The actual figures given by The Course of the Exchange for these dates were respectively £4. 1s. 6d. (4.7 per cent above the legal price of gold in coin), £4. 1s. (4 per cent), and £4. 0s. 6d. (3.4 per cent). See Boyer-Xambeu, Deleplace and Gillard (2010a, 2010b).
11 See also on 8 May 1820:
[In the first instance] he certainly would rather have been inclined to have altered the standard than to have recurred to the old standard. But while the committee [on the resumption of cash payments] was sitting, a reduction took place in the price of gold, which fell to 4l. 2s. and it then became a question whether we should sacrifice a great principle in establishing a new standard, or incur a small degree of embarrassment and difficulty in recurring to the old.
(V: 43)
He [Ricardo] had never imagined that the currency had never been depreciated more than 4 per cent. He had merely contended, that at the time when the subject was taken up by parliament in the last year, there was only that depreciation; which was too small to warrant an alteration of the ancient standard. He was well aware that during some of the latter years of the war, the depreciation had been as great as 25 per cent.
(ibid: 46)
A market price of bullion 25 per cent above the mint price was rated at £4. 17s. 4d.; the quotation was occasionally above this level beginning on 12 February 1811 and permanently from 26 May 1812 to 7 June 1814 (Napoleon abdicated for the first time on 6 April 1814 and left Fontainebleau for the Elba island on 20 April) and again from 28 March (Napoleon had returned to Paris on 20 March) to 30 June 1815 (after Waterloo on 18 June, Napoleon abdicated a second time on 22 June). The highest peak was £5. 16s. 8d. from 29 October to 12 November 1813 – as much as 50 per cent above the mint price.
12 On the discussions in 1819 about the Ingot Plan, see Bonar (1923), Sraffa (1952b) and Weatherall (1976).
13 Both pamphlets are published in vol. IV of Sraffa’s edition of Works, Principles being the object of vol. I. There is no other writing in vol. IV (published or in manuscript form) directly devoted to money (On Protection to Agriculture, published in 1822, contains one section on this question; see below Appendix 4). Of course, vol. V of Speeches and Evidence and vols VI to IX of Letters contain numerous mentions of monetary subjects. An important letter written by Ricardo in January 1823 on the question of the double standard came to light recently (see Deleplace, Depoortère and Rieucau 2013).
14 The initial transition from the existing system to the new one would be carried out by £15 million being issued to reimburse the capital of the Bank of England (thus extinguishing the interest-bearing public debt) and £10 million to buy from it an appropriate amount of gold reserve and exchequer bills.
15 Keynes perceived rightly that Ricardo’s views about note-issuing were not followed: “If Ricardo had had his way with his ingot proposals, commodity money would never have been restored, and a pure managed money would have come into force in England in 1819” (Keynes 1930: 14). The management of the currency by the Bank of England would start on a regular basis in the 1850s, after the Bank Charter Act proved inefficient to prevent the crises of 1847 and 1857; but it did not follow Ricardo’s lines and was mainly inspired by the “Banking Principle” of adjusting the discount rate, in the limits imposed by the “Currency Principle”.
16 The “open-market” policy – the purchase or sale of government securities in the market – was introduced by the Bank of England after the Bank Charter Act of 1844, but it was constrained by the legal link between the variation of the note issue and the variation of the metallic reserve.
17 “The transcript of this speech prepared for Hansard by Ricardo partly with cuttings from the Morning Chronicle’s report, is reproduced in the plate facing p. 332 below” (Note by Sraffa; V: 9).
There is, however, one speech of which we are now able to read Ricardo’s own report, undoubtedly written within a day after the debate; that is the speech on Mr Western’s Motion of 10 July 1822. The original transcript, hitherto unpublished, was found in the Mill-Ricardo papers and is given in the present volume instead of Hansard’s version, of which it is four times as extensive. This report, having been written by Ricardo himself so soon after delivering it, has an authority unequalled by any others, even by those of which we know, or can guess from their quality, that they were revised by him, since this revision would normally be carried out months later, owing to the delays in the preparation of Hansard. One can therefore take the report of the speech of 10 July 1822 as a standard by which to judge the quality of the others.
(Sraffa, 1952a: xxxi)
19 Hansard’s note reads: “This speech was written out by Mr. Ricardo for this work, and sent to the Editor a few days before his death” (V: 309) that is, at the end of August or the beginning of September 1823. It may thus be considered as the last paper on money written by Ricardo for publication.