4 The two causes of change in the value of money
A currency might be depreciated, without falling in value; it might fall in value, without being depreciated, because depreciation is estimated only by reference to a standard.
(Speech in the House of Commons, 11 June 1823; V: 311)
Being defined in terms of all commodities except the standard, the value of money expressed the purchasing power of the people over goods. A change in this value consequently affected their real wealth (for the part of it composed of assets denominated in money) and their relative position as income-earners. It impacted debt contracts, such as land leases and loans to the State: as seen in Chapter 2 above, the question of whether the return to the pre-war parity of the pound compensated or not the loss suffered by the “public creditor” during the period of depreciation was hotly debated when resumption of convertibility was discussed. A rise in the value of money increased the real burden of taxation, and the general fall in money prices was held by the land interest as responsible for the post-war distress in agriculture. Public opinion was concerned about changes in the value of money; as Ricardo wrote to McCulloch on 9 June 1816:
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.
(VII: 38)
The question of the causes of a change in the value of money and of the means to prevent them from operating was thus given much attention. In the continuity of his distinction in the Bullion Essays between the value of gold and its price, Ricardo emphasised in Proposals and beyond the distinction between two causes of variation in the value of money: a change in the value of the standard and a spread between the market price of bullion and the legal price of the metal in coin:
When a standard is used, we are subject only to such a variation in the value of money as the standard itself is subject to; but against such variation there is no possible remedy. […] While these metals [gold and silver] are the standard, the currency should conform in value to them, and, whenever it does not, and the market price of bullion is above the Mint price, the currency is depreciated.
(Proposals; IV: 62‒3; Ricardo’s emphasis)
One should notice that Ricardo spoke here of a monetary system endowed with a standard.1 This contrasts with a frequent misunderstanding in the literature which leads to consider that for Ricardo, either the Bank of England note was not convertible into the standard and it was depreciated because of an excess quantity, or it was convertible and depreciation was made impossible, so that the value of money was exclusively determined by the value of the standard. The difference between the two regimes was not for Ricardo that the price of bullion was variable in the former and fixed in the latter (depreciation being thus excluded), but that it varied without or within limits. His theory of money aimed at determining these limits, and his Ingot Plan at reducing them to the minimum.
Misunderstanding has nourished a recurrent accusation made against Ricardo of having two contradictory theories of the value of money, one based on its quantity and one based on the value of gold. Section 4.1 intends to refute this accusation by analysing the direction of the causality between the quantity and the value of money. Section 4.2 exposes next the crucial distinction between “a fall in the value of money” and “a depreciation of money”. This leads in Section 4.3 to Ricardo’s idiosyncratic theory of the value of money, formalised in what I call the Money–Standard Equation. Section 4.4 concludes on the two causes of change in the value of money.
4.1 The direction of the causality between the quantity and the value of money
An alleged inconsistency or contradiction
On this question the modern literature often points to an inconsistency or a contradiction in Ricardo between the defence of a commodity-theory of money – which implies that the causality runs from the value to the quantity of money – and the adherence to the Quantity Theory of Money – which implies that the causality runs the other way round.
As recalled by De Vivo (1987), this accusation is already to be found in Marx:
The contradiction between a quantity and a labour (or a cost of production) theory of the value of money is obvious, and has often been discussed, as for instance by Marx, who deals with it in his critique of Ricardo’s monetary theory in A Contribution to the Critique of Political Economy (Marx however overlooks the presence in the Ricardo of the early 1810s of a scarcity conception of value). As Marx writes, ‘if the value of gold is given [by the labour embodied in it], the amount of money in circulation is determined by the prices of commodities’ (1859, p. 171), and not the other way round. […] There is no explicit attempt at reconciling the two conflicting views in Ricardo.
(De Vivo 1987: 195)
An example of how Marx’s influence in academic circles contributed to the propagation of this critique of inconsistency is given by the reception of Ricardo in Japan during the interwar period, as documented by Takenaga (2016: 16): “As for the theory of money and finance, the almost exclusive aim of a small number of research works was, after Marx, to highlight the inconsistency and contradiction between Ricardo’s theory of money and his theory of value in High Price.”
Schumpeter, however, did not see the coexistence of cost-of-production and quantity elements in the value of money as a contradiction and criticised Marx for having failed to see that the latter adjusted to the former:
It seems that he [Marx] took this position under the impression that the quantity theory of the value of money and the cost of production theory of money are alternatives between which the analyst has to choose. This is not so: the value of money as ‘determined’ by quantity and the value of money as determined by cost of production must, in the long run, necessarily coincide.
(Schumpeter 1954: 703n)2
Schumpeter thus considered this coexistence as a mere extension of the “Classical” theory of value:
The leading ‘classics’ solved the problem of this rather dubious value of money simply by extending to it their general theory of value. Accordingly, they distinguished a natural or long-run normal value of money and a short-run equilibrium value. The former or, as they also said – misleadingly – the ‘permanent’ value was determined by the cost of producing (or obtaining) the precious metals, the latter by supply and demand. […] Even Ricardo, in spite of his bent for long-run analysis, reasoned about money chiefly in terms of the [short-run equilibrium], that is, in terms of supply and demand. […] [He] tried to deduce the quantity theorem from the ‘law’ of supply and demand.
(ibid: 701‒3; Schumpeter’s emphasis)
Further authors accordingly questioned Ricardo’s incapacity for linking short term and long term in a consistent way – a recurrent complaint about him. Some of them considered that the two levels were simply juxtaposed and applied to different cases; see for example Laidler (1975: 217):
Ricardo’s work contains two different but not incompatible theories of the price level. In his policy writings during the period of the bank restriction he relied on the quantity theory of money as a short-run theory of prices, but in the Principles the price level was viewed as being determined in the long run by the cost of production of gold relative to the cost of production of other goods.
Others were more critical, such as Blaug:
Ricardo continued to expound a labour theory of value of the monetary metal while at the same time espousing a hard-line version of the quantity theory. He might have reconciled the two by reserving the quantity theory for short-run problems and for inconvertible paper, while maintaining the cost-of production theory for the long run and for specie money and convertible paper only. In fact, however, he left the two doctrines standing in an unresolved relationship to each other.
(Blaug 1995: 31; see also Blaug 1996: 127)
This was the old suspicion of contradiction in new dresses. In modern literature, the contention that Ricardo had two theories of money is also to be found in Arnon (2011), Green (1992), and King (2013).
The culprit of this alleged contradiction is the labour (or cost-of-production) theory of value, as stressed by De Vivo (1987: 195):
It is also to be remembered that the contradiction is only to be found in the Principles, and not in Ricardo’s earlier works on monetary theory, where he does not yet have a labour theory of value (this is the case also for Economical and Secure Currency).
According to De Vivo, these “earlier works” would more easily bend to the quantity theory of money because of a scarcity approach to value:
Ricardo’s early idea that scarcity is a regulator of prices alongside cost of production, is (partly also thanks to its vagueness) much more in accordance with a quantity theory of money than his later labour theory of value, whose consistency with his monetary theory is problematic. These problems of consistency Ricardo failed to solve, and to a large extent even to consider.
(ibid: 186)
On the contrary, I will argue that not only did this scarcity approach to value vitiate Ricardo’s position on money in the Bullion Essays, but an essential aspect of the theory of value advocated in Principles allows discarding the suspicion of contradiction: the determination of the value of competitively produced commodities by the cost of production with the portion of capital that pays no rent.
The “analogy” with a gold mine
In the Bullion Essays, scarcity was among the various factors that determined the value of every commodity, including precious metals:
Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.
(High Price; III: 52)
The role of scarcity in the determination of the value of gold was instrumental in the famous comparison made by Ricardo between the effects of the discovery of a gold mine and those of an additional issue of Bank of England notes, a comparison still made more dramatic by his supposition, in Reply to Bosanquet, that a gold mine was discovered on the premises of the Bank of England.3 This supposition allowed Ricardo to make an “analogy” between an increase in the quantity of money caused by an increased production of bullion and one by a discretionary issuing of inconvertible notes by the Bank of England:
Commerce is insatiable in its demands [for currency], and the same portions of it may employ 10 millions or 100 millions of circulating medium; the quantity depends wholly on its value. If the mines had been ten times more productive, ten times more money would the same commerce employ. This Mr. Bosanquet admits, but denies the analogy between the issues of the Bank and the produce of a new gold mine. […] Now supposing the gold mine to be actually the property of the Bank, even to be situated on their own premises, and that they procured the gold which it produced to be coined into guineas, and in lieu of issuing their notes when they discounted bills or lent money to Government that they issued nothing but guineas; could there be any other limit to their issues but the want of the further productiveness in their mine? […] Now if the mine should double the quantity of money, it would depress its value in the same proportion, and there would be double the demand for it. […] The analogy seems to me to be complete, and not to admit of dispute. The issues of paper not convertible are guided by the same principle, and will be attended with the same effect as if the Bank were the proprietor of the mine, and issued nothing but gold.
(Reply to Bosanquet; III: 215‒7)
Elsewhere in the Bullion Essays, Ricardo also drew a parallel between a gold mine and the Bank of England to emphasise that the fall in the value of money – that is, the general rise in money prices – was to be ascribed to the increase in the quantity of money, whether specie or paper:
If instead of a mine being discovered in any country, a bank were established, such as the Bank of England, with the power of issuing its notes for a circulating medium; after a large amount had been issued either by way of loan to merchants, or by advances to government, thereby adding considerably to the sum of the currency, the same effect would follow as in the case of the mine. The circulating medium would be lowered in value, and goods would experience a proportionate rise.
(High Price; III: 54‒5)
Given the conception of value held by Ricardo at the time, the cases of the mine and of the bank had in common that the fall in value resulted from a diminished scarcity. The explanation of the variations in the value of money did not differ from that of the variations in the value of gold: when a new mine was discovered, the supply of gold bullion increased and its value in terms of all other commodities declined, as the value of notes in terms of commodities declined when they were issued in a greater quantity (in both cases, unless for any reason the demand itself increased). Both for gold bullion and money, an increase in the quantity lowered the value, so that the effect of the discovery of a new gold mine descended directly to the fall in the value of money: an increased quantity of bullion sunk its value in terms of all other commodities and generated an increased quantity of money which also sunk its value. The “analogy” with an increased issue of inconvertible Bank of England notes was complete.4
Things changed with Principles. Applied to gold bullion, the adoption of a theory of the value of commodities based on their cost of production with the portion of capital that pays no rent paved the way to the rejection of an explanation of the permanent fall in the value of gold-money by the increase in the quantity of bullion, in favour of an explanation stressing the fall in its value. This was now in sharp contrast with the explanation of the effect of an increase in the note issue: here, the quantity of notes caused their depreciation, which, as the title of Ricardo’s 1810 pamphlet made explicit, was “proved” by a high price of gold bullion. A value effect – that of the discovery of a new gold mine – could now be clearly distinguished from a quantity effect – that of an increase in the note issue.
Paradoxically, the theory of value and distribution contained in Principles stressed the importance of a distinction already made by Ricardo in the Bullion Essays but obscured by the scarcity approach to value that he then adopted. This distinction was between the value and the price of gold, and he considered that failing to recognise it was the source of much “error” (see Chapter 3 above).5
The theory of value and distribution contained in Principles thus allowed understanding that the value of money might be affected either by a cause of change in the value of gold bullion – such as a change in its cost of production following the discovery of a new mine – or by a cause of change in the price of gold bullion – that is, a variation in the quantity of money issued. These two causes of change in the value of money being complementary and additive, the contradiction between his alleged commodity-theory of money and his alleged quantity theory of money vanishes.6 Still more important, we will see in Section 4.2 below that this distinction provides a key to a coherent theory of the value of money.
Incidentally, it seems that, in spite of this theoretical achievement, the “analogy” between a gold mine and the Bank of England survived in Principles:
If by the discovery of a new mine, by the abuses of banking, or by any other cause, the quantity of money be greatly increased, its ultimate effect is to raise the prices of commodities in proportion to the increased quantity of money; but there is probably always an interval, during which some effect is produced on the rate of interest.
(Principles; I: 298)
This quotation from Chapter XXI “Effects of accumulation on profits and interest” is part of Ricardo’s contention that the quantity of money had no permanent effect on the rate of interest, only a temporary one. It is the reason why he mentioned various causes which might generate an increase in the quantity of money, and he then recalled that, in such cases, the money prices of commodities increased proportionately – that is, the value of money declined. But this does not imply that the modus operandi of this decline was the same: as shown by Ricardo’s distinction (analysed below) between “a fall in the value of money” and “a depreciation of money”, “the discovery of a new mine” sunk the value of money through a fall in the value of gold, while “the abuses of banking” sunk it through a rise in the price of gold. One should of course be explicit about what this modus operandi is in both cases: this will be done below in Chapter 5 (where the “analogy” is further discussed) and Chapter 7 respectively.
The effect of a monopoly in issuing money
The understanding of these two separate and additive effects on the value of money also allows clarifying the first pages of Chapter XXVII “On currency and banks” of Principles, which might again be used as an illustration of the contradiction discussed above. This chapter opens with a paragraph that seems to fit perfectly a commodity-theory of money:
Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them, and bring them to market. Gold is about fifteen times dearer than silver […] solely because fifteen times the quantity of labour is necessary to procure a given quantity of it. The quantity of money that can be employed in a country must depend on its value: if gold alone were employed for the circulation of commodities, a quantity would be required, one fifteenth only of what would be necessary, if silver were made use of for the same purpose. A circulation can never be so abundant as to overflow; for by diminishing its value, in the same proportion you will increase its quantity, and by increasing its value, diminish its quantity.
(Principles; I: 352)
The causal relation is here from the value of money to its quantity, so that “a circulation can never be so abundant as to overflow”. The reason is simple: the circulating medium is here a commodity (gold or silver) produced in competitive conditions, as testified by the fact that the labour-theory of value applies to it, in the same way as it applies to all other competitively produced commodities. In the next paragraph, Ricardo considers what happens “while the State coins money” (ibid: 353): the (say, gold) coin will now have the same value as any piece of the same weight in gold whenever the State does not charge a seignorage for coinage, and a higher value if the seignorage reflects the labour cost of fabricating the coin. The causal relation from value to quantity remains the same, since the role of the State is restricted to fabricate the coin and put a stamp on it: coins simply replace bullion as means of circulation, without altering the competitive determination of their value.
Things change with metallic coinage being subject to a monopoly:
While the State alone coins, there can be no limit to this charge of seignorage; for by limiting the quantity of coin, it can be raised to any conceivable value.
(ibid)
The causal relation is here reversed: if the State monopolist of coined money restricts its quantity, it may increase its value above the value of gold it contains, without limit. The three successive steps mentioned by Ricardo are not meant to provide a history of metallic money: there is no indication, here or elsewhere, that Ricardo had historical situations in mind. They only illustrate the two channels by which the value of metallic money may change: either because the value of the standard (gold), produced in competitive conditions, varies, or because the quantity of coined money issued, subject to a monopoly, itself varies. We will see below in Section 4.3 how these two causes of change in the value of money add up.
Once this is understood for metallic money, one further step is to extend this approach to paper money:
It is on this principle that paper money circulates: the whole charge for paper money may be considered as seignorage. Though it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin. […] There is no point more important in issuing paper money, than to be fully impressed with the effects which follow from the principle of limitation of quantity.
(ibid)
This does not mean that the value of paper money, when it is issued by a monopoly – such as the one enjoyed by the Bank of England in the London area – only obeys “the principle of limitation of quantity”. This would be the case if the note were deprived of any link with a standard – that is, if it were inconvertible, like the Bank of England note after 1797. Provided the working of the monetary system equalises the value of paper money with the value of “an equal denomination of coin, or of bullion in that coin”, this value also varies with changes in the value of the standard, as metallic money does.
A conclusion emerges: the value of money (whether coin or paper) is determined neither like that of competitively produced commodities nor like that of monopolised commodities. It obeys a determination sui generis, as the next sections will show.
4.2 Ricardo’s distinction between “a fall in the value of money” and “a depreciation of money”
From the Bullion Essays to Proposals and beyond
As already mentioned above in Chapter 3, the knotty point in the understanding of the value of money in Ricardo is the distinction between “a fall in the value of money” and “a depreciation of money”. We will see below that this distinction is consistent with a theory of money that separates the two channels through which the causes of a change in the value of money are transmitted: the value of the standard and the price of the standard. It is consequently worthwhile to ask whether the distinction between a fall in the value of money and a depreciation of money was already implied by the distinction made in the Bullion Essays between the value of gold and the price of gold. The answer to this question is not straightforward. As testified by the title of the 1810 pamphlet, The High Price of Bullion, a Proof of the Depreciation of Bank Notes, Ricardo then already emphasised the link between “depreciation” and the “price of bullion”. The ambiguity concerns the other channel of transmission, from a fall in the value of bullion to a fall in the value of money. In the papers of 1819‒1823 both channels would be clearly distinguished, but there are still until 1816 mixed signals on this point. The denunciation of Thornton’s “error” that “proceeds from not distinguishing between an increase in the value of gold, and an increase in its money price” (III: 60) indeed led Ricardo to separate what happened on the side of gold – which was reflected in a change in the value of bullion, not in its price – from what happened on the side of money – which was reflected in a change in the price of bullion, not in its value:
That the scarcity of gold should increase its value cannot be doubted; […] but no scarcity, however great, can raise the market price much above the mint price, unless it be measured by a depreciated currency.
(The Price of Gold; III: 22)
In saying however that gold is at a high price, we are mistaken; it is not gold, it is paper which has changed its value.
(High Price; III: 80)
In the last quotation, Ricardo speaks of a change in the “value” of paper, which, because it is associated with “a high price” of gold, is confused with its depreciation. In a letter to Francis Horner of 5 February 1810 (discussed below in Chapter 6), Ricardo mentioned four possible causes of “the excess of the market above the mint price of gold bullion” (VI: 1‒2), that is, of a depreciation of money: the debasement of the coins, a market ratio of the price of gold to silver higher than the legal one, “a superabundance of paper circulation” (ibid: 2), and “the severity of the law against the exportation of gold coins” (ibid). A lower scarcity of gold bullion was not mentioned here, and this might infer that it was not for Ricardo a cause of the depreciation of money but of a fall in its value. However, still in the Essay on Profits of February 1815, Ricardo, while criticising an observation by Malthus on the beneficial effect of a rise in prices, listed a fall in the value of bullion among the various causes of a depreciation of money:
A rise of prices [of commodities] has been stated [by Malthus] to be one of the advantages, to counterbalance the many evils attendant on a depreciation of money, from a real fall in the value of the precious metals, from raising the denomination of the coin, or from the overissue of paper money.
(Essay on Profits; IV: 36)
Such ambiguity disappeared in Principles. In Chapter VII “On Foreign Trade”, after having discussed the notion of par of exchange (see Chapter 8 below) Ricardo concluded:
Some indeed more reasonably maintained, that 130l. in paper was not of equal value with 130l. in metallic money; but they said that it was the metallic money which had changed its value, and not the paper money. They wished to confine the meaning of the word depreciation to an actual fall of value, and not to a comparative difference between the value of money, and the standard by which by law it is regulated.
(Principles; I: 149)
This was also clear in the papers of 1819‒1823, as testified by the extract of a speech on 12 June 1822 given above in Chapter 3. This extract continues as follows, with Ricardo stressing the difference between the respective effects on prices of a depreciation of money and of a change in the value of bullion, and emphasising the continuity with what he had written six years before in Proposals:
If, for instance, the standard of the currency remained at the same fixed value, and the coin were depreciated by clipping, or the paper money by the increase of its quantity, five per cent, a fall to that amount and no more, would take place in the price of commodities, as affected by the value of money.7 If the metal gold (the standard) continued of the same precise value, and it was required to restore the currency thus depreciated five per cent, to par, it would be necessary only to raise its value five per cent, and no greater than that proportionate fall could take place in the price of commodities. In these cases he had supposed gold always to remain at the same fixed value; but had he ever said that there were not many causes which might operate on the value of gold as on the value of all other commodities? No, he had not, but just the contrary. No country that used the precious metals as a standard, were exempted from variations in the prices of commodities, occasioned by a variation in the value of their standard. To such variations we had been subject before 1797, and must be subject to again, now that we have reverted to a metallic standard. […] It had been imputed to him that he entertained the extravagant idea, that if a metallic standard was adopted, from that moment commodities were never to vary more than 5 per cent. A proposition so absurd he had never maintained – his opinion on that subject had never changed, and, if not intruding too much on the time of the House, he would quote a passage from a pamphlet he had published in 1816, on the subject of his plan of bullion payments, to show the House what that opinion had then been:
‘When a standard is used, we are subject only to such a variation in the value of money as the standard itself is subject to; but against such variation there is no possible remedy; and late events have proved that, during periods of war, when gold and silver are used for the payment of large armies, distant from home, those variations are much more considerable than has been generally allowed. This admission only proves that gold and silver are not so good a standard as they have been hitherto supposed; that they are themselves subject to greater variations than it is desirable a standard should be subject to. They are, however, the best with which we are acquainted. If any other commodity less variable could be found, it might very properly be adopted as the future standard of our money, provided it had all the other qualities which fitted it for that purpose; but while these metals are the standard, the currency should conform in value to them, and, whenever it does not, and the market price of bullion is above the Mint price, the currency is depreciated.’
(V: 204‒6; the quotation of Proposals by Ricardo is in IV: 62‒3)
The distinction between a fall in the value of money and its depreciation was then rooted in the idea that each term should be expressed in reference to something different: a fall in the value of money in reference to all commodities except the standard, and depreciation in reference to the standard itself. As a consequence, depreciation might infer a fall in the value of money, but since the value of money also changed with any change in the value of the standard in terms of all other commodities, this inference was not systematic: it could happen that the two causes of a change in the value of money operated in opposite directions, so that the value of money actually rose while money at the same time depreciated:
The term ‘depreciation,’ I conceive, does not mean a mere diminution in value, but it means a diminished relative value, on a comparison with something which is a standard; and therefore I think it quite possible that a bank note may be depreciated, although it should rise in value, if it did not rise in value in a degree equal to the standard, by which only its depreciation is measured.
(Evidence of 4 March 1819; V: 393‒4)
This possibility would be reaffirmed by Ricardo before Parliament in his speeches of 7 May 1822 and 11 June 1823 (see below) and mentioned in a letter to McCulloch of 25 March 1823:
Depreciation as applied to money must be understood to mean relative lowness as compared with the standard, and nothing else, and therefore money may be depreciated although it should rise in absolute value.
(IX: 276)
The evolution from the Bullion Essays to the 1819‒1823 papers, permitted by the writing of Principles, was from the critique of an “error” – “the error of this reasoning proceeds from not distinguishing between an increase in the value of gold, and an increase in its money price” (High Price; III: 60) – to that of a “mistake” – “the great mistake committed on this subject was in confounding the words ‘depreciation’ and ‘diminution in value’” (speech of 12 June 1822; V: 203), that is, confounding the value of money in terms of the standard and the value of money in terms of all other commodities. In order to formalise the relation between a depreciation of money and a fall in the value of money, it is first necessary to explicit what the definition and the measure of depreciation were for Ricardo.
The definition and measure of depreciation
Money was for Ricardo depreciated when its value VM was below the value VG of the standard of money, both values being expressed in terms of all commodities except this standard:
Depreciation meant a lowering of the value of the currency, as compared with the standard by which it was professedly regulated.
(Speech of 7 May 1822; V: 166)
How “the value of the currency” should be “compared” had been made explicit in Principles:
While gold is exclusively the standard in this country, money will be depreciated, when a pound sterling is not of equal value with 5 dwts. and 3 grs. of standard gold, and that, whether gold rises or falls in general value.
(Principles; I: 149)
The pound sterling was depreciated when its value in terms of goods was below that of the quantity (5 pennyweights and 3 grains) of standard gold corresponding to its legal definition. This depreciation was distinct from what happened to the value of gold (“whether gold rises or falls in general value”) and it was reflected in the spread between the market price in pounds of 5 dwts. and 3 grs. of standard gold and its legal level (one pound). The following extract of the speech of 12 June 1822 already quoted above illustrates how Ricardo exactly measured such depreciation:
His hon. friend (Mr. Bennet) had stated, that the depreciation in the value of the currency was in 1813 about 42 per cent. He thought his hon. friend had much overstated the amount of depreciation. The highest price to which gold had ever risen, and that only for a short time, was 5l. 10s. per ounce. Even then the Bank-note was depreciated only 29 per cent, because 5l. 10s. in Bank-notes could purchase the same quantity of goods as the gold in 3l. 17s. 
of coin. If, then, 5l. 10s. in Bank-notes was worth 3l. 17s. 10½d. in gold, 100 l. was worth 71l., and one pound about fourteen shillings, which is a depreciation of 29 per cent, and not 42 per cent, as stated by his hon. friend. Another way of stating this proposition might make it appear that money had risen 42 per cent; for if 14s. of the money of 1813 were now worth 20s., 100l. was now worth 142l.; but as he had already observed, nothing was more difficult than to ascertain the variations in the value of money – to do so with any accuracy, we should have an invariable measure of value; but such a measure we never had, nor ever could have. In the present case, gold might have fallen in value, at the same time that paper-money had been rising; and therefore, when they met, and were at par with each other, the rise in paper-money might not have been equal to the whole of the former difference. To speak with precision, therefore, of the value of money at any particular period, was what no man could do; but when we spoke of depreciation, there was always a standard by which that might be estimated.
(V: 216‒7)
The situation discussed by Ricardo was such that the highest level reached by the market price 
of an ounce of gold bullion during the period of inconvertibility had been £5. 10s. in 1813, above the legal price 
of an ounce of gold in coin, equal to £3. 17s. 10½d. At the moment when Ricardo spoke (in 1822), had for one year returned to the same level of 
Two conclusions could be drawn from these figures: one – rigorously established – was that in 1813 the Bank of England note was depreciated 29 per cent; the other – which, according to Ricardo, lacked precision – was that the Bank of England note had increased in value by 42 per cent between 1813 and 1822. The second part of the quotation explains why the latter inference should be discarded. On the one hand, measuring precisely the change in the value of money through time required expressing this value in terms of “an invariable measure of value” – something that could not be had (see Chapter 3 above). On the other hand, a change in the value of money between two moments in time “might not have been equal” to the difference in the price of bullion between them, for a reason that will appear clearly below: part of this change might be ascribed to a change in the value of bullion, not in its price. In contrast, depreciation was assessed at a given moment in time and in reference to an observable and unambiguous magnitude: the mint price.
The first part of the quotation mentions a disagreement about the measure of depreciation in 1813: 42 per cent ([£5. 10s. – £3. 17s. 10½d.] / £3. 17s. 10½d.) or 29 per cent ([£5. 10s. – £3. 17s. 10½d.] / £5. 10s.). Ricardo’s choice of the latter might seem arbitrary and only dictated by the wish not to “overstate” the maximum amount of depreciation observed during the inconvertibility period. There is nevertheless a rationale for this choice, consequent upon his definition of depreciation, as it is illustrated by the sentence: “the Bank-note was depreciated only 29 per cent, because 5l. 10s. in Bank-notes could purchase the same quantity of goods as the gold in 3l. 17s. of coin”. The “quantity of goods” purchased by “5l. 10s. in Bank-notes” is by definition the value (in goods) of the quantity of notes that purchases an ounce of gold bullion in the market, because £5. 10s. was in this case (in 1813) the market price of an ounce of gold bullion when paid in notes. As for the “quantity of goods” purchased by “gold [bullion contained] in 3l. 17s. of coin”, it is by definition the value (in the same goods) of an ounce of gold bullion, since £3. 17s. 10½d. was the legal price of an ounce of gold bullion when coined. This equality in value thus reads 
, which is the condition (3.5) of coherence of the price system in Chapter 3 
.
For Ricardo money was in this case depreciated by 29 per cent. Following the definition given above, money is depreciated when the current value 
of one pound is below 
, the value of the quantity of gold bullion legally coined in one pound, that is, according to the condition of conformity (3.8), 
. The measure d of depreciation, in percentage of this value, is consequently given by:
|
(4.1) |
By definition, d = 0 when the condition of conformity of money to the standard applies 
. Replacing in (4.1) 
by its value in (3.8) and 
by its value in (3.5) gives:
|
(4.2) |
When money is depreciated, it is the same to say that its value is below that of the standard or to say that the market price of gold bullion is above the mint price. After conversion of £5. 10s. and £3. 17s. 10½d. in pence for the sake of calculation, d in 1813 was equal to (1320 – 934.5) / 1320 = 0.29, as announced by Ricardo.
In the symmetrical case of an appreciation of money relatively to the standard, d < 0, that is, 
:
To say that money is more valuable than bullion or the standard, is to say that bullion is selling in the market under the mint price.
(Proposals; IV: 57)
One may now determine accordingly the rate of change in the value of money.
4.3 The Money–Standard Equation
Two channels of change in the value of money
Let me consider a period of a given length, starting in [1] and ending in [2], and the following notations:
: rate of change in the value of one unit of money (the £) in terms of all commodities except gold bullion.
: rate of change in the value of an ounce of gold bullion in terms of all other commodities.
: rate of change in the market price of an ounce of gold bullion.
d[1], d[2]: depreciation of the £ in [1] or [2], in percentage (
: depreciation; 
: appreciation).
Equality (4.1) defining d may be rewritten as follows:
|
(4.3) |
Applying (4.3) to [1] and [2] gives, according to the definition of 
:
|
(4.4) |
According to the definition of given by (3.8), 
. Equation (4.4) thus becomes:
|
(4.5) |
The rate of change in the value of money during the period is positively related to the rate of change in the value of the standard, this relation depending on the percentage of depreciation at the beginning and at the end of the period.
“In a sound state of the currency” – that is, for Ricardo, with convertibility of the standard into money and of money into the standard – d is constrained within narrow limits (see Chapter 6 below) so that the factors 
and 
may be neglected. Relation (4.5) may thus be rewritten as:
|
(4.6) |
This relation states that the rate of change in the value of money during the period is equal to the rate of change in the value of the standard plus the difference between the percentage depreciation of money at the beginning and at the end of the period.
Replacing 
and 
in (4.5) by their values according to (4.2) gives:
|
(4.7) |
Here also, “in a sound state of the currency” 
is constrained within narrow limits so that the factor 
may be neglected. Relation (4.7) may thus be rewritten as:
|
(4.8) |
I will call (4.7) the Money–Standard Equation (in short MSE), with (4.8) its simplified form. It states that the rate of change in the value of money during the period is determined by the rate of change in the value of the standard minus the rate of change in the price of the standard.8 The MSE thus formalises the conjunction of two additive channels through which the value of money may vary: a change in the value of the standard and a change in its price. In particular, money could rise in value while being depreciated – as testified by a rise in the price of bullion – because the value of bullion had risen more than its price:
Depreciation meant a lowering of the value of the currency, as compared with the standard by which it was professedly regulated. When he used the word, he used it in this obvious and proper sense. The standard itself might be altered, as compared with other things; and it might so happen that a currency might be depreciated, when it had actually risen, as compared with commodities, because the standard might have risen in value in a still greater proportion.
(Speech of 7 May 1822; V: 166)9
The MSE thus accounts for any combination of change in the value of gold bullion and of change in its price, the resultant being a rise, a fall, or constancy in the value of money:
A currency might be depreciated, without falling in value; it might fall in value, without being depreciated, because depreciation is estimated only by reference to a standard.
(Speech of 11 June 1823; V: 311)
The Money–Standard Equation embodies Ricardo’s particular theory of the value of money. The approximation used in (4.6) and (4.8) should not obscure the fact that (4.5) is rigorously deduced from the definition of depreciation (4.1), hence from the condition of conformity (3.8), and that (4.7) is rigorously deduced from (4.5): the determination of the rate of change in the value of money by the MSE is a consequence of its being a function of the rate of change in the value of bullion and of the difference between the depreciation at the beginning and at the end of the period. There is a particular case that shows even more clearly the link between the two expressions of the rate of change in the value of money: this is when 
. In this case, (4.5) simplifies in:
|
(4.9) |
Neglecting 
gives the simplified relation:
|
(4.10) |
Since in this case 
, one has 
as given by the relation of definition (4.2): the simplified relation (4.10) between the rate of change in the value of money and depreciation is ipso facto the MSE in its simplified form (4.8).
The significance of this particular case is the following. When during the period money returns from a depreciated state 
to a state of conformity to the standard 
the rate of change in the value of money is approximately equal to the rate of change in the value of bullion plus the initial depreciation. This was the case repeatedly discussed by Ricardo in 1819‒1823: although the lack of an invariable measure of value resulted in that “nothing was more difficult than to ascertain the variations in the value of money” (see above the quotation from the speech of 12 June 1822), Ricardo found it worthwhile to try and he had in mind a formula to evaluate these variations – the Money–Standard Equation. And we will see below that with the figures he used in his calculation the MSE in its simplified form (4.8) was not far from the exact relation (4.7): such approximation implied 
being underestimated by 0.5 per cent only.
Ricardo’s factual illustration
As exposed in Chapter 2 above, Parliament adopted in 1819 Ricardo’s Ingot Plan as the basis for the resumption of the convertibility of the Bank of England note, which consequently would be into bullion instead of coins as before 1797. In addition, a decreasing scale was decided for the legal price of gold (the de jure standard of money since 1816), which was intended to lower the market price of bullion – thanks to an appropriate contraction of the Bank of England note issue – so as to bring it in 1821 to the pre-war parity of £3. 17s. 10½d. Knowing the hostility of the Bank of England to a plan that compelled it to supply the circulation with small notes (£5 and under) instead of coins, Ricardo had opposed during the debates a proposition that offered the Bank of England the choice of paying its notes in bullion or in coin. His argument was that the necessity of purchasing large amounts of bullion to have it coined would increase the demand for it in the world market and trigger an increase in its value. The consequent rise in the value of money would add up to the effect of the anticipated fall in the market price of bullion – in accordance with the MSE – and generate an unnecessary general deflation of money prices:
By withdrawing paper, so as to restore the note to its bullion value (an alteration, by the bye, only of 3 per cent.), the House would have done all that was required. But if the House adopted the proposition of the hon. Gentleman (Mr. Ellice), another variation in the value of the currency would take place, which it was his (Mr. R.’s) wish to guard against. If that amendment were agreed to, an extraordinary demand would take place for gold, for the purpose of coinage which would enhance the value of the currency 3 or 4 per cent in addition to the first enhancement.
(Speech in the House of Commons of 24 May 1819; V: 11)
Although the proposition opposed by Ricardo was rejected, it was only for him a half-victory, since Peel’s bill stipulated that convertibility into coin would be resumed in 1823, treating thus the Ingot Plan as a temporary device, aimed only at facilitating the return to the pre-1797 situation. Confident in the advantages of his plan, Ricardo nevertheless believed that after having been tried during three years it would be made permanent when the legislature would consider again in 1822 the return to convertibility into coin scheduled for 1823. Unfortunately, things did not go that way; on the contrary, when the return to the pre-war parity in 1821 approached, Parliament decided to anticipate the resumption of convertibility into coin, and Ricardo’s Ingot Plan was dropped two years in advance. Lobbying by the Bank of England was not the only reason for this move; the acceleration of the fall in agricultural prices – which had started at the end of the war in 1815 – played its part in a Parliament dominated by the land interest, because it was attributed by those who suffered from it to the Ingot Plan itself.
The debates on this point continued after 1821 and Ricardo had to defend himself against the repeated accusation of being responsible for the general deflation. His defence was along two lines. First, relying on estimates made by Thomas Tooke, he argued that the fall in agricultural prices was not representative of the general deflation but could be explained by a specific factor: the excess of the supply of over the demand for agricultural products. Second, the Ingot Plan implemented between 1819 and 1821 was in no way responsible for the general deflation, estimated by Ricardo at 10 per cent. Half of it was the rightly anticipated consequence of the fall in the market price of bullion that had been managed in order to return to pre-war parity – an aspect that was distinct from the plan itself. The other half was the consequence of what he had warned against in 1819: sabotaging the plan, the Bank of England had immediately started to make heavy purchases of bullion to have it coined, and when its vaults were full of coins it had pressed Parliament to resume convertibility into specie so as to release them through the exchange of its small notes (more on this behaviour of the Bank of England below in Chapter 5). The estimated five per cent increase in the value of bullion triggered by the purchases of the Bank had doubled the resulting general deflation – a fact that could not be imputed to the Ingot Plan since it was precisely the outcome of the sabotage of it:
He [Ricardo] had undoubtedly given an opinion in 1819, that, by the measure then proposed, the prices of commodities would not be altered more than 5 per cent; but, let it be explained under what circumstances that opinion had been given. The difference in 1819, between paper and gold, was 5 per cent, and the paper being brought, by the bill of 1819, up to the gold standard, he had considered that, as the value of the currency was only altered 5 per cent, there could be no greater variation than 5 per cent, in the result as to prices. But this calculation had always been subject to a supposition, that no change was to take place in the value of gold. Mr. Peel’s bill, as originally constituted, led the way to no such change. […] The charge against him [Ricardo] was, that he had not foreseen the alteration in the value of the standard, to which, by the bill, the paper money was required to conform. No doubt, gold had altered in value, and why? Why, because the Bank [of England], from the moment of the passing of the bill in 1819, set their faces against the due execution of it. […] By their measures they [the Bank] occasioned a demand for gold, which was, in no way, necessarily consequent upon the bill of 1819; and so raising the value of gold in the general market of the world, they changed the value of the standard with reference to which our currency had been calculated, in a manner which had not been presumed upon.
This, then, was the error which he (Mr. Ricardo) had been guilty of: he had not foreseen these unnecessary, and, as he must add, mischievous operations of the Bank. Fully allowing, as he did, for the effect thus produced on the value of gold, it remained to consider what that effect really had been. The hon. member for Essex estimated it at 30 per cent; he (Mr. Ricardo) calculated it at 5 per cent; and he was therefore now ready to admit, that Mr. Peel’s bill had raised the value of the currency 10 per cent. By increasing the value of gold 5 per cent, it had become necessary to raise the value of paper 10 per cent, instead of 5 per cent, to make it conform to the enhanced value of gold.
(Speech of 11 June 1823; V: 311‒2)
As in 1819, Ricardo’s argument in 1822‒1823, which combined a 5 per cent increase in the value of bullion and a 5 per cent fall in its price to produce a 10 per cent rise in the value of money, is thus an illustration of the MSE:
|
(4.8) |
In this particular case: 
With these figures, the use of the simplified form (4.8) of the MSE instead of the exact form (4.7) leads to underestimate the rise in the value of money by 0.5 per cent only (for additional textual evidence on the MSE see below Appendix 4).
As far as I know, the only author having noticed Ricardo’s numerical example in his 1822‒1823 speeches is Richard Sayers:
Ricardo estimated the damage done by the Bank’s action as a 5 per cent appreciation in gold against commodities which, added to the 5 per cent appreciation in paper against gold as forecast in 1819, made it ‘necessary to raise the value of paper 10 per cent, instead of 5 per cent’.
(Sayers 1953: 42)
But Sayers did not interpret this numerical example as an illustration of a general relation providing a foundation of Ricardo’s monetary theory. Referring to this episode, Peach mentions that Ricardo:
[D]id not foresee the events that were to follow [Peel’s Bill] which led, in his 1822 estimation, to a ten per cent depreciation of paper [after] the Bank of England had (in his opinion) needlessly purchased large quantities of gold in anticipation of resumption, thus raising its market price independently of note issues.
(Peach 2008: 12; his emphasis)
As seen above, this was neither Ricardo’s observation nor his argument: according to him, the purchases of the Bank of England had led to a rise in the value of gold bullion (while its market price was in fact decreasing as a consequence of a contraction of note issues), resulting in a ten per cent rise in the value of money, of which five per cent were the consequence of its appreciation.
4.4 Conclusion
The theory of value and distribution contained in Principles allowed combining the distinction – already emphasised in the Bullion Essays – between the value of gold and the price of gold with the other distinction – which would be emphasised by Ricardo during the debates of 1819‒1823 – between the value of gold and the value of money. In addition to the two aspects analysed in Chapter 3 above – the conclusion that a general rise (fall) in money prices and a fall (rise) in the value of money were one and the same thing and the dilemma between stabilising the value of the standard of money and stabilising its price – the determination of relative prices by the comparative cost of production of commodities with the portion of capital that pays no rent allowed Ricardo understanding that, in a monetary system regulated by a standard, it was not by its quantity that the standard affected the value of money (as he believed in the Bullion Essays) but by its cost of production.
In various papers of 1819‒1823, Ricardo developed what had been germinating since Proposals (1816) and benefited from the theory of value and distribution contained in Principles (1817): an idiosyncratic theory of the value of money. At the same time he deepened his inquiry into an invariable standard of value, which, as shown in Chapter 3 above, led him to the conclusion that, although they were central in the analysis of the value of money, changes in the value of the standard of money – gold bullion – could not be ascertained with precision. Only a depreciation (or appreciation) of money could be measured unambiguously, since it was the difference between two observable magnitudes: the market price of gold bullion and the legal price of gold in coin – a claim he had repeated since the Bullion Essays of 1809‒1811. Nevertheless, the difficulty of measuring the effect of a change in the value of the standard on the value of money did not prevent Ricardo from theorising it.
Three conclusions may be derived from this analysis. First, a change in the value of money during a period results from the combination of a change in the value of the standard during that period and the difference in depreciation between the beginning and the end (equation (4.6)). Second, because depreciation is measured by the spread between the market price of gold bullion and the legal price of gold in coin – as advocated by Ricardo since the Bullion Essays – one may deduce the Money–Standard Equation (MSE): the rate of change in the value of money during a period is equal to the difference between the rate of change in the value of the standard and the rate of change in its price (equation (4.8)). Third, the MSE leads to conjecture how a change in the quantity of money may affect its value: through a change in the price of the standard. Not only does the MSE provide a key to the integration of money in Ricardo’s theory of value and distribution, but it also allows refuting the often-alleged contradiction between a supposed commodity-theory of money and a supposed quantity-theory of money: as will be shown in the next three chapters, a change in the cost of production of the standard (gold bullion) causes a change in the value of money in the same direction, while a change in the quantity of money causes a change in the market price of the standard in the same direction, hence a change in the value of money in the opposite direction. In other words, the quantity of money affects its value indirectly, through the market price of the standard – and not directly as in the Quantity Theory of Money – and this quantity effect adds up to the value effect generated by the conditions of production of the standard.
A striking consequence emerges: in a monetary system with convertibility of bullion into money (whether coin or note) and of money into bullion, the value of money is not determined by the ratio of the aggregate value of commodities to the exogenous quantity of money (its velocity of circulation being given). The quantity of money endogenously adjusts to the level that equalises the value of money with the value of the standard. And it does so through arbitrage that equalises the (variable) market price of the standard with its (fixed) legal price. Of course, this theory of money only applies to a monetary system with convertibility.
Ricardo obviously did not formalise the Money–Standard Equation. But he gave a numerical illustration of it, based on what actually happened between 1819 and 1821. He showed that the value of money had increased by 10 per cent during this period, as a consequence of the combination of a rise of 5 per cent in the value of gold bullion and of a fall of 5 per cent in its price – in conformity with what would be expected from the MSE. The rise in the value of bullion had then resulted from the unanticipated (by Ricardo) increase in the demand on the world market consequent upon the purchases by the Bank of England to replenish its reserve in coin. As for the fall in the market price of bullion, it had resulted from the deliberate contraction of the note issue aimed at making this price conform in 1821 to the pre-war legal price of gold in coin.
It remains now to explain how the value of money adjusts in response to a change either in the value of the standard – in relation with the difficulty of production of gold bullion – or in the market price of the standard – associated with a change in the quantity of money. This will be done in Chapter 5 for the former and in Chapters 6 and 7 for the latter.
Appendix 4: Evidence on the Money–Standard Equation: the “Draft on Peel” (1821)
As shown above in Chapter 4, the Money–Standard Equation (MSE) encapsulates Ricardo’s theory of the value of money when it is regulated by a standard. The MSE states that the rate of change in the value of money during a given period is equal to the rate of change in the value of the standard in terms of all other commodities minus the rate of change in the market price of the standard in terms of money. Since the rate of change in the value of money is by definition equal to (with an opposite sign) the homothetic rate of change in the money prices of all commodities except the standard (see Chapter 3 above), the MSE also determines what in modern terms is called the rate of change in the general price level so defined.
Chapter 4 has provided many textual proofs of the MSE that may be found in Ricardo’s speeches and evidence in Parliament between 1819 and 1823 (speeches in the House of Commons on 24 May 1819, 18 February, 3 April, 7 May, 12 June, 10 July 1822, 26 February, 11 June 1823, and evidence before the Committee on Resumption on 4 and 24 March 1819). Three texts, all of them written between December 1821 and April 1822, also illustrate the MSE. The most explicit is the draft of a letter that Ricardo envisaged to send to a newspaper to defend himself against the accusations made by William Cobbett and his followers. This “Draft on Peel” summarised Ricardo’s arguments on the rise in the value of money that had occurred since the adoption of Peel’s bill in 1819. Sraffa mentions in the presentation of the draft (V: 515) that the same arguments appeared in a letter to McCulloch, dated 3 January 1822; this is the second text quoted and commented on here. The third one is the section devoted to this question in Ricardo’s last pamphlet published in his lifetime, On Protection to Agriculture (April 1822).
After having described the context in which these three texts were written, I will comment on them in order to account for Ricardo’s arguments in terms of the MSE.
1. The context
The context of the extracts reproduced below was that of recurrent attacks on Ricardo in public opinion, which he summed-up in a letter of 11 December 1821 to Trower as follows:
In the country I find much error prevailing on the subject of the currency, every ill which befals the country is by some ascribed to Peel’s bill, and Peel’s bill is as invariably ascribed to me.
(IX: 122)
There was first the campaign launched against him by “the man who over the years was to write more about David Ricardo than any other among his contemporaries, William Cobbett” (Weatherall 1976: 55). Cobbett had created the Weekly Political Register, in which:
[H]is prejudices were very strong. They were never stronger than when he came to write about stockbrokers or Jews: stockbrokers were always Muckworms, metaphorically, in the Weekly Political Register; while Jews strained the resources of a remarkable vocabulary of abuse. To him, of course, impatient of fact, David Ricardo was always both a Muckworm and a Jew.
(ibid: 58)10
Cobbett had mocked Ricardo’s Principles in the Register of 20 May 1820:
[I]t has taken but a few months to shew that ‘a Ricardo’ is a heap of senseless, Change-Alley jargon, put upon paper and bound up into book; that the measure [the Ingot Plan], founded upon it, must be abandoned, or will cause millions to be starved.
(quoted in V: 41n; Cobbett’s emphasis)
Since Henry Brougham had in Parliament called Ricardo “so great an oracle” on 24 December 1819, Cobbett ironically dubbed him “the Oracle” and even “the Oracle by excellence”, as in his article of 20 October 1821 on the Agricultural Report and Evidence:
To refer to the market price of gold as a standard is exactly what the Oracle did; the Oracle of the ‘Collective Wisdom.’ Gold, says he, being the standard of all things in the world; every price depending on that of gold; and gold now being within four and a half per cent. of its lowest possible price, the prices of other things cannot, by this measure, be brought down more than four and a half per cent. […] This was the ground upon which Peel’s Bill was passed! This queer, this ’Change-Alley, this Jew-like notion of the price of gold being the standard. However, this was no new notion; it had been harped on by Oracle Horner and his Bullion Committee; by Lord King; and by a great many others, long before the Oracle by excellence spouted it forth.
(quoted in IX: 123n; Cobbett’s emphasis)
Cobbett’s attack on this question of gold as the standard was echoed in Ricardo’s above-quoted letter to Trower of 11 December 1821:
I proposed a scheme by the adoption of which there would not have been a demand for one ounce of gold, either on the part of the Bank, or of any one else, and another is adopted by which both the Bank and individuals are obliged to demand a great quantity of gold and I am held responsible for the consequences. If I had been a bank director, and had had the management of this currency question, I maintain that I could have reverted to a metallic standard by raising money (only) 5 pc., I do not say that having a metallic standard I could protect it from the usual fluctuations to which standards have at all times been subject. Cobbett says I am little better than a fool in speaking of gold as a standard, that the only fair standard is corn. He shews his ignorance in saying so, but supposing it true, can he tell me what is to secure us from variations in his standard, – it would perhaps be more variable than any other.
(IX: 123)
Ricardo’s particular irritation at the end of 1821 was consequent upon a meeting in honour of his friend in Parliament, Joseph Hume, held in Hereford on 7 December. Ricardo spoke there briefly to recall his proposal of extinguishing the national debt with “a general and fair contribution of a portion of every man’s property; not, as had been said, of the property of the landowner only, but of that of the merchant, the manufacturer, and the fundholder” (V: 472). He also advocated a reform of Parliament extending the right of vote to any householder, increasing the frequency of elections, and introducing “election by ballot”, that is, secrecy of suffrage (ibid: 473‒4). In this speech he did not touch the question of money and falling prices, but three days later, in a meeting in Monmouth again in honour of Joseph Hume to which Ricardo was not present, he was attacked on this subject by two speakers, Mr. Moggridge and Mr. Palmer. This led Ricardo to draft a six-page letter supposedly to be sent to a newspaper by someone defending him, as testified by the expressions “I regret that Mr. Ricardo was not present to answer for himself …” (ibid: 516), “To this Mr. Ricardo would probably answer that …” (ibid: 518), or “I am of opinion with Mr. Ricardo that …” (ibid: 519). This MS was discovered by Sraffa among the Mill–Ricardo papers and published by him under the name “Draft of a letter to a newspaper on the effects of Peel’s bill”. Sraffa mentioned that “the following draft letter was intended for an unidentified newspaper which had reported those speeches [by Mr. Moggridge and Mr. Palmer]: there is no evidence of its having been published or even sent” (V: 515).
In this draft, Ricardo referred directly to both speakers and settled the question of the change in money prices in terms of the relation between the change in the value of gold and the contraction in the quantity of notes:
What is the cause of this difference [in the price of wheat since 1819], – it is owing entirely to the alteration in the value of gold say Mr. Moggridge and Mr. Palmer. I want to know to what cause they ascribe this alteration in the value of gold and on this subject they are silent, they give us no satisfaction whatever. If the question had been asked them at the Meeting when they delivered their opinions they would probably have said it is owing to the contracted quantity of paper currency, – but this would have been far from a satisfactory answer, for they were bound to shew how the contraction of a paper currency acted on the value of gold.
(“Draft on Peel”; V: 516)
Meanwhile, Cobbett had taken advantage of what had happened during the meetings at Hereford and Monmouth and published in the issue of the Register dated 29 December 1821 a new vitriolic attack at Ricardo, under the title “MESSRS HUME AND RICARDO”:
That the former was invited to a dinner in Herefordshire I heard and was glad of; but, what the devil did the latter do there? What merits had he, except those of having asserted, that it was the easiest thing in the world to carry Peel’s Bill into effect, and that the fall in prices could be only four and a half per cent.? He is, to be sure, the Oracle in a certain place; but, what could the Herefordshire farmers see in him, or have to do with him? Faith! the Radical shoe-makers and carpenters and smiths and labourers know a little better than this. Their Oracles are a little more correct in their predictions. At Monmouth, to which place Mr Hume went, there was a little of good sense in the proceedings. There the Oracle got some decent raps on the fingers; but, there he was not.
(quoted in IX: 141n; Cobbett’s emphasis)
A few days later, on 3 January 1822, Ricardo wrote to McCulloch and complained about these attacks. After having presented in a compact form the arguments contained in the “Draft on Peel” he concluded:
Some of Mr. Cobbett’s admirers spoke of my false predictions at Monmouth – the same men were at Hereford, where I had an opportunity of speaking for myself, for I was present, and then they said nothing.
(ibid: 141)
Ricardo’s irritation against Cobbett did not weaken. In a letter to Trower of 20 February 1822, the same man in whom Mallet in his diary admired “his placid temper, the candour of his disposition, his patience and attention” (quoted in VIII: 152) called his opponent “a mischievous scoundrel”:
Cobbett is a mischievous scoundrel; he ascribes the evils under which the country is laboring to the altered value of money, and yet recommends the people to hoard gold, which he knows will increase the value of money still more. It is confusion he wants, and he cares not what means he takes to produce it. But in spite of him the country will get over its difficulties, and when it is again prosperous he will have the insolence to say that he foretold it.
(IX: 167)
This may be the reason why Ricardo felt it necessary to introduce in April 1822 in his pamphlet On Protection to Agriculture a whole section devoted to the demonstration that Peel’s bill could not be responsible for more than a ten per cent general fall in prices, of which half was to be attributed to an unnecessary and harmful behaviour of the Bank of England and nothing to his Ingot Plan.
2. Ricardo’s “Draft of a letter to a newspaper on the effects of Peel’s bill”, December 1821
Ricardo started to recall the existence of the Ingot Plan which he had exposed in Proposals:
It will be recollected that Mr. Ricardo wrote a pamphlet to shew that a currency might be regulated by a metallic standard without the use of any other metal as money but silver and copper the latter for payments under a shilling the former for payments under a pound. For this purpose Mr. Ricardo proposed that the Bank should be obliged to give gold in bullion in exchange for their notes if of a certain amount on the demand of the holder of them.
(V: 516‒7)
The quotation given below goes uninterrupted on pp. 517‒21 of Vol. V of Works. I have cut it here so as to comment on it in the light of the MSE.
In Proposals Ricardo had acknowledged that, if the Ingot Plan were adopted, it would not prevent future variations in the value of gold bullion, hence in the value of money. All currencies regulated by a standard were liable to the inconvenience of varying in value with the value of this standard. What he had contended was that the adoption of a currency so regulated by the standard would not in itself require a demand for bullion by the Bank of England to replenish its metallic reserve and thus would not in itself raise the value of gold bullion, hence the value of money. The only rise in the value of money to be expected was consequent upon the increase in the value of the Bank of England note so as to make it conform to the value of gold bullion – that is, according to the MSE, with a zero change generated by the Ingot Plan in the value of the standard the rise in the value of money would be equal to the 5 per cent fall in the market price of gold bullion necessary to make it agree with the pre-war mint price:
Did Mr. Ricardo mean by this that gold itself could not thereafter vary, and that if it did the currency which was to be regulated by the value of gold would not vary with it? Quite the contrary, it is evident from the whole of the reasoning of the pamphlet in question that he considered gold as a variable commodity, as well as corn or any other merchandize, but his argument was, ‘adopt my system which will render all demand for gold unnecessary, and will therefore probably be unattended with any variation in the value of that metal, and then the whole variation in the value of money will be only equal to the difference between the value of paper and the value of gold or 5pct. You can now buy a quarter of corn with as much gold as is coined into £ [blank] for the same quantity of corn you are obliged to give £ [blank] in bank notes. Diminish the quantity of bank notes and you will raise them 5pc. in value and when this is effected you will obtain a quarter of corn for £ [blank] in paper as well as in gold – the price of corn in gold will not be altered, its price in paper will fall 5 pct.’ it is for Mr. Palmer to shew what is defective in this reasoning. Mr. Ricardo could not mean to say that no variation should thereafter take place in the value of gold, he must have known full well that the currency of every country regulated by a metallic standard was liable to all the variations of that standard. In Mr. Ricardo’s speeches on Mr. Peel’s bill, to which reference has been made, he said that we should be still liable to have our currency vary in proportion as the metal varied which was the standard, but that this was an inconvenience to which all metallic currencies were exposed – it was one to which France, Holland, Hamburgh and all those countries whose currencies were on the most solid system were exposed, and no case could even be imagined to exempt a currency from such variations.
(ibid: 517‒18)
Contrary to the Ingot Plan, Peel’s bill of 1819 opened the possibility of a belated rise in the value of the standard, when convertibility into coin would be reverted to four years later and the Bank of England would purchase bullion to have it coined. Ricardo was well aware of that when the bill was adopted and thus he should not have maintained that the rise in the value of money would be limited to five per cent after the resumption of cash payments. However, according to him, such resumption might have proved unnecessary, if the advantages of the Ingot Plan had been fairly tested. This is why in 1819 Ricardo had advised the Bank of England to sell gold rather than to buy it:
It may be said that this is a good defence for Mr. Ricardo’s evidence before the committee, when he had reason to think that his plan was the one contemplated respecting the operation of which only he was examined, but it is not equally good for the opinion which he afterwards expressed in his speech when he had seen Mr. Peel’s bill and which was essentially different from his proposed plan as it provided for payments in coin in 1823 and therefore made a demand for gold obviously necessary and the rise of its value certain. To this Mr. Ricardo would probably answer that he saw no such obvious necessity for the demand for gold – that as he understood the bill no specie would be necessary till May 1823 four years distant from the time of discussion and he might confidently rely that if for 3 out of these 4 years his plan had a fair trial it would be found so efficient for all the objects of the most improved currency that the legislature would have altered the law and dispensed with specie payments altogether: In the speech to which allusion has been made I recollect he advised the Bank to sell gold instead of buying it so little did he think the quantity actually in the possession of the Bank inadequate for all the purposes of bullion payments.
(ibid: 518)
Ricardo’s expectations had been deceived because of the behaviour of the Bank of England, which immediately after Peel’s bill purchased bullion to have it coined in anticipation of the resumption of cash payments. This demand for gold by the Bank of England was implemented through a greater contraction of its issue than what would have been necessary to make the price of bullion fall by five per cent and be thus brought to the pre-war parity. The price of foreign bills consequently fell and this made the import of gold bullion in England advantageous (when the exchange rate of the pound rose to the import gold point; see Chapter 8 below). The Bank of England then purchased this additional bullion in the London market and had it coined by the Mint. When its vaults were filled with gold coins, the Bank of England applied to Parliament for having the right to release them against its small notes as early as 1821 – a request agreed by Parliament when it decided to resume at that date convertibility of the Bank of England note into coin. This demand for gold by the Bank of England, and the consequent rise in the value of gold, provoked a rise in the value of money (in addition to the one provoked by the fall in the market price of gold bullion) which could not fairly be imputed to Ricardo:
Mr. Ricardo cannot fairly be held responsible for the narrow views, and obstinate prejudices of the Bank of England. He could not contemplate that the Bank would so narrow the circulation of paper as to occasion such a rise in its comparative value to gold and the currencies of other countries as to make the influx of gold into this unexampled in amount. He could not foresee that they would immediately provide themselves with so large a quantity of gold coin as to make it incumbent on them to apply to the legislature to permit them to withdraw all their small notes and fill the circulation with gold coin even so early as the middle of 1821 – this is what Mr. Ricardo could not anticipate – he relied on there being no demand for gold and the Bank by their injudicious measures occasioned a demand for many millions. He supposed that the reverting from a currency regulated by no standard, to one regulated by a fixed one, the greatest care would be taken to make the transition as little burthensome as possible, but the fact is that if the object had been to make the alteration from the one system to the other as distressing to the country as possible no measures could have been taken by the Bank of England so well calculated to produce that effect as those which they actually adopted.
(ibid: 518‒19)
Taking into account the additional rise in the value of money caused by the behaviour of the Bank of England did not, however, lead to explain the whole of the fall in prices mentioned by Ricardo’s opponents to the rise in the value of money. Only a fall by 10 per cent was general and could be explained by it; 5 per cent due to the rise in the value of the standard consequent upon the demand for gold by the Bank of England (as evaluated by Thomas Tooke), plus 5 per cent due to the fall in the market price of the standard necessary to raise the value of the Bank of England note to the value of bullion (that is, to lower the market price of gold to its pre-war legal level). Ascribing to the rise in the value of money the 50 per cent fall in the prices of commodities, as Ricardo’s opponents did, could be proven absurd. Because the effect of the rise in the value of the Bank of England note as compared to gold on the rise in the value of money since 1819 was recognized as being 5 per cent – the difference between the market price of gold in 1819 and that in 1821 (equal to the mint price) – saying that the value of money had risen by 50 per cent amounted (according to the MSE) to saying that the value of gold bullion in terms of all other commodities had risen by 45 per cent. The value of gold bullion being established at the world level, such an enormous change in the gold-price of all commodities would have been observed everywhere in Europe. It was not so and this proved that contending that the value of money rose in England by 50 per cent was absurd:
In saying this it must not be supposed that I agree with Mr. Moggridge and Mr. Palmer that any thing like the effect which they compute has been produced on the value of the currency by reverting to specie payments. I am of opinion with Mr. Ricardo that if the Bank had followed the obvious course of policy which they ought to have pursued this great measure might have been accomplished with no other alteration in the value of money but 5pct, but by the course which they did adopt and the demand which they in consequence occasioned for gold bullion they have raised the value of that metal about 5pct more and consequently that the whole alteration in the value of the currency since 1819 has been about 10 pct. My reason for thinking that the demand for gold has caused a rise of 5pc. in that metal is nearly the same as that expressed by Mr. Tooke in his evidence before the Agricultural committee. This rise in the value of gold it must always be remembered is not confined to this country, it is common to all, and if the standard of all were gold and not silver, the money of all would have varied 5 pct. What cannot be too often insisted on is that that paper money has only increased in value 5 pc. more than gold – it could not have increased more because it is now on a par with gold and in 1819 and for 4 years before 1819 had not been depressed more than 5 pc. below gold. When Mr. Palmer says therefore that money has altered 50 pct in value in consequence of Mr. Peel’s bill he must mean that Paper money has risen 50 pct and gold bullion 45 pct. If this be true all commodities in this country as well as in every other ought to have varied 45 pc. as compared with gold – Does he or any other man believe this to be the fact? Are the people of France, Germany, Italy, Spain, Holland and Hamburgh obliged to give nearly double the quantity of commodities for the purchase of a given weight of gold. Can the Stock holder with the same money dividend procure double the quantity of all commodities he desires – it is notoriously otherwise and how men with such good understandings as Mr. Moggridge and Mr. Palmer can be made the dupes of such an absurd theory I am at loss to conceive.
(ibid: 519‒20)
Hence, if it was contended that the price of corn and other raw produce had fallen by 50 per cent, only 10 per cent could be ascribed to the rise in the value of money. The other 40 per cent were to be explained by causes specific to these commodities:
That raw produce is frightfully depressed no one can deny but that this depression is either wholly or in any very great part occasioned by the rise in the value of money is not made out by any plausible arguments. Corn and raw produce are not exempted from a fall of value more than other commodities and if it be true that they have fallen 50 pct 40 of that 50pct fall is entirely owing to causes which have operated on their value. Such variations are by no means uncommon. In 1792 wheat was at 39/- in 1800 134/- 1804 52/- 1808 81/- 1812 140/- 1814 67/- 1816 53/- 1817 109/- and it cannot be pretended that these variations were occasioned by the altered value of money. That some part of these variations may be imputed to variations in the value of money is not disputed, but while money varied 10 pc. corn varied 100 pc. and why may not the same have occurred now. Those who deny this are bound to give some reason for their opinion – hitherto they have given none.
(ibid: 520‒1)
3. Ricardo’s letter to McCulloch of 3 January 1822
The quotation given below goes uninterrupted on pp. 140‒1 of Vol. IX of Works. Here also, my comments aim at accounting for Ricardo’s arguments in terms of the MSE.
The forecast made by Ricardo in 1819 was that the Ingot Plan would require no additional demand for gold, so that its value would remain unaltered. The only expected change in the value of money was thus consequent upon the fall in the market price of an ounce of gold bullion from £4. 2s. to £3. 17s. 10½d., required to make the value of the Bank of England note conform to the value of bullion – that is, £3. 17s. 10½d. in notes (and no longer £4. 2s.) having henceforth the same value as an ounce of gold bullion (the legal price of which as anticipated by Peel’s bill for 1821 was £3. 17s. 10½d.). This expected 5 per cent fall in the market price of bullion – in Ricardo’s terms its appreciation – would raise the value of paper money by 5 per cent:
Cobbett and his followers keep up incessant attacks upon me, for having said in my evidence before the Bank Committee, that the restoring the currency to the ancient standard, would only alter its value 5pct. He forgets that I was speaking of the plan recommended by me for restoring it, which would not have called for the use of any gold, and which would therefore not have occasioned any demand for that metal; and then, I ask, what there was in reverting to a bullion standard to make prices alter more than 5 pct.? Suppose that in 1819, when gold was at £4. 2 – pr. oz, we had had two prices, a paper price and a bullion price; £4. 2 –, in paper, would have purchased no more than £3. 17. 10½ in gold. By raising the value of paper 5 pt. would not £3. 17. 10½ in paper purchase the same, as the like sum in gold?
(IX: 140)
All that the Bank of England had to do, according to the Ingot Plan implemented by Peel’s bill, was to reduce its issues so as to bring back the market price of an ounce of gold bullion from £4. 2s. to £3. 17s. 10½d.. But at the same time the Bank of England purchased gold in anticipation of the return to convertibility of its notes in specie, which had been stipulated in Peel’s bill as scheduled for 1823. So doing, it provoked an increase in the value of bullion, hence in the value of paper money, at a moment when the latter was already raised – through the above-mentioned fall in the market price of bullion – to make its value in commodities conform to that of bullion. The result was harmful to the country:
If indeed during the operation of limiting the amount of paper, I make immense purchases of gold, and lock it up in a chest, or devote it to uses to which it had not before been applied, I raise the value of gold, and thereby lower the prices of goods, both in gold and in paper, which latter must conform to the value of gold; and this is precisely what the Bank have done. They have, from ignorance, made the reverting to a fixed currency as difficult a task to the country as possible.
(ibid)
Such behaviour of the Bank of England was wholly unnecessary. Surely, the resumption of convertibility into specie required additional metallic reserves. But the adoption of the Ingot Plan – that is, convertibility into bullion – from 1819 to 1823, as decided in Peel’s bill, was intended to prevent such immediate additional demand for gold, with its harmful consequences. One could even hope that the success of the plan would postpone the resumption of specie payments indefinitely, and with it the additional deflation imposed on the country. The abrupt move by the Bank of England had unfortunately the opposite result: it accelerated the resumption of convertibility into specie as early as 1821 and consequently the substitution of coins for small notes – the very object of the Bank of England:
Cobbett forgets too that Peel’s bill absolutely prohibited the Bank from paying in specie till 1823. All the friends of that bill had a right to expect that the Bank would make no preparation for specie payments till 1822, one year before the period fixed, and I for one flattered myself that if from 1819 to 1822 it were found that the system of bullion payments was a safe and easy one, specie payments would be still further deferred, but the Bank had strong prejudices against the plan and immediately commenced purchasing bullion and coining money, and were absolutely forced to come to the legislature for permission, last year, to pay in specie, as they had accumulated a large quantity of coin. After they had been foolish enough to do so, it became a matter of indifference whether parliament agreed to their request or refused it – indeed it was more desirable to comply with it: – the evil had already been done by the purchase and accumulation of gold, and no further mischief could arise from the substitution of the coins (in circulation) for the paper which they were desirous of withdrawing.
(ibid: 140‒1)
4. The pamphlet On Protection to Agriculture, April 1822
In Section V of this pamphlet, entitled “On the Effects produced on the Price of Corn by Mr. Peel’s Bill for restoring the Ancient Standard” (IV: 222‒35) and in the “Conclusion” to it (ibid: 261‒6), Ricardo used the same arguments as in the two preceding texts:
There was nothing in the plan [the Ingot Plan] which could cause a rise in the value of gold, for no additional quantity of gold would have been required, and therefore 5 per cent. would have been the full extent of the rise in the value of money.
(IV: 224)
Their [the Bank of England] issues were so regulated, that the exchange became extremely favourable to this country, gold flowed into it in a continued stream, and all that came the Bank eagerly purchased at 3l. 17s. 10½d. per ounce. Such a demand for gold could not fail to elevate its value, compared with the value of all commodities. Not only, then, had we to elevate the value of our currency 5 per cent., the amount of the difference between the value of paper and of gold before these operations commenced, but we had still further to elevate it to the new value to which gold itself was raised, by the injudicious purchases which the Bank made of that metal.
(ibid: 225)
Mr. Tooke […] came to the conclusion that the eager demand for gold made by the bank in order to substitute coin for their small notes, had raised the value of currency about five per cent. In this conclusion, I quite concur with Mr. Tooke. If it be well founded, the whole increased value of our currency since the passing of Mr. Peel’s bill in 1819, may be estimated at about ten per cent. To that amount, taxation has been increased by the measure for restoring specie payment; to that amount the fall of grain, and with it of all other commodities has taken place as far as this cause alone has operated on them; but all above that amount, all the further depression which the price of corn has sustained, must be accounted for by the supply having exceeded the demand; a depression, which would have equally occurred, if no alteration whatever had been made in the value of the currency.
(ibid: 228)
The cause of the present low price of agricultural produce is partly the alteration in the value of the currency, and mainly an excess of supply above the demand. To Mr. Peel’s bill, even in conjunction with the operation of the Bank, no greater effect on the price of corn can, with any fairness, be attributed than 10 per cent., and to that amount the far greatest part of the taxation of the country has been increased: but this increased taxation does not fall on the landed interest only; it falls equally on the funded interest, and every other interest in the country.
(ibid: 262)
Notes
1 At the time of the publication of Proposals (February 1816) gold had not yet been legally declared as the sole standard. It is the reason why the quotation refers to metals (in the plural).
2 For another refutation of Marx’s critique, see Marcuzzo and Rosselli (1991: 56):
Marx’s interpretation loses the distinction between the fall in the value of gold and the depreciation of money. In Ricardo’s view, a variation in the quantity of money with respect to its natural level would provoke a change in the value of money, defined as the purchasing power of the currency over the standard; but it would not change the value of the standard, which depended on the specific conditions prevailing on the gold market.
This argument is, however, weakened by the adoption of a definition of the value of money by its purchasing power over the standard.
3 The same supposition is already to be found in one of the three letters on the Bullion Report published by Ricardo in the Morning Chronicle, that of 24 September 1810 (III: 150).
4 According to Schumpeter (1954: 704 n13), “His [Ricardo’s] famous analogy between the Bank’s power under the Restriction Act and the discovery of a gold mine in the Bank’s courtyard was not only telling but, so far as it went, also correct.”
5 The denunciation of this “error” would be repeated by Ricardo each time it led to a wrong diagnosis, such as the one made by the Directors of the Bank of England in 1819: “They still maintain that the high price of bullion in their depreciated medium, means the same thing as a high exchangeable value of bullion in all other things” (Letter to McCulloch, 7 April 1819; VIII: 21).
6 For another refutation, based on the notion of “natural quantity of money”, of this alleged contradiction, see Marcuzzo and Rosselli (2015: 373‒4).
7 One should understand that such a fall would occur if depreciation were to be eliminated, as it is stated in the following sentence. Depreciation raised prices by five per cent, and consequently prices would fall by five per cent if “it was required to restore the currency thus depreciated five per cent, to par”.
8 In previous publications where the Money–Standard Equation appeared I presented it in continuous time (see Deleplace, 2008: 26; 2013a: 119; 2013b: 984; 2015c: 348). Its presentation in discrete time seems closer to what Ricardo had in mind, as in the factual illustration above.
9 The sentence about a currency being depreciated while it rises in value was quoted in substance in Blake (1823) on which Ricardo’s notes have been published in Works: “And in another part of his evidence he [Mr. Ricardo] says, ‘I think it quite possible that a bank note may be depreciated, although it should rise in value, if it did not rise in value in a degree equal to the standard’”, a sentence that gave rise to Ricardo’s modest comment: “I believe all the other witnesses agreed with Mr. Ricardo in this explanation of the meaning of the word depreciation” (IV: 330). He had, however, many occasions to complain of it not being the case, as in his speech in the House of Commons of 10 July 1822: this meaning was “a doctrine which I have always maintained but which is now very often in this house and out of it called in question” (V: 236)
10 Cobbett’s animus survived Ricardo’s death, as testified by his observations on Gatcombe (then owned by Ricardo’s second son David) and Bromesberrow Place (owned by Ricardo’s elder son Osman) during his tours of England in 1825 (see Weatherall 1976: 99, 131).