Money and currency

Ricardo is typically portrayed as a representative of orthodox monetary views and a strict advocate of a narrow quantity theory of money (see Blaug 1995: 31, who echoes Schumpeter 1954: 703).

In his book Ricardo had pointed out the important role of a standard of value, which was to provide a solid basis upon which to assess the causes of changes in the prices of commodities; see his chapter I, “On Value”. After some deliberation he decided to take gold to be a standard that performed reasonably well vis-a-vis the requirement of being an “invariable standard of value” in the sense that it was produced across time with roughly always the same amount of labour needed directly and indirectly per ounce. On the one hand, gold was a commodity like any other commodity, and its value was regu­lated as that of other commodities by the amount of labour expended in its production. On the other hand, gold served as money under the gold standard and as such was not a commodity; see his chapter XXVII, “On Currency and Banks”. The “only use” of the standard, Ricardo insisted, “is to regulate the quantity, and by the quantity the value of a currency” (Works IV: 59; emphasis added). If the state coins money and charges a seignorage for coinage, “the coined piece of money will generally exceed the value of the uncoined piece of metal by the whole seignorage charged” (Works I: 353). Hence the value of gold (of a given weight and fineness) and the value of money will differ and the difference will depend on the quantity of money provided. Ricardo was concerned with proposing an ideal monetary system, which he defined in the following way: “A currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent.” (Works I: 361).

In Ricardo we encounter the purchasing power theory of exchange rates and the theory of a gold currency including the mechanism that is seen to bring about an equali­zation of the balance of payments. In the Bullion Controversy, which generated impor­tant insights into the functioning of a monetary system without convertibility, Ricardo fought on the side of the “bullionists” who argued in favour of a swift return to the Gold Standard. An increase of the domestic relative to the foreign price level leads via the flow of commodities and capital to a falling external value of the domestic currency and thus prompts a tendency towards the parity of its purchasing power at home and abroad.

For a through treatment of Ricardo’s monetary theory, see also Laidler (1975), Marcuzzo and Rosselli (1991), Arnon (2011) and Deleplace in Kurz and Salvadori (2015).