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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

IV. Ricardo's Position on the Gold Standard

Although Ricardo believed that stability of its purchasing power was the criterion for an ideal standard of value, the effect of the suspension of cash payments on the purchasing power of the pound received no emphasis in his appraisal of the consequences of the suspension. In the first place, he thought the measurement of general purchasing power impossible.1 Secondly, he attached great importance, on ethical grounds, to the maintenance of contractual obligations, and regarded it as vital that creditors should be enabled to collect, upon the maturity of their claims, the amount of gold specified by or contemplated by the contractors. He regarded it as unjust to withhold from a creditor the benefit of any rise in the purchasing power of his monetary claim as long as he was obliged to assume the risk of any fall in its purchasing power.2

It is a mistake to suppose, however, that Ricardo assumed or believed that gold always maintained a constant purchasing power, and that a premium on gold over paper always meant that paper had fallen in value and never meant that gold had risen in value, views frequently attributed to him by anti-bullionists and apparently ascribed to him by Silberling in the following passage: “Ricardo assumed that gold was still effective as a legal standard and could never itself rise in price in terms of paper. It was always paper that fell, not gold ... that rose.” 3 Ricardo never denied that it was possible for the value of gold to fluctuate, and claimed for it only that it was more stable in value than any other commodity:

A measure of value should itself be invariable; but this is not the case with either gold or silver, they being subject to fluctuations as well as other commodities. Experience has indeed taught us, that though the variations in the value of gold and silver may be considerable, on a comparison of distant periods, yet, for short spaces of time, their value is tolerably fixed. It is this property, among other excellencies, which fits them better than any other commodity for the uses of money.4

Ricardo complained, in fact, that while all his argument rested on the fluctuations in the price of gold, his opponents insisted on raising objections based on the fluctuations in its value. Although he was justifiably skeptical of it, he did not deny that an increase in the value of gold had occurred during the war; he claimed only that it was irrelevant to the question of whether depreciation of the paper currency had occurred.5

The violent currency and price fluctuations which followed the termination of hostilities led Ricardo later to admit that gold and silver were more variable in their value even in short periods of time than had generally been recognized. He still insisted, however, that the variations in the value of gold were irrelevant to the bullionist case, and that in spite of these variations gold and silver still provided the most stable standard of value available.6 It was apparently Ricardo's position that since gold and silver were in general more stable in value than an inconvertible paper currency would be, in case of departure from a metallic standard the paper currency should ordinarily be so regulated as to give to it the value which a metallic currency would have had under like circumstances, even if this should occasionally result in a greater instability of the value of the currency than would have prevailed if the paper currency had not been so regulated.

Malthus, in the same spirit, maintained that even if gold had risen in its world value during the Restriction, as some critics of the Bullion Report had claimed, it would nevertheless be desirable to restore the paper currency to parity with gold.7 Although sufficiently loyal to the metallic standard, John Stuart Mill refused to go so far, though his refusal, given his denial that the circumstances which would justify this heresy had ever existed, was rather academic:

... Mr. Blake is of opinion, that instead of causing a variation, it [the Bank Restriction] prevented that which would necessarily have taken place, if the currency had continued on a level with its nominal standard. We ourselves, if we could believe the Bank Restriction to have had this effect, should be among the warmest of its defenders and supporters.8

[1]Cf. Proposals for an economical and secure currency [1816], Works, p. 400.

[2]Cf. Reply to Mr. Bosanquet's observations [1811], Works, p. 326; Proposals for an economical and secure currency [1816], Works, p. 403.

To the argument that departure from the metallic standard involved injustice to bondholders, Thomas Attwood later replied that when bondholders lent their money, they knew that their debts were in terms of pounds sterling, whose metallic content had been altered in the past and was liable to alteration in the future. If they wanted to make certain that they would be repaid the same amount of bullion as they had lent, they should have stipulated “in a special contract, that their debts and dividends should be paid in so many ounces of silver or of gold, and not in the variable medium of the pound sterling. They never thought of such a contract as this, but were content to advance their money in the usual way, taking a large interest, and generally a large premium, as a consideration for the depreciation of money which they naturally saw was in progress.” (Observations on currency, population, and pauperism, 1818, pp. 178–79.) This is, of course, specious reasoning. The absence of such stipulations in contracts was due, not to a consious assumption of risk of alteration of the standard, but to the absence of recognition that there was any risk of such an alteration. In earlier centuries, when the risk had been apparent, such stipulations, akin to the modern “gold clauses,” had been at least occasionally introduced into contracts.

[3]“Financial and monetary policy,” Quarterly journal of economics, XXXVIII, 424.

[4]High price of bullion, Works, p. 270, note.

[5]Cf. Ricardo to Horner, Feb. 5, 1810, Minor papers on currency, p. 40;Ricardo to McCulloch, March 25, 1823, Letters of Ricardo to McCulloch, p.146. Ricardo thought that “whether in point of fact gold really rose or paper really fell, there is no criterion by which this can positively be ascertained.” (Ibid) Cf. also Hansard, Parliamentary debates, new series, VII (June 12, 1822), 947.

[6]“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.” (Proposals for an economical and secure currency [1816], Works, p. 402.)

“The bullionists, and I among the number, considered gold and silver as less variable commodities than they really are, and the effect of war on the prices of these metals were [sic] certainly very much underrated by them. The fall in the price of bullion on the peace in 1814, and its rise again on the renewal of the war on Bonaparte's entry into Paris are remarkable facts, and should never be neglected in any future discussion on this subject. But granting all this it does not affect the theory of the bullionists.” Ricardo to Trower, Dec. 25, 1815, Letters of David Ricardo to Hutches Trower and others, 1899, p. 12 Cf. similarly, Francis Horner, in a speech in the House of Commons on May 1, 1816 (Hansard, Parliamentary debates, 1st series, XXXIV, 145): “The opinions which he had formerly given had received a strong and unexpected confirmation by late events; but he had already modified the opinion which he had formerly given as to the price of gold. When by the depreciation of the currency, gold was permanently separated from paper, it was subject to all the variations in price of any other article of merchandise.”

[7]“Review of the controversy respecting the high price of bullion,” Edinburgh review, XVIII (1811), 451. Cf. Substance of two speeches of Henry Thornton, Esq., 1811, p. 72: “It was said that gold itself had risen; but even if it had, gold being the standard, we were bound to hold to it; we had held to it in the general fall, and we ought to abide by it in its general rise also.”

[8]Review of Blake's Observations, 1823, Westminster review, II (1824), 47. Blake, in 1823, had recanted some of his previously published views, and now claimed that it had been gold which had risen in value, and not paper which had fallen. (Observations on the effects produced by the expenditure of government, 1823, pp. 17, 79.) As Mathias Attwood pointed out (Letter to Lord Hamilton, 1823, pp. 68–69), Blake was hopelessly confused. Blake insisted that gold had risen in value and that paper had not fallen, although he conceded that there had been a rise in commodity prices in terms of paper, and that this rise was greater than the rise of gold in terms of paper.