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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

V. Reform Without Departure from the Metallic Standard

The currency difficulties of the period, and especially the violent fluctuations after 1815 in the premium on gold, in commodity prices, and in business conditions, gave rise to a number of proposals for reform of the currency, with greater stability of its value as the objective. We will deal first with those proposals which involved a restoration and maintenance of a metallic standard of some sort, and then with those more radical proposals which involved the complete abandonment of a metallic standard and the substitution of a stabilized paper standard.

From at least 1809 on, proposals had been made that further depreciation of the currency should be checked, and at the same time a disastrous fall in prices avoided, by returning to the gold standard at then prevailing price of gold in terms of paper, instead of at the old par. The Bullion Committee held that devaluation would be a “breach of public faith and dereliction of a primary duty of Government,” 1 while Huskisson characterized it as “a stale and wretched expedient.” 2 Ricardo, writing in September, 1809, when, it should be noted, a marked depreciation had been prevailing for less than a year, not only termed devaluation “a shocking injustice,” but for some reason which he does not make clear, claimed that it would not remove the premium on gold over paper and would result in a further rise in commodity prices.3

Devaluation was not without its advocates in 1819, but they failed to receive a sympathetic hearing in influential circles. There was considerable impatience at the failure of the government to redeem the pledge which it had repeatedly given from 1814 on that resumption would be carried out at the old par as soon as practicable; and the decrease of the premium on bullion in 1819 to a point where the paper currency was almost at a par with gold, and the widespread feeling that the resumption of cash payments at anything less than the mint par would serve still further to increase the reputedly excessive profits of the Bank of England, also operated strongly to prevent devaluation from becoming a practical issue at the critical moment when policy was to be decided. Ricardo was therefore in accord with parliamentary sentiment in giving little or no consideration to the desirability of resumption of cash payments at a higher mint price for gold than the old par. In his testimony before the Parliamentary Committees of 1819 Ricardo still advocated resumption at par, with no reference to devaluation that I have been able to find.4 But in a speech in Parliament in 1820, Ricardo stated that if the premium on gold had not fallen to 5 per cent while the 1819 Committees were sitting, he would have favored an alteration of the standard in preference to a return to cash payments at the old standard,5 and he later made similar statements.6

By Silberling and Angell, this is taken as evidence of a revolution in Ricardo's views, corresponding to a change in his personal economic status from that of presumably a large holder of fixed-income securities to that of a landed proprietor. But Ricardo's will shows that he still had very large holdings of securities at his death, and the apparent change in his views can be explained in a much more creditable—and credible—way. When he attacked devaluation in 1809, the pronounced depreciation in the currency had prevailed only for a few months. By 1819 it had prevailed for some ten years, and many of the existing contracts had been entered into on the basis of such depreciation. What would be glaring injustice in the one situation might well be defended as the closest approach to justice available in the other situation.7

During the period of rising prices, the bullionists, Ricardo included, had always explained the mode of operation of a metallic standard as if, under given conditions in the world at large, it dictated to a country adhering to it a specific quantity of currency and a specific range of commodity prices. After 1815, however, Ricardo made it clear that he regarded the gold standard as not absolutely inflexible, but as permitting for short intervals of time some degree of latitude with respect to the quantity of currency and the level of prices which could be maintained under it. His charge that the Bank had so managed resumption as to bring about a greater contraction of the currency and a sharper fall in prices than was necessary would be unintelligible if he did not hold such views.8 In 1816 he proposed a remedy for the periodic scarcities in currency which occurred prior to the dates of payment by the government of the quarterly dividends on the public debt.9 He thought that the rigid rules for granting loans followed by the directors of the Bank made commercial discounts unsuitable as an instrument for the regulation of the volume of currency, and therefore recommended that the managers of the currency should engage in open-market operations when expansion or contraction of the currency was desirable.10

Walter Hall argued that if there were a return to the gold standard—which he vigorously opposed—the Bank of England should maintain generous specie reserves, so that it would not be necessary for it to make its note issue fluctuate in exact correspondence with specie movements. Whenever an unfavorable balance of payments occurred which was due to temporary factors, the Bank should permit gold to flow out without contracting its issues.11

John Rooke, although an advocate of more thoroughgoing currency stabilization than was possible on a fixed metallic basis,12 insisted that there were limited possibilities of price stabilization even on a fixed metallic basis:

A plain view of actual events would, therefore, seem to point out the justice and propriety of augmenting the circulating medium when prices have a tendency to fall, and of diminishing it when they have a tendency to rise. There is always a direct mode of acting at hand. A greater or less amount of bank paper may always be forced out of or into circulation, as occasion may require, and to a given extent, without causing the price of gold to vary. It evidently does not follow at all times, that an increase of bank paper will occasion a rise in the market rate of gold, since that depends upon the circumstance, whether the circulation of the paper money be carried to its greatest possible extent, which is seldom the case.13

Torrens also claimed that the gold standard permitted some scope for flexibility of the quantity of the currency, within the limits of the gold points. If a return were made to the gold standard, it would be desirable that the range between the gold points should not be too small. He therefore urged the retention of the laws against the melting and export of coin, as operating to raise the gold export point. For the same reason, he opposed Ricardo's plan of substituting ingots of bullion for gold coin. Coin was a “less eligible article of export” than bullion, and therefore would not reflect as closely as bullion the fluctuations in the foreign balance of payments.14

In 1812 Torrens had advocated raising the tariff as a means of making resumption of cash payments possible without resulting in a fall in the English price level. He conceded that this would involve a loss of the advantages of the “territorial division of employment,” but he maintained that the evil of a fall in prices was greater than the benefit from foreign trade.15 Another writer made a similar proposal in 1818:

A more rapid method however of increasing the price of commodities, may be found in the adoption of a paper currency; which, if aided by uniform duties on importation, will not entirely drive out of circulation the precious metals. By this means they may be kept at par with the paper, so long as the amount of paper issued does not exceed its due proportion to the rate of the import duties.16

In 1819 the Bank of England urged that if it were to be required to make gold payments, it should not be at a fixed rate, but at the market price of gold in paper, whatever that might be when its notes were being presented for payment in gold.17 Ricardo pointed out the obvious flaw in this proposal: The Bank, by regulating its issue of paper, could determine the price of gold in paper, and therefore would not be subject to any real limitation on its note issue.18 Only slightly less naive was George Booth's proposal.19 He advocated a paper standard currency. He vaguely suggested that a paper currency must de natura retain a constant general purchasing power, but gave no hint as to what he would do if the purchasing power of the paper currency should in fact fluctuate. But because of the liability to forgery of paper money of small denominations, he would retain gold and silver coinage. The standard would be the paper money, of which £1 would equal 20 silver shillings. The quantity of silver in a silver shilling would be made to vary with the market price of silver in paper money, so as to maintain parity of value between a paper pound and the quantity of silver in 20 silver shillings. The existing gold guineas were to be retained unaltered in their metallic content, but the number of shillings, paper or silver, which the guinea was to represent was to be varied according to the market price of gold in shillings. Booth failed to specify, however, any criterion for regulating the quantity of paper shillings in order to maintain stability of their purchasing power.

John Rooke, in 1824, made a somewhat similar proposal, which was not guilty, however, of the crucial omission in Booth's scheme of any plan for the regulation of the paper money issues.20 Rooke advocated a convertible paper currency so regulated in its amount as to have stable purchasing power. He proposed that, as the purchasing power of the paper currency increased, the amount of paper money should be increased, and vice versa. The market price of gold in paper should be permitted to fluctuate freely, but convertibility of the paper currency should be maintained by changing the value in shillings or the denominations of the gold coins whenever necessary. The paper money would thus have a constant purchasing power, but the gold coins would have a variable value both in shillings and in general purchasing power. Rooke preferred, as the criterion for stabilization of the purchasing power of the currency, the “annual price of farm labor” to the price of any other commodity or set of commodities, because it has few or no short-term fluctuations. But he conceded that “the prices of other things might be taken into account as well as labor, if doing so would give more exactness to the exchangeable value of the currency.” 21

Henry James, in 1818, advocated continuance of the Bank Restriction in order to avoid deflation.22 In 1820 he recommended stabilization of the purchasing power of the currency in terms of wheat and agricultural labor, but did not make any concrete suggestions as to the method of stabilization.23

Joplin was in general a strong adherent of a metallic standard currency, but he nevertheless recommended that gold payments should be stopped temporarily during periods of crop shortages, if otherwise the external drains of gold would result in sharp declines in prices.24

[1]Bullion Report, p. 74.

[2]Huskisson, The question concerning the depreciation of our currency stated, 1810, p. 18.

[3]“The hint thrown out of altering the mint price to the market price of gold, or, in other words, declaring that 3 1. 17 s. 10½ d. in coin, shall pass for 4 1. 13 s., besides its shocking injustice would only aggravate the evil of which I complain. This violent remedy would raise the market price of gold 20 per cent above the new mint price, and would further lower the value of bank notes in the same proportion.” Three letters on the price of gold [1809], J. H. Hollander, ed., 1903, p. 18.

[4]Cf., however, Silberling, “Financial and monetary policy,” loc. cit., p. 437; Angell, Theory of international prices, p. 56, note.

[5]“At the time when that discussion took place, he certainly would rather have been inclined to have altered the standard than to have recurred to the old standard. But while the Committee was sitting, a reduction took place in the price of gold, which fell to 4 1. 2 s. and it then became a question whether we should sacrifice a great principle in establishing a new standard, or incur a small degree of embarrassment and difficulty in recurring to the old.” Hansard, Parliamentary debates, 2d series, I (May 8, 1820), 191.

[6]Ricardo to Wheatley, Sept. 18, 1821, in Letters of David Ricardo to Hutches Trower and others, p. 160; On protection to agriculture [1822], Works, p.468.

[7]Cf. Ricardo, in the House of Commons, June 12, 1822 (Hansard, Parliamentary debates, 2d series, VII, 946, italics not in original): If, in the year 1819, the value of the currency had stood at 14 s. for the pound note, which was the case in the year 1813, he should have thought that upon a balance of all the advantages and disadvantages of the case, it would have been as well to fix the currency at the then value, according to which most of the existing contracts had been made ...

[8]Cf. Hansard, Parliamentary debates, 2d series, VII (June 12, 1822), 939 (Ricardo speaking): His hon. friend had said, that whilst the Bank was obliged to pay its notes in gold, the public had no interest in interfering with the Bank respecting the amount of the paper circulation, for if it were too low, the deficiency would be supplied by the importation of gold, and if it were too high, it would be reduced by the exchange of paper for gold. In this opinion he did not entirely concur, because there might be an interval during which the country might sustain great inconvenience from an undue reduction of the Bank circulation.

[9]Proposals for an economical and secure currency [1816], Works, pp. 410–11.

[10]Hansard, Parliamentary debates, 1st series, XL (May 24, 1819), 744; Plan for the establishment of a national bank [1824], Works, p. 512.

[11]Walter Hall, A view of our late and of our future currency, 1819, pp. 48 ff,

[12]See infra, pp. 208–09.

[13]An inquiry into the principles of national wealth, 1824, pp.214–15.

[14]A comparative estimate of the effects which a continuance and a removal of the restriction upon cash payments are respectively calculated to produce, 1819, pp. 36 ff.

[15]An essay on money and paper currency, 1812, pp. 56 ff., 295.

[16]Anthony Dunlop, “Sketches on political economy,” Pamphletter, XI (1818), 424.

[17]In response to a question sent to the Bank by the 1819 Lords Committee, the directors replied: “The attainment of bullion by purchase in the market at £3. 17s. 6d, is, in the estimation of the Court, so uncertain, that the Directors, in duty to their Proprietors, do not feel themselves competent to engage to issue bullion at the price of £3. 17s. 10½d.; but the Court beg leave to suggest, as an alternative, the expediency of its furnishing bullion of a fixed weight to the extent stated, at the market price, as taken on the preceding foreign post day, in exchange for its notes; provided a reasonable time be allowed for the Bank to prepare itself to try the effect of such a measure.” Lords Committee, Report, 1819, appendix a.8, p. 314.

[18]On protection to agriculture [1822], Works, p. 470.

[19]George Booth, Observations on paper currency, 1815, pp. 22 ff., 36 ff.

[20]An inquiry into the principles of national wealth, 1824, pp. 216–17, 226–27, 460 ff. Irving Fisher has acknowledged Rooke as an anticipator of his own “compensated dollar” plan.

[21]Ibid., p. 462. In 1819, Rooke had advocated a continually depreciating currency: “A system which secures a constant depreciation in the real value of money, is alone calculated to accelerate national wealth.” (Remarks on the nature and operation of money, 1819, p. 57.) But later in the same year he withdrew his support of a depreciating currency, because it “carries along with it in its train, evils and irregularities that, ultimately, may more than counterbalance the good to be derived from its adoption.” (A supplement to the remarks, 1819, p. 4.) He advocated instead a stable monetary system “conforming to the prices of the last 16 years,” and presented in outline the proposals which in his later work he developed in greater detail. As in his later work, he proposed that stabilization be accomplished in terms of the wages of farm labor, but because of the delay in the adjustment of farm wages to changes in prices of commodities and also because of the problem created by fluctuations in harvests, he suggested that wages in export industries be followed as a guide; presumably for short-term fluctuations. (Ibid., pp. 88 ff.)

[22]Considerations on the policy or impolicy of the further continuance of the Bank Restriction Act, 1818.

[23]Essays on money, exchanges, and political economy, 1820, p. 203. In a later work, he advocated raising the price of silver in paper currency as prices fell, and in the same proportion, thus approaching closely to Rooke's proposal.(State of the nation, 1835, p.173.)

[24]Views on the subject of corn and currency, 1826, p. 76.