Front Page Titles (by Subject) 3.: ricardo to sir philip francis - The Works and Correspondence of David Ricardo, Vol. 6 Letters 1810-1815
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3.: ricardo to sir philip francis - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 6 Letters 1810-1815 
The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005). Vol. 6 Letters 1810-1815.
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First published by Cambridge University Press in 1951. Copyright 1951, 1952, 1955, 1973 by the Royal Economic Society. This edition of The Works and Correspondence of David Ricardo is published by Liberty Fund, Inc., under license from the Royal Economic Society.
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ricardo to sir philip francis1
New Grove Mile-end 24th. April 1810
In compliance with your request, when I had the honour of seeing you, I will endeavor to repeat in writing, as nearly as possible, the substance of the observations, which I made in defence of the passage in my pamphlet, on which you have animadverted in the second edition of your work.2 Your dissent from my conclusions is expressed in the following words
“Supposing any given quantity of paper (and no more) to be necessary for the uses of circulation, and that any issue beyond that quantity would be superfluous, then the consequence seems to be, that, in proportion as the Bank issued more of their paper, the country banks must issue less, because so much less, on the whole, would be wanted.”1
To which I answer, that if the quantity of paper necessary for the uses of circulation were a given quantity, and would not admit of increase, the truth of the above proposition could not be successfully controverted, but, as the circulation, under the present circumstances of the restriction on the Bank-payments in specie, admits of an indefinite increase, the issues of the Bank of England will be the cause of a proportionate increase in the issues of the country-banks.
Let us suppose, that the whole amount of the paper currency in England, in circulation, is, at any one moment twenty millions, and that that sum is fully adequate to all the purposes of circulation;—that of these 20 millions, 5 millions, are exclusively current in London and consist of Bank of England notes; and that the Bank, without any alteration in the state of commerce or of credit, increase the amount of their notes one million.
The circulation of the London district being increased one fifth, from 5 to 6 millions, whilst that of the country continued as before,—the prices of commodities would be considerably raised in London, at the same time that they continue stationary in the country. Commodities would therefore be sent from the country to be sold in London, and this would continue till the usual level between London and country prices were again restored, and the additional million had been divided between London and the country, in the same proportion as the 20 millions had been originally divided.
This would be the operation if the country Banks did not increase the amount of their notes; but the conductors of those establishments are sufficiently alive to their interests readily to avail themselves of any opportunity which might offer of increasing the issue of their notes, provided they had a reasonable probability of being able to continue them in circulation. This opportunity would now be afforded them. The London currency having been increased and the prices of goods raised in the London markets, the country banks would be enabled to add to the country currency till the same effect had been produced on the prices of commodities in the country. The amount necessary for such purpose would be precisely a fifth of the country currency, or three millions, that having been the proportion in which the currency of London had been increased. The country currency would for a short time1 be relatively deficient but could not continue so, and must therefore be raised to its usual proportion to the London currency, either by participating in the million which the Bank of England had added to the general circulation2 , or by increasing the amount of the country bank notes. The bank of England then by increasing the amount of their notes one million, would enable the country banks to increase theirs three millions, so that four millions would be added to, and absorbed in the general circulation of England.
If the country banks commenced this operation by adding to the amount of their notes, whilst the amount of those of the Bank of England remained stationary, they could not maintain them in circulation. Their notes would be exchanged for Bank of England notes till they were reduced to their former amount. The steps by which this would be effected are these. There would be a rise in the prices of commodities in the country only; which would therefore be sent from London to the country to be sold for country bank notes in the dearer market; the country bank notes would be exchanged, as by law they may be, for bank of England notes, as these would be wanted to purchase again in the cheaper market, and this would continue whilst there existed any profitable difference in the prices of commodities in the two markets. By these means the country bank notes would speedily be reduced to their former amount.
I hope Sir I have been so fortunate as to make myself understood by you;—if I have not, I shall be happy to give you any further explanation of my meaning. If you see occasion still to differ from me, I shall be glad to have your reasons for so doing; but if, as I hope, you should agree with me in the principle here stated, I shall be gratified by the communication.
[On the reverse side of the sheet, in Osman Ricardo’s hand-writing:
‘The signature of this letter to Sir Philip Francis was cut off to give to Mr Edwards of Ross who wished to have my Father’s signature. O.R. Oct: 26th 1846’.]
[1 ]MS (a copy or draft in Ricardo’s handwriting) in R.P.—Headed ‘To Sir Philip Francis’ in Osman Ricardo’s handwriting.
[2 ]Reflections on the Abundance of Paper in Circulation, and the Scarcity of Specie, by Sir Philip Francis, K.B., 2nd ed., London, Ridgway, 1810.
[1 ]p. 60. The passage continues: ‘I should be much obliged to David Ricardo, as I am already on other accounts, if he would explain this matter by its process, in a plain popular way, without resorting to metaphysics; and also on what evidence he states it, as a matter of fact, or why he believes it to be probable, that any increase in the issue of Bank paper enables the country banks to add more than four times that amount of their own. [High Price of Bullion, above, III, 86–7 and cp. n. 1.] All this, he would be able to explain, if it be true, by a short paragraph in the Morning Chronicle.’
[1 ]‘for a short time’ is ins.
[2 ]Replaces ‘either by decreasing the amount of Bank of England notes’.