32.: ricardo to malthus3[Answered by 33] - 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 malthus
[Answered by 33]
New Grove Mile end 22d. Decr. 1811.
My dear Sir
I write to you, in the first place to remind you that Mrs. Ricardo and I fully depend on having the pleasure of Mrs. Malthus’ and your company at Mile end in the next month, when we hope that our endeavors to make your visit comfortable, will induce you to make a long stay with us. In the second place, I am desirous of correcting some of the errors in the papers which I left with you and which I have been enabled to discover, as I have many others, by the ingenious arguments with which you have opposed my conclusions. In my endeavors to trace the effects of a subsidy in forcing the exportation of commodities, I stated, if I recollect rightly that it would occasion, first, a demand for bills; secondly, an exportation of all those commodities the prices of which already differed so much, in the two countries, as to require only the trifling stimulus which the first fall in the exchange would afford; thirdly, a real alteration in the relative state of prices, viz a rise in the exporting and a fall in the importing country,—in a degree too to counterbalance the advantage from the unfavourable exchange; and lastly, a further fall of the exchange and a consequent exportation of an additional quantity of goods and then of money till the subsidy were paid. It appears, then, that if the subsidy were small it would be wholly paid by the exportation of commodities, as the fall in the exchange would be sufficient to encourage their exportation, but not sufficient to encourage the exportation of money. If the exportation of money were in the same proportion as the exportation of commodities, that is to say, supposing the commodities of a country to be equal to 100, and its money equal to 2, then if not less than one fiftieth of the exports in payment of the subsidy consisted of money, prices would after such payment be the same as before in both countries, and although the exchange must have fallen to that limit at which the exportation of money became profitable, it would immediately have a tendency to recover, and would shortly rise to par; but it is precisely because less than this proportion of money will be exported that the exchange will continue permanently unfavourable and will have no tendency to rise, more than it will have to fall.
I believe you admit, that in the case of an augmentation of 2 pct. to our currency, altho’ it were wholly metallic, the prices of commodities would rise in this country 2 pct. above their former level, and that such rise being confined to this country alone it would check exportation and encourage importation; the consequence of which would be a demand for bills and a fall in the exchange. This rise of prices and fall of the exchange, proceeding from what you do not object to call a redundant currency, would not be temporary but permanent, unless it were corrected by a reduction of the amount of the currency here, or by some change in the relative amount of the currencies of other countries.
That these would be the effects of a direct augmentation of currency, I believe, you, with very few qualifications admit. Now as a bad harvest or the vote of a subsidy tend to produce the very same effects, namely, a relative state of high prices at home, accompanied by an unfavourable exchange they admit only of the same cure,—and as in the case of an augmentation of currency the exchange would have no tendency to rise, neither would it in the case of a subsidy the unfavourable exchange being in both instances produced by a redundant currency, or in more popular language by a relative state of prices which renders the exportation of money most profitable. I have uniformly maintained that the money of the world is distributed amongst the different countries according to their commerce and payments, and that if in any country it should from any cause happen to exceed that proportion, the excess would infallibly be exported to be divided amongst the other countries. I have, however, always supposed that my readers would understand me to mean that this would be strictly the fact only if money could be exported free from all expence. If the expences of exporting money to France be 3 pct., to Vienna 5 pct., to Russia 6 pct., and to the East Indies 8 pct., the currency of England may exceed its natural level as compared with those countries by 3, 5, 6 and 8 pct. respectively, and consequently the exchange may permanently continue depressed in those proportions. If an excess of currency once occurs, an unfavourable exchange must continue till some alteration in the relative amount of currency. The circumstances which may occasion such an alteration are numerous, and are fully detailed in the papers which I left with you. To the precise agreement between the effects of an augmented currency and the effects of a subsidy I most particularly request your attention, as on such agreement depends the whole success of the argument which I am advancing in favour of my opinion that an unfavourable exchange has no tendency to correct itself.
It may be urged that the relative state of high prices at home occasioned by an augmentation of currency is the natural effect of such a cause, but that this is not the case in a subsidy; that the exportation of commodities in payment of a subsidy is forced and that it will produce a glut in the foreign market, but that after the subsidy is paid and the necessity for exportation shall cease prices will rise in the foreign market to their former rate. This however will not be true. Commodities may rise in a trifling degree abroad but cannot regain their former rate unless the exchange should also rise to par, but this it can never do whilst the demand for bills do not exceed the supply. Now as the prices of foreign commodities in the home market which could not have been supplied in the usual abundance during the operation of the subsidy when we had a large balance to pay, would fall, and would be in greater demand from the moment that our commodities would be received in exchange, the exportation of our goods would be balanced by the importation of foreign goods and the sellers of bills would neither exceed nor fall short of the purchasers. These are the substance of the amendments which I wish to make to my paper, which is now so faulty that I shall be glad to have it returned to me. Have the goodness to bring it with you when you come to town.
I am my dear Sir Y rs. with great esteem