Front Page Titles (by Subject) 333.: ricardo to mcculloch1[Reply to 331.—Answered by 344] - The Works and Correspondence of David Ricardo, Vol. 8 Letters 1819-June 1821
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333.: ricardo to mcculloch1[Reply to 331.—Answered by 344] - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 8 Letters 1819-June 1821 
The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005). Vol. 8 Letters 1819-1821.
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ricardo to mcculloch1
The same error of considering a premium of 1 pct. on one sum to be equal to the discount of 1 pct.; on a similar sum, is committed in another place. If a commodity worth £100 rise to £200,—it will rise 100 pct.; but if it fall again to £100 —it will fall only 50 pct.. No commodity can fall 100 pct. if it retain any value whatever. Apply this observation to beginning of page 8,3 where you speak of paper being worth only half its nominal value, “or which is depreciated 100 pct.” should it not be 50 pct.?
2 I think the cause of the exchange with the country, being favorable to London, is owing to rather an excess of currency in the country.4 The same cause might produce the same effect, if nothing but coin were used both in London and the Country. Diminish the quantity of Country currency, and the exchange would be in favour of the Country. It never will be so reduced, because it is the interest of Country Banks to maintain the largest amount possible of Country circulation. I cannot help thinking that in all cases an unfavorable exchange may be traced to a relative redundancy of currency.
Suppose a country to carry on its circulation with coins, its market and mint price of gold to be the same, and its exchanges at par with other countries. Now suppose gold to be in great demand for our manufactures, its price would rise above the mint price, if the coin could not be readily converted into bullion; but it would be converted into bullion, and consequently the coin being reduced in quantity, would rise in exchangeable value with other commodities. A fall in the value of commodities here would encourage the exportation of goods and the importation of gold, and thus by an influx of gold would our currency be again increased in quantity and lowered in value, and till it was so, the exchange would be favorable to England.
But suppose England to carry on its circulation by means of paper only, not exchangeable for gold, and the same demand for gold to arise for our manufactures, gold would rise, estimated in paper, and therefore with the same computed exchange as before it might be advantageous to import gold. But even in this case it may I think be justly said that the exchange was unfavorable to the foreign country because its currency was relatively redundant. Bullion is the commodity in which the value of currencies would be estimated. That of England would be lowered in value for it could command, after the rise in the price of bullion, fewer ounces than before. Those of Foreign Countries (within the limits of the expences of transmission) would be the same as before:—bullion or coin would purchase the same quantity of commodities abroad as before; in England it would purchase more. The same quantity of paper in England would be equivalent to a less quantity of gold—the same quantity of foreign money would be equivalent to the same quantity of gold. The exchange would vary on account of the relatively higher value of the currency of the foreign country1 .
3 You say that the price of Foreign Bills of exchange depends entirely on two circumstances; [“]first, on the value of the currency at the place where they are made payable, compared with the value of the currency at the place where they are drawn; and secondly, on the relation which the supply of bills in the market bears to the demand.”2 From what I have said you will perceive that I see no difference between these two causes—they appear to me to be one and the same. The supply of bills and the demand for them must depend on the previous purchases and sales of goods in the two countries, and these are entirely influenced by relative prices. But relative prices are determined by relative value or quantity of currencies. Increase the quantity of currency in France, goods will rise in France, and will be exported thither from England. Bills on France will fall in England, bills on England will rise in France. The demand and supply will be strictly regulated by the relative value of the currencies of the two countries. Double the quantity of currency in England and commodities will rise to double their former price3 in England, and twice the quantity of the money of England will be given for the former quantity of the currency of France. This is undoubtedly a mere nominal alteration, the real value both of commodities and bills will be the same as before. In fact the real par is altered, and nothing else. Instead of ascertaining the par by a consideration of what the pound sterling was formerly worth, it should be computed with reference to its present value, which is to be known by the value of the bullion which a pound can command.
We mean the same thing, but I doubt whether there be any advantage in the distinction which is drawn between real and nominal exchange; by correcting the par, with every alteration in the bullion value of money,1 all would be clear. *See the end of this paper.
[Note at the end of the paper] *On further reflection there may I think be real use in the distinction drawn between the nominal and real exchange, but the distinction should be clearly defined. The exchange may be said to be nominally affected to the amount of the difference between the market and mint prices of bullion, and be really affected by any deviation from par exceeding or falling short of this difference. You have I think so defined them.
4 In the article on Foreign Exchange you say “the price of foreign bills depends on the value of the currency at the place where they are made payable, compared with the value of the currency at the place where they are drawn.” But soon after it is said “that the comparative value of the currencies of particular countries must depend 1st on the relative value of bullion in those countries and 2dly on the quantity of bullion contained in their coins, or on the quantity of bullion for which their paper money, or other circulating media, will exchange.[”]2 Do you not then mean to say that the price of Foreign bills depends on the relative value of bullion in the countries between which they are negociated? Under some circumstances you agree with me that bullion might possess a higher value in Poland, than in England, but a bill on France for 10000 francs would not vary in either of those countries on that account,—the same quantity of bullion must be paid in both for the bill on France, without any regard to the quantity of corn or labour that can be commanded by it. It is true that the expences of sending bullion from France to Poland may exceed the expence of sending it to England, but this circumstance will not alter the par, although it will allow of a greater deviation in the exchange from par between the more distant countries, before bullion moves to stop the rise or fall of the exchange. I cannot help thinking that the language of the Bullion Report is correct, and that it would introduce a new and less satisfactory definition if we were to allow of these expences in estimating the par of exchange between different countries.1 Suppose that the expence of sending silver from Poland to France or from France to Poland, to be 5 pct. it would in my opinion be correct to say that the exchange was at par when 100 ounces of silver in Poland would purchase a bill for 100 ounces of silver payable in France. According to your explanation I do not know whether you would estimate it to be at par when 105 ounces were given in Poland for a bill of 100 ounces payable in France or when 105 were paid in France for a bill of 100 ounces payable in Poland.
The restraints laid on the exportation of gold may lower its relative value in Spain 3 pct., and therefore if from that which is usually called the par, there should be a difference in the computed exchange of 3 pct. against Spain, that deviation may as justly be called a nominal deviation, as if it were occasioned by an abundant paper money not convertible into bullion. The market price of bullion that could be legally exported would in Spain be 3 pct. above the mint price.2
5 In this paragraph the word value has an ambiguous meaning. In the first sentence I understand [“]whatever occasions a rise or fall in the relative value of the precious metals estimated in commodities must proportionably affect the nominal exchange with other countries[”]1 , in which I agree, if you suppose that the precious metals can be forcibly detained in such country;—if they are free to pass, I think it is the real exchange which will be affected, altho’ the exportation of the metals will not continue till the exchange is at par—it may remain for a very considerable time unfavorable to the exporting country, within the limits of the expences of transmitting bullion. When you speak afterwards of the “difference between the value of the precious metals in the home and foreign market,[”] in what do you estimate that value? If you say in goods, I ask in the goods of which country?
6 This2 would depend on the abundance of the clipped money. If not in excess the real par would or ought to be estimated, not by what the coin contained of pure metal, but what it would have contained if not clipped. The depreciation of the currency is inferred as a necessary consequence of a clipped coin.
8 Does not this paragraph5 confirm the above opinion? The real par is justly estimated by the current value of the pound sterling—that current value is depreciated, hence a new real par is, or ought to be, established.
9 Because it rarely happens that the currency of one or other is not redundant. It is redundancy or deficiency which is the cause of balances being paid from one to the other.1
10 We should not have imported a single ounce of bullion from Hamburgh, because the real exchange would not be such as to afford a profit on its importation, while there were goods which could be imported to more advantage.2
11 Provided money did not alter in value.3
12 This is true if the prices of goods do not vary from the same cause that the exchange varies, namely a superabundance of money in one of the two countries.4
13 See last observation.
14 I am rather doubtful of this tendency to disappear.5
15 I doubt whether an unusual deficiency in the supply of corn [“]must always materially affect the state of debt and credit with foreign countries[”]6 . If we import to a greater value, we shall also export to a greater value. If we import an unusual quantity of corn we are less able and willing to purchase the usual quantity of other foreign commodities. The exportation of commodities is supposed here to be caused by the previous effect on the exchange. I believe it to be caused by the unusual importation of foreign goods.
16 Here1 you adopt the usual language and say that the computed exchange with Rio Janeiro would be 5 pct. in favour of London. As the money of both countries is supposed to be at its mint standard, the computed exchange is the same thing with the real exchange, you agree therefore that the real exchange is favorable to England when it differs from par any part of the expences of transit, and you state the real par to be what the bullion committee defined it, and which definition you quote page 4.2 The latter part of the paragraph is I think at variance with the first. In the first we are told that when the market and mint prices of bullion agree both in Rio Janeiro and in London and bullion is transmitted from Rio Janeiro to London at an expence of 5 pct.—the computed, or which in this case is the same thing the real exchange is 5 pct. unfavourable to Rio Janeiro and 5 pct. favourable to England; but in the latter part we are told that under the very same circumstances the expence of transit will measure the unfavourable nominal exchange. Now by nominal exchange I understand you to mean that percentage of the exchange which is caused by the depreciation of money in either country. But you have not explained what you mean strictly by depreciation of money. I thought you always meant to measure depreciation of money by the agreement of its market with its mint price, but in this place you speak of another depreciation, of relative depreciation. If the exchange be 5 pct. against Rio Janeiro and money therefore comes to England, I agree with you that it is to that amount relatively depreciated in Rio Janeiro, 105 ounces of silver in one place is really paid to obtain 100 ounces in the other, but the exchange which is the consequence of this relative depreciation should I think be called real and not nominal. If you dispute this I do not know what you would call a real favorable exchange. If there were no expences whatever in sending bullion from one country to another the exchange would never deviate from par. It would be as invariable as the price of bullion is in countries where money is freely exchangeable for bullion on demand.—It appears to me essential that a very marked line should be drawn between actual and relative depreciation of money. There can be no unfavorable exchange without relative depreciation—the exchange may be still more unfavourable because of actual depreciation. In this case relative depreciation will be increased. I think we agree in principle, I object to the language.
17 Adopting your language, and making your allowances the exchange can never be very different from par. You say “Had the computed exchange been less unfavorable, it would have shewn that the real exchange was in favour of London.”1 It could not be either more or less unfavorable and therefore the real exchange could be only at par. Money can be relatively depreciated only from two causes—one the actual depreciation of its value from its bullion standard, the other the expence of sending it from one country to the other, the latter is always the range within which the real exchange varies. You add these together, and then say if there be any thing more than these, in the deviation from par of the computed exchange, then only is the exchange really unfavorable. I ask how can it deviate more, the computed exchange being an accurate exponent of relative depreciation?
18 I agree with the argument here, but I think the word relative in the expression of relative redundancy should be left out,—2 a real unfavourable exchange, which it is acknowledged facilitates exportation, is always in my opinion accompanied, and may be said to be caused by relative redundancy.
[1 ]MS (in Ricardo’s handwriting) in British Museum.—Letters to McCulloch, IX.
This paper contains Ricardo’s criticisms on the article ‘Exchange’ prepared by McCulloch for the Supplement to the Encyclopaedia Britannica. The enclosing letter is wanting, but McCulloch’s reply (below, p. 125) gives its date as 2 Oct. 1819.
Ricardo’s page-references are to the pagination of a proof of McCulloch’s article (cp. letter 331); but in the footnotes below they are to the published volume.
[2 ]Supplement to the Encyclopaedia Britannica, vol. iv, p. 205; corrected.
[3 ]p. 211, not corrected.
[4 ]McCulloch says, p. 205, that the chief causes of the exchange between London and other parts of the country being invariably in favour of London are ‘the demand for bills on London to remit revenue’ and ‘the superior value of Bank of England currency’.
[1 ]Actually written ‘currency’ in MS; the mistake is due to the words ‘currency of the’ having been ins.
[2 ]p. 206, unchanged.
[3 ]‘former price’ replaces ‘value’.
[1 ]The last nine words are ins.
[2 ]p. 207, unchanged. See McCulloch’s reply to the criticism, letter 344.
[1 ]McCulloch, p. 207, quotes and describes as ‘obviously incorrect’ the definition of the Bullion Report (8vo ed., p. 22): ‘The Par of Exchange between two Countries is that sum of the currency of either of the two, which, in point of intrinsic value, is precisely equal to a given sum of the currency of the other; that is, contains precisely an equal weight of Gold or Silver of the same fineness.’
[2 ]This sentence is ins.
[1 ]p. 208, where the words ‘estimated in commodities’ are replaced by ‘in a particular country’.
[2 ]i.e. McCulloch’s statement that between two currencies clipped in an unequal degree the real par should be estimated by their relative weights, p. 209. In a footnote Ricardo’s qualification respecting the abundance of clipped money is adopted as ‘a principle which must be constantly kept in view.’
[3 ]‘par of’ is ins.
[4 ]p. 210, apparently unchanged.
[5 ]p. 211, first paragraph.
[1 ]Refers probably to p. 218 § 3.
[2 ]pp. 218–19, McCulloch criticises Bosanquet’s argument based on the importation of bullion from Hamburg in 1797–8 (on which see above, III, 170); Ricardo’s observation is inserted in the published article.
[3 ]This phrase was added onp. 219, § 5, second sentence.
[4 ]The statement that an unfavourable exchange operates as a stimulus to exportation, p. 219, qualified as suggested by Ricardo.
[5 ]‘Fluctuations in the real exchange have a necessary tendency to correct themselves’, owing to their effects on exports and imports, p. 219.
[6 ]p. 220.
[1 ]p. 223; McCulloch assumes that the expense of conveying bullion from Rio Janeiro to London is 5 per cent.
[2 ]See above, p. 89, n. 1.
[1 ]p. 223, unchanged.
[2 ]p. 224, where the word is omitted.