“Ricardo on Money: Not a Quantity Theory”

There is a paradox in the way Ricardo's theory of money is usually evaluated in the literature: it is ascertained on the basis of the Bullion Essays of 1809-1811 which were mostly concerned with a monetary regime deprived of any standard – a kind of money that Ricardo always decidedly opposed – and not on the basis of Principles, which integrate in Ricardo's theory of value and distribution a money anchored to a standard – the only way for him to guarantee "a sound state of the currency." This paradox explains the widespread opinion that Principles at best brought nothing new to Ricardo's monetary theory – his subsequent positions being mostly practical –, at worst made his quantity theory of money inconsistent with his determination of the value of money by the cost of production of gold. The first task to rehabilitate Ricardo's attempt at integrating money in his theory of value and distribution is thus to show how Principles transformed Ricardo's theory of money and, in conjunction with Proposals for an Economical and Secure Currency (published one year before), provided a theoretical foundation to the plans of monetary reform advocated by Ricardo in Parliament (the Ingot Plan) or in draft (the Plan for a National Bank). An unexpected result then emerges: Ricardo did not hold a quantity theory of money, because: a) there was no equilibrium value of money depending on its quantity, which only affected the value of money in disequilibrium; b) this influence was not direct, as in the quantity theory of money, but indirect, through its effect on the market price of the standard (gold bullion). A practical consequence was that the policy rule advocated by Ricardo in his plans – varying the note issue inversely with the spread between the market and legal prices of gold – does not fit the modern reading key "rules versus discretion". Assessing in Ricardo a theory of money that focuses on the standard could as well be for him the kiss of death. Against the old disqualification of his views on money as being inspired by a hard-line (hence irrelevant) quantity theory, but also against the more recent emphasis on his empirical or practical orientation, any attempt at putting the monetary standard centre stage seems to be a sure recipe to bury his theory of money in the gone-away times of the gold standard. However, Ricardo's conditions for "a perfect currency" in no way require the standard to be metallic: any marketable asset that is legally convertible into money and into which money is legally convertible at a fixed price may play the same role. Such asset might as well be a public bond purchased and sold for money by a central bank at a fixed price – a situation not far from that of our modern economies in times of crisis and non-conventional central bank policy. The paper is organised as follows. Section 2 exposes how Principles are usually not considered for the evaluation of Ricardo's monetary theory, except to show that it is flawed by an internal contradiction. Section 3 shows that the theory of value and distribution contained in Principles (1817) complemented the monetary analysis contained in Proposals for an Economical and Secure Currency (1816) to build Ricardo's mature theory of money, which, as contended in Section 4, was not a quantity theory of money. Section 5 studies how this theory provided a foundation to the plans of monetary reform advocated by Ricardo. Section 6 concludes on its relevance in modern monetary conditions.