Money and Foreign Trade Ricardo’s “ Magic Numbers”

The aim of this paper is to present and compare Ricardo's monetary and foreign exchange analysis in the writings of 1809-1811 on one side, and in the chapter seven of his 1817 book on the other side. By means of a numerical example, the second section recalls the main features of the 1809-1811 analysis. According to Ricardo, the value of money in two trading countries must be equal for the foreign exchange equilibrium to be reached. Several notions such as the price specie flow mechanism, the quantity theory and the criticism of Thornton's gold point mechanism are emphasized in this section. The third section presents the theory of the comparative advantage developed in chapter seven of the Principles; more than half of this text is consecrated to monetary components. Emphasis is placed on the distinct effects and mechanisms that intervene in the dynamics of money prices and wages that led to international specialization. The numerical example is used to bring to light the quantity of labour effect, the gold points mechanism, the quantity of money effect and the substitution of imports for production effect that lead to the money prices - i.e. £45, £50, £50, £45 , – linked to the "magic numbers" – i.e. 80, 90, 120, 100 . The fourth section studies first the disconnection established by Ricardo in chapter seven of the Principles between the values of currencies and exchange rates, and concludes. Our research provides the following conclusions. Firstly, Ricardo's statement of the comparative advantage theory involves the monetary theory; specifically it presupposes the validity of the quantity theory. The specie inflow (outflow) in one country drops (increases) the value of money in this country. Secondly, according to the comparative advantage theory, "England would give the produce of the labour of 100 (English) men, for the produce of the labour of 80 (Portuguese)" (Ricardo, 1817, p; 135). It entails that the money price of the produce of 80 Portuguese men is equal to the money price of the produce of 100 English. It means that the money price of the produce of a given quantity of labour is 25% higher in Portugal than in England; i.e. that the value of a given quantity of money is 20% lower in Portugal than in England. Third, the specie flow between countries is not described with Hume's price specie flow mechanism, but with Thornton's gold points mechanism. Fourth, fixed exchange rate under gold standard does not involve gold has the same value in various countries. The symmetrical changes, in two countries, in the quantities of money, that lead to symmetrical changes in the values of money, do not modify the market prices of gold in any of these countries. To conclude, the seventh chapter of the Principles does not support Ricardo's monetary view at the time of the Bullion Committee.