Money and Foreign Trade in Ricardo (1809-1811) and in Ricardo (1817)

Over the past two centuries, the connection David Ricardo made between money and foreign trade was widely commented on the basis of the 1809-1811 writings, notably the High Price of Bullion, Proof of the Depreciation of Bank Notes, of the 1816 Proposals for an Economical and Secure Currency, proposals taken again in the chapter twenty seven "On Currency and Banks" of the 1817 Principles of Political economy an Taxation, and of the 1823 Plan for a National Bank. On the other hand, the chapter seven "On Foreign Trade" of the 1817 Principles was mostly ignored with the exception of J.W. Angell (1926), F.W. Taussig (1927), K. Kojima (1951), M. Blaug (1976), J. de Boyer (1992) et G. Faccarello (2013) who did pay attention to it. Yet, according to Ricardo, the concept of comparative advantage cannot be understood without studying the international distribution of precious metals, and the determination of the natural prices of wine and cloth. In other words, the determination of relative prices includes monetary mechanisms. However the chapter seven of the Principles did not simply resume the 1809-1811 Ricardo's monetary ideas. Here, Ricardo used arguments he had criticized seven years before. Furthermore, he reconsidered the link between value of money and exchange rate. 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 foreign exchange market, the price specie flow between countries, and also the dynamics of money prices and wages that led to international specialization. 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 second then his comments relative to the bullionist controversy; these comments close the chapter. The fifth section provides some precisions on (1) the "magic numbers" – i.e. 80, 90, 120, 100 -, (2) on the assumptions made to obtain the money prices - i.e. £45, £50, £50, £45 -, so that the terms of trade/exchange are not indeterminate contrary to an opinion inherited from John Stuart Mill, (3) finally on the consequences of an "improvement in making" English wine. Our research provides the following conclusions. First, 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.