This volume focuses on Ricardo's shorter essays printed in the Morning Chronicle, which deal exclusively with his thoughts on the inflationary monetary policy of the Bank of England and Britain's consequent Bullion Crises. In these essays, the genesis of Ricardo's theory of "hard money" emerges as a tool to hedge against inflation using metallic currency. The Bullion Committee, created by the House of Commons in 1819, subsequently adopted his recommendations. His writings here gave rise to the currency school of hard money.
HIGH PRICE OF BULLION, A PROOF OF THE DEPRECIATION OF BANK NOTES
THE precious metals employed for circulating the commodities of the world, previously to the establishment of banks, have been supposed by the most approved writers on political economy to have been divided into certain proportions among the different civilized nations of the earth, according to the state of their commerce and wealth, and therefore according to the number and frequency of the payments which they had to perform. While so divided they preserved everywhere the same value, and as each country had an equal necessity for the quantity actually in use, there could be no temptation offered to either for their importation or exportation.
Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.
David Ricardo (1772-1823) was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill.
Ricardo’s father, a successful stockbroker, introduced him to the Stock Exchange at the formative age of fourteen. During his career in finance, he amassed a personal fortune, which allowed him to retire at the age of forty-two. Thereafter, he pursued a political career and further developed his economic ideas and policy proposals. A man of very little formal education, Ricardo arguably became, with the exception of Adam Smith, the most influential political economist of all time.
Ricardo was the first economist to make extensive use of deductive reasoning and arithmetical models to illustrate the anticipated reactions to juxtaposed market forces and responsive human action. His modes of analysis have become identified with economics as an academic discipline.
Like Smith, Ricardo believed that minimal government intervention best served an economy. His contributions to economics are numerous and include the theory of “hard money” to hedge inflation, the law of diminishing returns, developed along with his close friend the classical economist T. R. Malthus, and the labor theory of value.
One of Ricardo’s most significant contributions to economics is the law of comparative advantage as applied to international commerce, which grew out of Adam Smith’s division of labor and has become the central argument for free trade and open markets. It implies that countries best serve themselves when they trade with other countries abiding by their respective scales of efficiency. Besides being the most efficient method of international commerce, the comparative-advantage mode of trade also encourages international stability through multilateral business interests and global interdependencies. As Frédéric Bastiat, the French journalist and politician, wrote, “If goods do not cross borders, armies will.”
Throughout the years, several economists have elaborated on fundamental Ricardo themes and developed compelling theorems. Using Ricardo’s assertions about the interrelationships among capital, labor, output, and investment, the Nobel laureate F. A. Hayek posed the Ricardo effect, a retort to John Maynard Keynes’s accelerator principle. Robert Barro of Harvard University used Ricardo’s equivalence theorem to argue that the distinction between government taxing its citizens or deficit spending on credit is inconsequential to the long-term aggregate economy. Gordon Tullock, one of the founders of the public choice school, built upon Ricardo’s rent theory to explain his “rent-seeking” phenomenon, which illuminates the inequitable and monopolistic distribution of excessive gains derived through discriminate government subsidies.