The explanation is very schematic. Every incidental phenomenon is omitted, and the whole theory implies the validity of the quantity theory of money, which is now open to considerable criticism as being altogether inadequate for an explanation of the facts involved. But this theory of the automatic regulation of the balance of trade by means of variations in the value of money, although already hinted at by Hume and Smith, is none the less a discovery of the first order, and one that has done service as a working hypothesis for a whole century.[359]
Its explanation turns upon a particular theory of international trade which we can only mention in passing, but which we shall find more fully developed in Stuart Mill’s theory of international values.
4. Paper Money, its Issue and Regulation
The enunciation of the principles which should govern the conduct of bankers in issuing paper money is another debt that we owe to the genius of Ricardo. The Bank Act of 1822, and that of 1844 especially, which laid down the future policy of the Bank of England, represent an attempt on the part of the Government to put his principles into practice.
Ricardo was an eye-witness of the great panic of February 26, 1797, when the reserves of the Bank of England fell from ten millions to a million and a half, necessitating an Order in Council suspending cash payments. The suspension, which was supposed to be a temporary expedient, extended right up to 1821. The depreciation in the value of the bank-note averaged about 10 per cent., but at one period towards the end of the Napoleonic wars it rose as high as 30 per cent. He also witnessed the suffering which such depreciation caused. Landlords demanded the payment of their rents in gold, or claimed an increase in the rent equal to the fall in the value of the note.
Ricardo tried to unravel the causes of this depreciation in his pamphlet entitled The High Price of Bullion, published in 1809, and came to the conclusion that there was only one cause, namely, an excessive supply of paper. At this distance of time it might not be thought such an extraordinary discovery after all. Still, he had the greatest difficulty in getting people to admit this, and in refuting the absurd explanations which had previously been suggested. He showed how a depreciation in the value of the note necessarily resulted in the exportation of gold, although most of his contemporaries, on the contrary, believed that the exportation of gold was the cause of all the mischief which they sought to check by an Act of Parliament. “The remedy which I propose for all the evils in our currency is that the Bank should gradually decrease the amount of their notes in circulation until they shall have rendered the remainder of equal value with the coins which they represent, or in other words till the prices of gold and silver bullion shall be brought down to their Mint price.”[360]
But if that is the case why not cut the Gordian knot and suppress paper money altogether? The reply shows how well Ricardo had studied Smith: “A well-regulated paper currency is so great an improvement in commerce that I should greatly regret if prejudice should induce us to return to a system of less utility.” “The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps towards the improvement of commerce and the arts of civilised life; but it is no less true that with the advancement of knowledge and science we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied.”[361]
Proceeding, he points out that where you have only metallic money it might happen that the production of gold fails to keep pace with the growth of population, in which case you have a rise in the value of gold accompanied by a fall in prices. This danger might be obviated by a careful issue of notes in accordance with the demands of society. In short, Ricardo is so little disposed to abandon the system of paper money and to return to the previous system of metallic money that, on the contrary, he would prefer to abolish the metallic system altogether, taking good care that paper money did not become superabundant.
So convinced was he of the superiority of paper money that he had no desire to see the Bank resume cash payment. The result of the resumption would be a demand on the part of the public for a conversion of their paper money, “and thus, to indulge a mere caprice, a most expensive medium would be substituted for one of little value.”
But if the notes are not convertible into cash, what is there to guarantee their value or to regulate their issue and prevent depreciation? This can be done merely by keeping a reserve of gold at the bank, not necessarily in the form of money, but in the form of ingots. The bank would not be allowed to issue any notes beyond the value of these ingots. This regulation would have the effect of keeping the value of the note at par, for bankers and money-dealers would immediately proceed to convert these notes into gold as soon as they showed any signs of depreciation. This would not mean, however, that the public at large would again return to the use of metallic money, for these ingots would be of little use for purposes of everyday life.
It is a curious system. One would hardly expect the great champion of Liberal political economy to outline a banking system which could only operate through a State bank. This was clearly his opinion, however. He declared himself utterly opposed to the free banking system, and doubted the ability of such a system to regulate the currency. “In that sense there can be no excess whilst the bank does not pay in specie, because the commerce of the country can easily employ and absorb any sum which the bank may send into circulation.”[362] This shows what little confidence a Liberal individualist like Ricardo had in the liberty of individuals and their ability to judge of the kind of money that is most serviceable.
Ricardo’s disciples are legion, and among them is every economist of standing of the earlier part of the nineteenth century. The best known among these are the three writers who immediately follow him in chronological order: James Mill, the father of John Stuart Mill (Elements of Political Economy, 1821), his friend McCulloch (Principles of Political Economy, 1825), and Nassau Senior (Political Economy, 1836).
The two first-named writers contented themselves with a vigorous defence of the master’s views without contributing anything very new. We have already referred to the very different conclusions which James Mill draws from the theory of rent, and how he became an advocate of land nationalisation. McCulloch also was one of the earliest advocates of the right to strike.
Senior deserves a few pages to himself, for his work in systematising the Classical doctrines. We shall deal with him in our chapter on John Stuart Mill.
BOOK II: THE ANTAGONISTS
With the completion of the work of Say, Malthus, and Ricardo it really seemed as if the science of political economy was at last definitely constituted.
It would, of course, be extravagant to imagine that these three writers were unanimous on all questions. There were several points that still remained obscure, and more than one theory that was open to discussion. Despite its apparent rigidity, it would not have required much critical ability to detect flaws in the symmetrical doctrine so recently elaborated and to predict its ultimate discredit.
Hardly, indeed, was their task completed before the new doctrine found itself subjected to a most formidable attack, which was simultaneously directed against it from all points of the compass. The criticisms and objections advanced against the new science of political economy form the subject-matter of this second book.
First comes Sismondi, a purely critical mind, with a haunting catalogue of the sufferings and miseries resulting from free competition. Spirits still more daring will essay the discovery of new principles of social organisation. The Saint-Simonians will demand the suppression of private property, the extinction of inheritance, and the centralised control of industry by the arm of an omniscient government. The voluntary socialists—Owen, Fourier, Louis Blanc—will claim the substitution