Money, Banks and Finance in Economic Thought

Orthodox versus Unorthodox Views on Ricardo's Theory of Money

Deleplace Ghislain, Université Paris 8-LED

Following Marcuzzo and Rosselli (1991, 1994a, 1994b, 2015), what I will call the unorthodox view on Ricardo’s theory of money has been advocated by several scholars from France (Deleplace 1994, 1996, 2008, 2013, 2015, 2017; Depoortère 2015, 2018; Diatkine 1994, 2008, 2013) and from Japan (Sato 1999, 2008, 2013, Takenaga 2000, 2013, 2018). They all have in common to consider that the market price of gold bullion (in other words the market price of the standard) is central in Ricardo’s theory of money – in contrast with the orthodox view which contends that the market price of gold bullion is only a proxy of the General Price Level and that what matters is the quantity of money, as in the so-called Quantity Theory of Money. According to Ricardo, “The only use of a standard is to regulate the quantity, and by the quantity the value of a currency” (Ricardo 1816: 59). This sentence may be interpreted in two different ways. The orthodox one consists in complementing it as follows (in italics): “The only use of a standard is to regulate the quantity, and by the quantity the market prices (in a homothetic way) of all commodities, hence the value of a currency”. The direct causality between an increase in the quantity of money and a rise in the general price level is obtained thanks to the real-balance effect. Under the (unjustified) assumption of a homothetic change in the money prices of all commodities, the equilibrium relative prices are left undisturbed. I have suggested elsewhere (Deleplace 2017) that an unorthodox interpretation of Ricardo’s sentence might read: “The only use of a standard is to regulate the quantity, and by the quantity the market price of the standard, hence the value of a currency”. In equilibrium, the causality goes from the value of the currency (determined by the value of the standard) to its quantity. An increase in the quantity of money causes a fall in its value only in disequilibrium and it does so indirectly, through a rise in the market price of the standard. I suspect that all unorthodox advocates of Ricardo’s theory of money do not subscribe to this interpretation. Nevertheless, they agree on two propositions which, loosely formulated, read as follows: a) In a monetary system where the currency is convertible both ways into the (gold) standard, the market price of gold bullion does not change much (a contrario, in an inconvertible system, it is liable to vary a lot). In Ricardo’s words, this proposition is “incontrovertible”; in other words, it is a fact. b) There exists a mechanism which ensures that it is so. In Ricardo’s words, the market price of gold bullion is “regulated”; in modern words, one would say that it is stable. This is not a fact but a piece of theory. The difficulties – and the potential disagreements among the advocates of the unorthodox view – start with the understanding of this mechanism. The paper explores the various forms it takes in the unorthodox literature mentioned above.

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Keywords: Ricardo, Theory of money, Unorthodoxy

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