Money, Banks and Finance in Economic Thought

Ricardo on money and foreign trade

Takenaga Susumu, Daito Bunka University

Ricardo began his career as economist with the intervention in the ongoing Bullion controversy and ended it with writing a posthumously published manuscript proposing to establish a national bank. His activity as economist was thus inseparable from the monetary problems of his time. And at the same time, he thought about these problems always in an international setting, because the gold bullion was both the national standard of money and the international means of settlement. In his first pamphlet on high price of bullion, aiming at criticizing the over-issue of inconvertible banknote by the Bank of England resulting in its depreciation and the fall in foreign exchange rate, Ricardo adopted Hume’s theory on international distribution of precious metal money tending to equalize its value all over the world. Once attained, a balanced distribution of it can always be disturbed by some monetary or real shock (accidental discovery of gold mines or unexpected expansion or contraction of economic activity in certain countries). The foreign trade was conceived as the movement reacting such disturbances to reestablish the balanced distribution of precious metal money. In this framework, the foreign trade is not related with international division of labour, based on relative advantage or disadvantage of certain goods according in various countries. This view of Ricardo on foreign trade particular to his early writings is very different from his view in Principles, where he established his theory of value and distribution (of profit above all). The foreign trade is now considered from the point of view of its influence on the rate of profit for a country as well as on the validity of the theory of value in domestic economy. The differences and division between industrial and agricultural countries become an important question. And Ricardo becomes aware of gap in the value of money accompanying the foreign trade and the ensuing international monetary flow. In Principles Ricardo devotes chapter 7 especially to the problems concerning foreign trade, and in only a small part of about 3 pages he gives the so-called ‘theory of comparative cost’, which, after the influence of the very particular interpretation by J.S. Mill, became a standard orthodox theory on the foreign trade, taken up in every textbook of the international economics as ‘Ricardo model’. In contrast, this is an area which has been rather neglected or avoided by the historians of economic thought specialized in Ricardo studies. In the present paper, I will try to read the chapter 7 as a whole in relation with the theory of value and of profits developed in the preceding chapters, attaching particular importance to the monetary elements in Ricardo’s theory of foreign trade, which should be distinguished in some essential respects from his early writings.

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Keywords: Ricardo, foreign trade, value, money, exchange

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