David Ricardo (1772-1823) was one of the most influential economic theorists of the first half of the nineteenth century. Born in London, England, his father’s family were orthodox Jews originally from Portugal who had moved to England from Holland. His father was a highly successful stockbroker. David Ricardo learned the family business, and most likely would have inherited it from his father.
But he fell in love with an English Quaker, converted from Judaism to Christianity, and at the age of 21 eloped without his family’s knowledge. His father disowned him and his mother never spoke to him again. He, therefore, had to go out on his own and set up his own brokerage company. He soon showed himself to be an expert at all financial and brokerage dealings. Making a fortune, including dealing in British government securities during Britain’s long war with Revolutionary and then Napoleonic France, Ricardo retired from business in his early 40s to an estate in the English countryside.
Ricardo became interested in economics when he read Adam Smith’s The Wealth of Nations during a holiday in 1799. He began to write on economic topics in 1809 with a series of articles and a monograph on the causes for inflation in Great Britain that gained him wide notoriety.
The publication of The Principles of Political Economy and Taxation in 1817 soon established his permanent reputation as one of the leading economists in the world.
He also served as a member of the House of Commons in the British Parliament from 1819 until his death in 1823, when he was 52 years old.
Ricardo’s Method of Making Money
What was Ricardo’s “secret” for success in business? Shortly before his death, a friend asked how he had been able to accumulate such a large fortune when he was still a relatively young man. Ricardo said it was all a matter of taking advantage of profit opportunities, while not waiting too long to gain the positive return:
“My whole art in getting rich lay in my always being contented with small profits; or, in other words, never holding on to the commodities or goods in my possession too long, when small profits could be had, in an ill-grounded expectation of realizing eventually a higher rate of profit. I had my eyes, for example, upon every new road, bank, or other joint stock concern, and, where I deemed the prospect of success to be a fair one, I was ever ready to buy a certain number of shares. These shares, from the nature of all new undertaking of a joint-stock character, seldom failed, after a short time, to rise in value beyond the point about which they would afterwards have a tendency to fluctuate. Before the full accomplishment of this rise, however, my shares were in most instances already disposed of to others, and the proceeds invested in a different manner.”
This resulted in a reputation as a shrewd businessman who others attempted to emulate, often following his buying and selling to try to ride on his profit-making coattails. Explained Ricardo:
“It was then that a new element of success was spontaneously presented to me. Many persons, who had heretofore been unsuccessful in acting on the suggestions of their own judgments, preferred now to be guided in their speculations by what they supposed me to be doing. My example was continually referred to on change. One said not infrequently to another – ‘Mr. Ricardo has purchased this and that article or stock, and depend on it, you cannot do better.’ In this state of things, it must be manifest that I may often have created that very demand that enabled me to dispose of the article purchased, with a small profit, only a very short time afterwards. At length, such had my reputation as a successful speculator become, that I had sometimes thought it possible for me to have gone into the market and purchased at random, no matter what, with a good prospect of advantage to be gained by selling out again promptly.”
War, Government Debt and Paper Money Inflation
Ricardo’s reputation as an economist emerged out of his writings during the long war that broke out between Great Britain and Revolutionary France in 1793, and which was almost continuous until 1815, with the defeat of Napoleon in the famous Battle of Waterloo in Belgium.
The British government’s war costs increasingly grew to cover the expenses of its own fighting forces, and the subsidized war expenditures of other European countries that were fighting France, as well, at various times. By 1797, the British government was covering over 70 percent of its expenditures with borrowed money from the Bank of England, a private bank with the “privilege” of having a monopoly of issuing banknotes in Great Britain.
The Bank of England supplied the necessary loans by the issuance of increasing amounts of banknotes. As the government spent the banknotes, the paper money passed into the hands of people in the private sector, who proceeded to spend it, in turn, on desired goods and services. Prices began to rise, resulting in a growing demand to redeem the banknotes for gold from the Bank of England by people wishing to either hoard valuable gold rather than hold depreciating paper money or to export gold to buy less expensive goods from other countries.
Fearing insolvency, or even eventual bankruptcy, the Bank of England said it could no longer extend loans to the government under these conditions. As a consequence, the British government passed the Restriction Act of May 3, 1797, freeing the Bank of England from redeeming banknotes for gold. The banknotes, therefore, were no longer claims to gold previously left on deposit by bank customers, but were de facto legal tender – irredeemable paper money.
The Restriction Act of 1797 remained in affect until May 1, 1823. During the remaining war years, the government continued borrowing from the Bank of England. Between 1797 and 1801, the quantity of Bank of England notes in circulation had almost doubled from 9.7 million to nearly 17 million. The value of the paper pound fell nearly 10 percent against gold, while the foreign exchange rate of the paper pound lost more than 13 percent of its value.
The supply of Bank of England notes continued to expand until 1817, two years after the defeat of Napoleon and the end of the wars with France, when it reached nearly 30 million, three times the money supply twenty years earlier when the Restriction Act had been imposed. The Bank of England notes reached their greatest degree of loss of value against gold in 1813, when it had decreased by 36 percent; that same year saw the foreign exchange value of the paper pound down by 30 percent on the Hamburg exchange market. The gold and foreign exchange value of the paper pound only returned to near par value in 1819
Between 1819 and 1823, the British government ran budget surpluses, paid back many of the banknotes it had borrowed bringing about a monetary deflation, until the implementing of the Resumption Act of May 1, 1823 that again put Great Britain on a gold standard by legally requiring the Bank of England to redeem its notes for gold on demand.
Controversies Concerning the Cause of Inflation
From the time of the Restriction Act of 1797 to the Resumption Act of 1823, a great debate went on in Great Britain about the causes for the depreciation of the paper pound and the rise in prices. On the one hand, the officials of the Bank of England and its supporters insisted that the price inflation it had nothing to do with the issuance of banknotes to cover the government’s war borrowing.
It was insisted that the paper pound’s fall in value was due to: A shortage of goods caused by the war; speculators betting against the pound in terms of Great Britain winning the wars with France; and, the demand for foreign goods, which created a “premium” on gold and other currencies relative to the paper pound.
On the other hand, there were those who traced the fall in the paper pound’s value precisely to the increase in the quantity of Bank of England notes in circulation.
It was argued that: The increase in the banknote supply put upward pressure on domestic prices; this resulted in profitability from importing less expensive foreign goods; greater amounts of paper pounds were offered for either gold (to hoard or illegally export), or for foreign currencies in whose monies goods could be purchased in other countries for import into Great Britain; hence, the increased quantity of paper pounds caused prices to rise at home, and for the paper pound to lose value against gold and other currencies on the foreign exchange markets.
Ricardo on the “High Price of Bullion”
Ricardo took the side of those who argued that the price inflation had its origin and cause in the expansion of the banknote money supply to cover the British government’s war expenditures. In 1809, he published his famous essay, “The High Price of Bullion,” and explained the workings of the inflationary process:
“If . . . a bank were established, such as the Bank of England, with the power of issuing its notes for a circulating medium; after a large amount had been issued, either by way of loans to merchants or by advances to Government, thereby adding considerably to the sum of the currency, the effect [would be that] . . . the circulating medium would be lowered in value, and goods would experience a proportionate rise. The equilibrium between that and other nations would only be restored by the exportation of part of the [gold or silver] coin. The establishment of the bank, and the consequent issue of its notes, therefore . . . operate as an inducement to the exportation of either bullion or coin . . .
“It is evident, then, that a depreciation of the circulating medium is the necessary consequence of its redundance [i.e., its excess, increased supply]; and that in the common state of the national currency this depreciation is counteracted by the exportation of the precious metals . . .
“Parliament by restricting the Bank from paying in specie, have enabled the conductors of that concern [the managers of the Bank of England] to increase or decrease at pleasure the quantity and amount of their notes; and the previously existing checks against an over-issue [i.e., gold redemption on demand] having been thereby removed, those conductors have acquired the power of increasing or decreasing the value of the paper currency . . . There can be no limit to the depreciation which may arise from a constantly increasing quantity of paper . . . Every increase in its quantity degrades it below the value of gold and silver bullion, and below the value of the currencies of other countries.”
Gold Redemption and Monetary Deflation
Ricardo’s policy proposal was to restore gold redemption to end the Bank of England’s unlimited ability to expand the supply of paper pounds. But realizing the need for an “adjustment period” if prices were to be brought down to their former, pre-inflationary level with minimal economic disruption, he proposed a gradual reduction in the money supply over a period of years.
“The remedy which I propose for all the evils in our currency, is that the Bank [of England] should gradually decrease the amount of their notes in circulation until they have rendered the remainder of equal value with the coins they represent, or in other words, till the prices of gold and silver be brought back to the Mint price.
“I am well aware that the total failure of paper credit [a rapid decrease in the quantity of banknotes] would be attended with the most disastrous consequences to the trade and commerce of the country, and even its sudden limitation would occasion so much ruin and distress, that it would be highly inexpedient to have recourse to it as the means of restoring our currency to its just and equitable value . . .
If gradually done, little inconvenience would be felt; so that the principle were fairly admitted, it would be for future consideration whether the object should be accomplished in one year or in five.
“To prevent the evil consequences which may attend the perseverance in this system, we must keep our eyes steadily on the repeal of the restriction bill. The only legitimate security which the public can possess against the indiscretion of the Bank [of England] is to oblige them to pay their notes on demand in specie [gold]; and this can only be effected by diminishing the amount of bank notes in circulation till the nominal price of gold be lowered to the Mint price.”
Ricardo, therefore, was well aware that a monetary contraction could also, like a monetary expansion, distort and temporarily imbalance various market relationships through the period of falling prices meant to raise the value of the paper currency to its previous gold parity level for reestablishing redemption at the old rate of banknotes for a fixed quantity of gold.
If the degree of depreciation had fallen by 30 percent or more from its previous par value, Ricardo suggested that it would be better to reestablish gold redemption at a new lower rate, rather than generate the degree of price deflation necessary to restore the old parity. In a letter to a parliamentary associate, in September 1821, Ricardo said:
“I perceive that you rather misconceive my opinions on this question – I never should advise a government to restore a currency, which was depreciated 30 percent to par; I should recommend, as you propose, but not in the same manner, that the currency should be fixed at the depreciated value by lowering the standard, and that no further deviations should take place.”
But as a factual matter, Ricardo went on to say, when the paper pound was still “protected” by the Restriction Act of 1797, it had returned by 1819 to within five percent of the pre-restriction parity. Thus, the amount of monetary contraction needed to return to full parity was, he argued, a relatively small amount to reinstitute gold redemption.
Ricardo on Democratic Reform and a Free Press
Ricardo was also a strong proponent of civil liberties and the security of private property rights. This was shown most clearly in his posthumously published “Observations on Parliamentary Reform” (1824). He was an advocate of widening the voting franchise for election of representatives to the British House of Commons. Ricardo considered it a source of corruption and abuse of power when the landed aristocracy not only made up the membership of upper House of Lords, but also controlled and manipulated those who were members in the House of Commons.
An essential check against this one-sided concentration of power and privilege, Ricardo reasoned, was to have the House of Commons reflect a far greater number of voters among the general society, and especially from the middle class. He did not call for an immediate universal suffrage, but considered that that might be the eventual goal as learning and understanding of the essential institutions of a free society grew among the general population.
But regardless of a narrower or wider extension of the voting franchise, a free society was unsustainable without an independent and free press. Said Ricardo:
“The check on this government, which operates on behalf of the people, is the good sense and information of the people themselves, operating through the means of a free press, which controls not only the Sovereign and his Ministers, but the Aristocracy, and the House of Commons, which is under its influence.
“Every transaction of the great functionaries of the state is, by means of the press, conveyed in two days to the extremities of the kingdom, and the alarm is sounded if any measure is adopted, or even proposed, which might in its tendency be hurtful to the community.
“This check, then, like others that we have been speaking of, resolves itself into the fear which government and the aristocracy have of an insurrection by the people, by which their power would be overturned, and which alone keeps them within the bounds which now appear to arrest them.
“The press, amongst an enlightened and well-informed people, is a
powerful instrument to prevent misrule, because it can quickly organize a formidable opposition to any encroachment on the people’s rights . . .”
But Ricardo admitted that often people are not easily aroused to pay attention to every possible unjustifiable extension of government abuse and misuse of its power. The only way to remedy the frequency of such actions by those in political authority and decision-making was to allow more of the people, themselves, to participate in the voting process to assure a greater accountability of those holding political power to those who they are supposed to represent, for the protection of people’s rights rather than a violation of them.
Under the existing parliamentary system in Great Britain, Ricardo declared:
“In spite of the thunders of the press men continue to be placed in parliament whose interests are often in direct variance with the interest of the people. The offices of state, and the lucrative situations under government, are not bestowed according to merit; bad laws continue to disgrace our statute-book; and good ones are rejected, because they would interfere with particular interests – wars are entered into for the sake of private advantage, and the nation is borne down with great and unnecessary expenditures . . .
“Nothing can be effectual to that purpose [of more honest and less abusive government] but placing the check in a more regular manner in the people, by making the House of Commons really and truly the representative of the people.”
Ricardo on the Importance of Private Property in a Free Society
A primary argument made by those opposing any significant increase in democratic participation by “the people” was that the ignorant and impassioned masses could easily by aroused by demagogies and potential tyrants to pillage and plunder the private property of others, thus threatening the foundations of society.
Ricardo did not deny this, and for this reason he was unwilling, as yet, to extend the voting franchise to all. But he believed that anyone who had accumulated even the most modest amount of property could be made to understand that there would be little personal gain to him by expropriating and dividing up the wealth and property of those better off than himself. Indeed, reflection should make him conscious of the fact that any redistributive scheme that disposed of the property and wealth of others, once accepted as a principle, might be at anytime extended to threaten his own ownership and possessions.
Furthermore, education and intelligent reflection by a growing number of people in society should inform them that to undermine the security of property would weaken the motives and incentives for the work, savings and investment without which all in the society would be made far worse off. Private property and private enterprise were the foundations of a prosperous society. Explained Ricardo:
“The quantity of employment in the country must depend, not only on the quantity of capital, but upon its advantageous distribution [among alternative productive uses], and above all, on the conviction of each capitalist that he will be allowed to enjoy unmolested the fruits of his capital, his skill, and his enterprise.
“To take away from him this conviction is at once to annihilate half the productive industry of the country, and would be more fatal to the poor laborer than to the rich capitalist himself. This is so self-evident, that men very little advanced beyond the lowest stations in the country cannot be ignorant of it, and it may be doubted whether any large number even of the lowest would, if they could, promote a division of property.”
Ricardo’s sided on almost every Parliamentary issues with the cause of liberalization of markets and support for personal liberty won him respect from virtually members in the House of Commons, even those who disagreed with him. As Henry Lord Brougham expressed it not long after Ricardo’s death:
“His speaking, his conduct, his manner, were all unexceptionable . . . There was something about him, chiefly a want of all affectation as well as pretension in everything he said and did, that won the respect of every party . . .
“Whether you agreed or differed with him, you were well pleased to have it brought out and made to bear upon the question, if indeed the pursuit of right and truth was your object . . . He was uniformly and universally respected for the sterling qualities of his capacity and his character, which were acknowledged by all . . . Few men have, accordingly, had more weight in Parliament; certainly none who, finding but a very small body of his fellow-members to agree with his leading opinions . . . ever commanded a more patient or even favorable hearing.”
David Ricardo and the Classical Liberal Spirit
After almost two hundred more years of human history, friends of freedom may consider naïve David Ricardo’s confident innocence that a free press never might be corrupted or serve narrow ideological purposes inconsistent with the preservation of liberty; or that the educated and property-owning members of society, great and small, might never see avenues and advantages from violating the possessions and freedom of others for their own purposes through the democratic process.
But nonetheless, what is clear is that David Ricardo was a representative of the classical liberal spirit in the early decades of the nineteenth century. Political power needed to be reined in to prevent abuse through competing sources of influence and power in society.
Essential to this was a free press serving as a public watchdog investigating and reporting on the plundering and privileges of those in government. Democratic representation was a means of making those holding political office answerable to those over whom they ruled. And property ownership among a growing number of members of society could and should be used as an educational meanings of informing them on the importance of respecting private property and a free market, both as a protection of their own rights and productive possessions and as the institutional prerequisite for the wealth and prosperity of all.
[Originally Published at the Future for Freedom Foundation]