Ricardo, David (1772–1823)

IN HIS SHORT LIFE David Ricardo managed to amass a fortune, live the life of a country gentleman, serve in Parliament, and most of all, become one of the founding fathers of classical English political economy. The works for which he is chiefly known are The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1809), “Essay on the Influence of a Low Price of Corn on the Profits of Stock” (1815), and On the Principles of Political Economy and Taxation (1817).

[Page 922]Finding employment with his father, Ricardo started his professional career at the age of 14. Despite a falling-out with his father—Ricardo had married outside of his Sephardic Jewish faith—Ricardo had, at an early age, accumulated a fortune in the London stock exchange. This early success allowed Ricardo to retire from business in 1814 and to devote the remaining years of his life to pursuing his various studies, which included, of course, political economy. Ricardo's brilliant career in economics lasted only the remaining 14 years of his life.

Among Ricardo's contributions to economics are a clear statement of the quantity theory of money, a theory of value, a theory of production and distribution, a theory of international trade, and the introduction of the deductive method. Ricardo's name, unlike many other classical economists', is still remembered today among the students of economics—he is still mentioned in today's textbooks on economics—principally for his monetary economics, principle of comparative advantage, theory of rent, and iron law of wages.

According to Ricardo, increased productivity, capital accumulation, free trade, and technological progress leads to economic prosperity. He was much in accord with the modern dictum that “a rising tide lifts all boats.”

Certainly, there is no doubt of his enormous influence on the theory and application of monetary economics. Ricardo formulated and espoused his views on money during the bullion controversy in the second decade of the 19th century during the Napoleonic Wars. Britain had suspended the convertability of paper notes into gold.

This led to an inevitable increase in Bank of England notes, as there was no monetary restraint. This in turn led to an increase in the general price level and a fall in the exchange rate. Parliament took notice and began an investigation in which a number of witnesses were called to give evidence. Among those expert witnesses was Henry Thornton, whose theory on money was adopted by Ricardo.

Ricardo, however, developed a more rigid quantity theory of money than Thornton and unlike Thornton was unconcerned with the dynamic process of a monetary disturbance. Ricardo followed Thornton in the crucial role played by the interest rate in producing monetary equilibrium. According to this theory, an increase in the quantity of money would lower the rate of interest. With the rate of profits determined by real factors, a lower rate of interest compared to the profit rate would mean an increase in the quantity demanded of loanable funds.

So long as the rate of interest was low compared to the profit rate, businesses would be willing to borrow and spend. This spending would lead to a rise in the prices of goods. Ricardo thus had a quantity theory of money that worked through the interest rate mechanism. This holds true whether circulated money was paper or gold. When it was gold, Ricardo believed in David Hume's price-specie flow mechanism whereby gold flows would determine price levels among various countries through export and import changes. Ricardo also accepted Say's Law, whereby any increase in saving is met by an equal increase in spending.

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