16. From Ricardo to Sraffa: A Quest for a Modern Classical Standpoint on Money

For a more detailed critique of the introduction of money through the rate of interest , see Deleplace (2017, pp. 276–8) about Ricardo and Deleplace (2014, pp. 141–6) about Sraffa.

There are other studies which involve, jointly or separately, the authors already mentioned and develop what may be called a monetary approach; see for example Benetti et al. (2015) and the volume Cartelier (2018). I restrict here myself to those studies which explicitly aim at making the Sraffa system and the existence of money mutually consistent.

Contrary to what is usually ascribed to Ricardo, the exportation of bullion, which under inconvertibility adjusted the aggregate quantity of money when it was in excess, only played a role at the beginning of the adjustment process under convertibility. As soon as the bank of issue purchased bullion to replenish its metallic reserve, the exportation of bullion was replaced by a domestic adjustment: the reduction of the bank issue under the pressure of the Penelope effect. For the international part of the adjustment, see Deleplace (2017: Chapter 8).

Gold should also be a non-basic product, so that it does not affect the distribution of income, hence the ranking of the mines by their physical productivity; see Deleplace (2017, pp. 182–3).

The exclusion by Ricardo of “the mass of commodities” as standard of money is not contradictory with his definition of the value of money by its purchasing power over all commodities except the standard. See Deleplace (2017, pp. 89–93; 115–16)

See Ricardo (1817–1821, pp. 45–6). In his Notes on Malthus, Ricardo justified this supposition: “It was never contended that gold under the present circumstances was a good measure of value, it was only hypothetically, and for the purpose of illustrating a principle, supposed that all the known causes of the variability of gold, were removed. […] I beg you [Malthus] to suppose all causes of variation removed, that we may speak about the variations of other things in an unvarying measure without confusion.” (Ricardo 1951–1973, II, pp. 82–3).

For another discussion of the relation between the standard commodity and the standard of money, see Marcuzzo and Rosselli (1994).

The emphasis on an arbitrage implying the market for gold—whether international arbitrage with its foreign markets , as in Marcuzzo and Rosselli (1991), or domestic arbitrage with the monetary institution, as in Deleplace (2017)—is a distinctive aspect of the unorthodox understanding of Ricardo’s monetary theory; see Deleplace (2020).

For a detailed study of money in Sraffa from the late 1920s to Production of Commodities, see Deleplace (2014).

“Loans are currently made in the present world in terms of every commodity for which there is a forward market. When a cotton spinner borrows a sum of money for three months and uses the proceeds to purchase spot, a quantity of raw cotton which he simultaneously sells three months forward, he is actually ‘borrowing cotton’ for that period.” (Sraffa 1932, pp. 49–50)

In this extract Sraffa mentioned as “attribute” of money “a store of value” (see also Sraffa 1932, p. 43). As seen above, in his manuscript notes on General Theory (four years later), he discarded Keynes’s “underlying assumption […] that people borrow an article in order to keep it and enjoy its advantages.” It is possible that Keynes’s faulty use (in Sraffa’s view) of the notion of “commodity-rate of interest” which Sraffa had introduced in his 1932 article led him to stress that fixing one’s debt in terms of an article was different from storing it.

“Now we might ask, whether the ‘monetary constants’ referred to above are in terms of this money, or not; and if yes, how can it be indifferent for a debtor, when the money price of wheat falls, whether his debt is fixed in money or wheat.” (Sraffa Papers: D3/9/50)

See also Ricardo’s clarification about the position of the Bullion Committee: “Their principle, when fairly stated, is, not that gold as a commodity may not rise above its value as coin, but that it cannot continue so (ital. added), because the convertibility of coin into bullion would soon (ital. added) equalize their value.” (Ricardo 1811, p. 187)

It is the only function of the Bank we deal with, see D. Ricardo (1824, p. 277): there is “no necessary connection” between the issuance of “paper currency, as a substitute for a metallic one” and the credit operations.

This issue is independent of “facts”, for instance the “high price of bullion” when the convertibility had been suspended (see GD p. 503), the monetary policy at the time of Ricardo, the evolution of the gold price and its possible difference from the legal price during the convertibility which is considered in the Ingot Plan, and erroneously interpreted by GD as a critique of our position (see GD p. 504). Actually, we adopt Rousseau’s famous methodological precept: “ Commençons par écarter tous les faits, car ils ne touchent point à la question ” (1754, p. 132).

GD takes this metaphor from Smith. See A. Smith (1776, book IV, Chap. VI, pp. 516–17): the Bank’s gold demand is mainly due to the fact that “the greater part of the current coins is almost always more or less worn”. See also book II, ch. II, p. 286.

We put aside GD’s critique according to which our position “would amount to assuming away convertibility: why would arbitragers return their notes for gold to the bank at the legal price if they could not sell this gold in the market at a higher price, where it is purchased by the bank itself?.” This assertion is obviously incorrect: “arbitragers [would] return their notes for gold to the bank at the legal price” simply in order to export gold. (See Ricardo 1810–1811, p. 58).

These results support the two main conclusions of the book for the history of economic thought: the existence of an evolution in Ricardo’s monetary theory from his initial views (at the time of the Bullion Report) to his mature views (in relation to his genuine theory of value and distribution developed in Principles), and the rejection of the usual understanding of this theory as an incoherent mix of a quantity-theory of money in the short run and a commodity-theory of money in the long run.

Contrary to the (majority) orthodox scholars who consider that the market price of gold is only in Ricardo a proxy of the general price level, in the absence of a solution to the index-number problems. In such an interpretation, the divergence between the market price of gold and its legal price is obviously deprived of any significance.

The long quotation from Ricardo given by Benetti and Cartelier had another object: to stress that, if this regulation was done through international arbitrage, freedom of gold export should be granted—a sensible stipulation since it reduced the limits between which the exchange rate might fluctuate (the gold points).

Benetti and Cartelier make fun of the Penelope “metaphor” (which I do not “take from Smith” as they say but borrow from Ricardo himself who takes it from Smith; see Ricardo 1810–1811, p. 58) on the motive that it “implies that Penelope undid in the night more than what she did in the day. It is easy to guess the end of such a tale.” (p. 517; BC’s emphasis). Contrary to what they write (“the difficulty does not lie in the Bank’s losses as such”; ibid.), the loss experienced by the Bank and the expansion of its note issue to purchase gold in the market are one and the same thing: the latter is the exact measure of the former.

By insisting on the export of gold as the “favoured” regulating mechanism in Ricardo and by giving to the reserve coefficient a prominent role in their model, Benetti and Cartelier land unexpectedly in the realm of the Currency principle.

It is interesting to note that the link between monetary theory and disequilibrium was made by Sraffa in his preparatory notes for his 1932 article against Hayek: “The dividing line, which appears to assert itself more and more definitely, is another one [than Hayek’s]. The non monetary theory studies a state of equilibrium, and the conditions which determine it: it goes as far as comparing two, or more states of equilibrium, and measuring the differences in their conditions—but goes no further. Here begins the field of monetary theory: or rather, jumping over the study of the path followed in the transition from one position to another, it sets to study states of disequilibrium.” (Sraffa Papers, D3/9¹⁸¹)

The existence in the importing country (where gold is used as standard of money) of a sector specialized in the gold trade explains that there is also a natural price of gold in this country. However, it is not determined by the conditions of production of gold in this economy (since it is not produced there) but by the natural price in the gold-producing country (to which the market price there is equated), plus the cost of transportation and the profit at the general rate in the importing country (see Deleplace 2017, pp. 187–91). The equalisation of this domestic natural price of gold with the legal price (thanks to the adjustment of the quantity of money) determines the exchange rate between the currencies of the two countries. This exchange rate is thus solely determined by the conditions prevailing in the market for gold in both countries and not by the state of the balance of payments.