- Person
- David Ricardo
- Lived
- 1772–1823
- Field
- Economics and finance
- From
- British
The story
In Ricardo's day the Bank of England held the privilege of issuing banknotes and profited from it. During the long suspension of gold convertibility that began in 1797, it could expand or shrink the supply of paper money largely as it chose. David Ricardo spent years thinking about how money should be managed. In 1816, the year he published Proposals for an Economical and Secure Currency, he warned that the Bank had the power, without any control, of increasing or reducing the money supply as it thought proper, and that such a power should be entrusted neither to the state nor to anybody in it.
He also objected that the Bank was making large profits from issuing money, profits that he believed fairly belonged to the public. He pointed out that if the government issued paper money itself rather than borrowing it from the Bank, the nation would save the interest it was paying, while all other classes would be in the same position as before.
In the summer of 1823 he wrote out his answer in full: a Plan for the Establishment of a National Bank. He died that September, and his brother Moses saw the plan through the press in February 1824. It proposed taking the right to issue paper money away from the Bank of England and giving it to a National Bank run by commissioners who would be completely independent of the government. The bank would act as banker only to public departments, and it would not be allowed to lend money directly to the government, only to buy government securities in the open market. The Bank of England would carry on as an ordinary bank.
Adam Smith had favoured free commercial banking without a central bank. Ricardo's case for a central bank was taken up by his followers, including John Stuart Mill, who favoured laissez-faire in every field except banking.
The principles in Ricardo's plan, a monopoly of note issue held by a public body, independence from the government of the day, and a ban on direct lending to the state, anticipate in remarkable detail how many central banks are organised today.
Why it matters
The principle that money should be managed by an independent public authority, insulated from political pressure, underlies how most central banks work today.
About David Ricardo
Sephardic stockbroker’s son who made a fortune in the City, then founded classical economics, the theory of comparative advantage, rent and money behind the case for free trade.
More about David Ricardo
- David Ricardo called slavery a stain on BritainDavid Ricardo was an abolitionist. In March 1823 he told a meeting of the East India Company’s Court that he regarded slavery as a stain on the nation’s character.
- David Ricardo voted to end the death penalty for forgeryAs an MP, David Ricardo voted in 1821 to abolish the death penalty for forgery, backed criminal law reform and sought an inquiry into the Peterloo Massacre.
- David Ricardo admitted machines could hurt workersIn 1821 David Ricardo added a chapter “On Machinery” to his Principles, openly changing his mind and accepting that machines could harm workers’ interests.
- David Ricardo proved that trade can benefit every nationIn his 1817 Principles, David Ricardo introduced comparative advantage, showing that two countries gain from trade even if one is better at producing everything.
- David Ricardo warned against issuing too much moneyIn 1810 David Ricardo published The High Price of Bullion, arguing that the Bank of England’s excessive note issue had caused banknotes to lose value.
- David Ricardo’s theory of rent inspired later reformersDavid Ricardo explained economic rent as the extra return from better land, an idea that inspired Henry George’s 1879 classic Progress and Poverty.
- David Ricardo campaigned against Britain’s Corn LawsDavid Ricardo argued that Britain’s Corn Laws made bread dearer and held back growth. After his death Parliament repealed them in 1846 and free trade became policy.
- David Ricardo backed reform of Parliament and the ballotDavid Ricardo used his seat in Parliament to support parliamentary reform and the secret ballot, speaking for reform at a Westminster dinner in 1822.
Sources
- David Ricardo Wikipedia
- Ricardo, David (1772–1823) Keir Armstrong, Carleton University (from The New Palgrave)
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.