I have been so much engaged since I had the pleasure of receiving your
letter that I have not had an opportunity of answering it till this
evening.
The information which you are desirous of obtaining respecting the
premium on bills in Jamaica from the year 1808 to the present period, I
will endeavour to procure, but, as these transactions all take place in
Jamaica, and as the merchants here are frequently not acquainted with
the prices at which the bills remitted to them are negociated, I am not
sure that I shall be successful.
I very much regret that there is so little probability of our finally
agreeing on the subject which has lately engaged our attention. The
definition which you give of the word 'redundant,' as applied to the
currency, is not satisfactory to me. Though it should be allowed that
the rise in the price of one commodity, in the case of a scarcity of
corn, should be accompanied with a fall in the prices of all others, why
should a redundancy of currency be impossible under such circumstances?
The currency must, I apprehend, be considered as a whole, and as such
must be compared with the whole of the commodities which it circulates.
If then it be in a greater proportion to commodities after than before
the scarce harvest, whilst no such alteration has taken place in the
proportions between money and commodities abroad, it appears to me that
no expression can more correctly describe such a state of things than a
'relative redundancy of currency.' Under these circumstances not only
money but every other commodity would become comparatively cheap as
compared with corn, and would therefore be exported in return for the
corn which would be in demand in this country. By relative redundance
then I mean, relative cheapness, and the exportation of the commodity I
deem, in all ordinary cases, the proof of such cheapness. Indeed, from
one who allows that the amount of money employed in any country is
regulated by its value, and might therefore be comparatively redundant
though it consisted only of a million, or deficient though it amounted
to a hundred millions, I should not have expected any difference of
opinion on the comparative cheapness of money being the only
satisfactory proof of its redundance. If however I thought that the
difference between us was as to the correct use of a word, I should
immediately yield the point in dispute, but I am persuaded that we do
not agree in the principle. You are of opinion that a bad harvest will
raise the price of corn, but will lower in some degree the prices of
other commodities. Whether it would or would not do so is not material;
but, if your opinion is correct, then I say there would be no
exportation of money, because money would not be the cheapest exportable
commodity. If, before the deficient harvest, money was at the same value
in any two countries, that is to say all their exportable commodities
without exception were at the same prices in both, then, according to
your view of the question, after the scarcity the prices of all
commodities would fall in the country where such scarcity occurred.
Whilst then the prices were unequal in the two countries, commodities
only would be exported in exchange for corn, and there would be no
question between us, because we differ as to the cause of the
exportation of money. You have indeed said that there may be a glut of
commodities in the foreign market. What! a glut of commodities with a
dearer price! impossible,--these two circumstances are incompatible. If
the price of any commodity had been L20 in both countries and in
consequence of the bad harvest it had been lowered to L15 in one of
them, there could not be a glut of that commodity in the other country
till it had there also fallen to L15. Not only must the price of one
commodity fall in the foreign market, but the prices of all (because you
suppose them all to have fallen in England) before money could be
exported in exchange for corn, and then I would allow that money would
be exported, but even then it would be so only because it was more cheap
on the whole, as compared with commodities in the exporting country, and
this I contend is the proof of its relative redundance. You maintain
that money is rendered cheap by a bad harvest as compared with corn
only, but with all other commodities it is dearer than before,--and
then, what appears to me very inconsistent, you insist that this
commodity thus rendered scarce and dear will be exported, though, before
it had increased in value, it had no tendency to leave us, whilst too
there are commodities which have undergone an opposite change, which
from being dearer have become cheaper, and which will nevertheless be
obstinately retained by us. This is a mode of reasoning which I cannot
reconcile.
With respect to the other point, namely, that the exchange accurately
measures the depreciation of the currency[43], I cannot but humbly
retain that opinion notwithstanding the high authorities against me. I
do not mean to contend that a convulsed state of the exchange, such as
would be caused by a subsidy granted to a foreign power, would
accurately measure the value of the currency, because a demand for bills
arising from such a cause would not be in consequence of the natural
commerce of the country. Such a demand would therefore have the effect
of forcing the exports of commodities by means of the bounty which the
exchange would afford. After the subsidy was paid the exchange would
again accurately express the value of the currency. The same effects
would follow, as in the case of a subsidy, from the foreign expenditure
of Government. These have a natural tendency to create an unfavourable
exchange, yet if the demand for bills is regular it is surprising how
this bounty on exportation will be reduced by the competition amongst
the exporters of commodities. I am of opinion that in the ordinary
course of affairs, if, from any of the circumstances so often mentioned,
there should be a slight alteration in the value of the currencies of
any two countries, it will speedily be communicated to the exchange;
and, if such a state of things should permanently continue, the exchange
has no tendency to correct itself. The fact however appears to be that
there is no degree of permanence in the proportions between the
currencies and the commodities of nations,--they are subject to constant
fluctuations always approaching an absolute level but never really
finding it. I hope I have not wearied you with the defence which I have
endeavoured to make for the opinions which I have imbibed. I assure you
that I am not obstinately attached to any system, but am ready to
relinquish any views I may have taken as soon as I am satisfied that
they are incorrect. I shall not fail attentively to consider the
chapters in Sir J. Steuart's work which you have mentioned[44]. I hope
before the summer is over to pay you a visit at Hertford.
I am, dear Sir,
Yours very sincerely,
DAVID RICARDO.
NEW GROVE, MILE END, _17 July, 1811_.