I write to you, in the first place, to remind you that Mrs. Ricardo and
I fully depend on having the pleasure of Mrs. Malthus' and your company
at Mile-end in the next month, when we hope that our endeavours to make
your visit comfortable will induce you to make a long stay with us. In
the second place, I am desirous of correcting some of the errors in the
papers which I left with you and which I have been enabled to discover,
as I have many others, by the ingenious arguments with which you have
opposed my conclusions. In my endeavours to trace the effects of a
subsidy[47] in forcing the exportation of commodities, I stated, if I
recollect rightly, that it would occasion, first, a demand for bills;
secondly, an exportation of all those commodities the prices of which
already differed so much, in the two countries, as to require only the
trifling stimulus which the first fall in the exchange would afford;
thirdly, a real alteration in the relative state of prices, viz. a rise
in the exporting and a fall in the importing country,--in a degree too
to counterbalance the advantage from the unfavourable exchange; and
lastly, a further fall of the exchange and a consequent exportation of
an additional quantity of goods and then of money till the subsidy were
paid. It appears, then, that if the subsidy were small it would be
wholly paid by the exportation of commodities, as the fall in the
exchange would be sufficient to encourage _their_ exportation, but not
sufficient to encourage the exportation of money. If the exportation of
money were in the same proportion as the exportation of commodities,
that is to say, supposing the commodities of a country to be equal to
100, and its money equal to two, then if not less than one fiftieth of
the exports in payment of the subsidy consisted of money, prices would
after such payment be the same as before in both countries, and,
although the exchange must have fallen to that limit at which the
exportation of money became profitable, it would immediately have a
tendency to recover, and would shortly rise to par; but it is precisely
because less than this proportion of money will be exported that the
exchange will continue permanently unfavourable and will have no
tendency to rise, more than it will have to fall.
I believe you admit, that in the case of an augmentation of 2 per cent.
to our currency, although it were wholly metallic, the prices of
commodities would rise in this country 2 per cent. above their former
level, and that such rise being confined to this country alone it would
check exportation and encourage importation; the consequence of which
would be a demand for bills and a fall in the exchange. This rise of
prices and fall of the exchange, proceeding from what you do not object
to call a redundant currency, would not be temporary but permanent,
unless it were corrected by a reduction of the amount of the currency
here, or by some change in the relative amount of the currencies of
other countries. That these would be the effects of a direct
augmentation of currency, I believe, you, with very few qualifications,
admit. Now, as a bad harvest or the vote of a subsidy tend [_sic_] to
produce the very same effects, namely, a relative state of high prices
at home, accompanied by an unfavourable exchange, they admit only of the
same cure,--and, as in the case of an augmentation of currency the
exchange would have no tendency to rise, neither would it in the case of
a subsidy, the unfavourable exchange being in both instances produced by
a redundant currency, or in more popular language by a relative state of
prices which renders the exportation of money most profitable[48]. I
have uniformly maintained that the money of the world is distributed
amongst the different countries according to their commerce and
payments, and that, if in any country it should from any cause happen to
exceed that proportion, the excess would infallibly be exported to be
divided amongst the other countries. I have, however, always supposed
that my readers would understand me to mean that this would be strictly
the fact only if money could be exported free from all expense. If the
expenses of exporting money to France be 3 per cent., to Vienna 5 per
cent., to Russia 6 per cent., and to the East Indies 8 per cent., the
currency of England may exceed its natural level as compared with those
countries by 3, 5, 6, and 8 per cent. respectively, and consequently the
exchange may permanently continue depressed in th[ose pr]oportions. If
an excess of currency once occurs, [the unfa]vourable exchange must
continue till some alterati[on in] the relative amount of currency. The
circumstances which [may] occasion such an alteration are numerous, and
are fully detailed in the papers which I left with you. To the precise
agreement between the effects of an augmented currency and the effects
of a subsidy I most particularly request your attention, as on such
agreement depends the whole success of the argument which I am advancing
in favour of my opinion that an unfavourable exchange has no tendency to
correct itself. It may be urged that the relative state of high prices
at home occasioned by an augmentation of currency is the natural effect
of such a cause, but that this is not the case in a subsidy; that the
exportation of commodities in payment of a subsidy is forced, and that
it will produce a glut in the foreign market, but that after the subsidy
is paid and the necessity for exportation shall cease prices will rise
in the foreign market to their former rate. This however will not be
true. Commodities may rise in a trifling degree abroad, but cannot
regain their former rate unless the exchange should also rise to par,
but this it can never do whilst the demand for bills do[es] not exceed
the supply. Now, as the prices of foreign commodities in the home
market, which could not have been supplied in the usual abundance during
the operation of the subsidy when we had a large balance to pay, would
fall, and would be in greater demand from the moment that our
commodities would be received in exchange, the exportation of our goods
would be balanced by the importation of foreign goods, and the sellers
of bills would neither exceed nor fall short of the purchasers. These
are the substance of the amendments which I wish to make to my paper,
which is now so faulty that I shall be glad to have it returned to me.
Have the goodness to bring it with you when you come to town.
I am, dear Sir,
Yours with great esteem,
DAVID RICARDO.