David Ricardo is the dominant British economist of the nineteenth century, just as Adam Smith was the dominant economist of the eighteenth century, or Maynard Keynes of the twentieth century. Ricardo can be regarded as the father of monetary economics just as Adam Smith was the father of free market theory. From the early nineteenth century until the Great Depression of the 1930s, Ricardo was the authoritative figure; he represented the classic theory.
However, the classic theory broke down in the period between 1914 and 1933, in which period it failed to develop a satisfactory doctrine of war economics, failed to prevent the post war inflations in the defeated countries, particularly Germany, failed the foresee or prevent the Great Depression, and failed to maintain the Gold Standard. Before 1914, orthodoxy meant Ricardian theory and Ricardian finance. The Great Depression destroyed the Gold Standard and undermined the authority of the classic school.
That would not necessarily have surprised Ricardo himself. He had been a Government loan broker on a scale almost comparable to the Rothschild family, during the period of the Napoleonic War, and had raised millions of pounds for the British struggle against Napoleonic France. He had experienced the 1797 suspension of convertibility by the Bank of England. The 1797 panic was partly caused by the fear of a French invasion; it led to demand for gold from citizens who did not trust the banks and were afraid that the invasion might mean that bank notes could no longer be cashed in terms of gold.
Ricardo, in various writings, makes it quite clear that he thought that the banks could never have complete security against a panic of this kind. He argued, as it is again being argued today, that banks can never have enough cash in their balance sheets to provide for the cashing of all deposits. Banking depends upon lending more money than the banks will ever have in their vaults. To this point, Ricardian economics have remained current orthodoxy.
Nevertheless, the controversy in Britain seems again to be centred on the differences between Ricardo and Keynes. David Cameron, the leader of the Opposition, is not keen to be described as a Ricardian, presumably because Ricardo died nearly two hundred years ago, but his rejection of stimulus through Government debt would have seemed orthodox to 19th century Ricardians. An earlier Conservative leader, Ted Heath – the man who took Britain into Europe – dismissed Ricardo on the grounds that he died a hundred and fifty years ago. Politicians believe that even the logic of money becomes redundant with time.
The Labour Party have adopted Maynard Keynes as their champion in the battle of deceased economists, and use his powerful name as a cover for their policy of borrowing and spending in order to restart the British economy. Other interesting economists, either American like Irving Fisher or Austrian like Schumpeter, have become recruits to one side or the other, to inflation or stabilisation, to stimulus or sound finance. The international Central Banking community has also been split, with Germany, like the British Conservatives, supporting sound money, and France, like the British Labour Party, supporting stimulus. The United States, both Republicans and Democrats, are Keynesian, as are the Federal Reserve, Britain and France. The European Central Banks, Germany, the British Conservatives and China can be described as Ricardian.
It all depends on what one is trying to achieve. The left want – as who would not? – to reflate the world economy. The right – if one can call them the right – want to stabilise the world economy. Both sides nominally accept that their aim is to restore confidence. The left believe that large injections will restore confidence, by making money and credit plentiful. The right believe that confidence depends on a return to sound finance and sound national balance sheets. In the argument one can see the case for Keynes and the case for Ricardo. The Keynesian Budget produced by Gordon Brown and Alistair Darling cut VAT for 2009, but promised to restore it to its present level in 2010. That will provide a little extra cash for the market place in 2009, but lowers the expectation for 2010. That is not good Keynesianism. Maynard Keynes managed wartime finance in the Second World War by managing expectations. I fear that one cannot play around with Budget deficits in an arbitrary manner without rational expectations being damaged. One cannot have a surplus of debt by gratuitously cutting the Government’s revenue.
For Markets and Money