‘Writings on Money Full of Instruction’: Steuart and Ricardo as Two Squabbling Bedfellows

Half-a-century after the publication of Steuart's Principles of Political Oeconomy, David Ricardo's judgment on the monetary theory contained in this book was ambivalent: "The writings of Sir James Steuart on the subject of coin and money are full of instruction, and it appears surprising that he could have adopted the above opinion, which is so directly at variance with the general principles he endeavoured to establish." This "opinion" was the "idea of a currency without a specific standard." The present paper analyses the reasons of such ambivalence. On the positive side, Steuart established that a metallic currency could not be stable in value, and that the debasement of the coin was reflected in a high price of bullion. This was a lesson which Ricardo developed by advocating the complete substitution of banknotes for coins. Steuart also showed that monetary conditions at home and abroad could produce an unfavourable exchange, even when the foreign balance was in favour of England. This was echoed by Ricardo's contention that an unfavourable exchange could only be caused by the depreciation of the domestic currency. On the negative side, Steuart extended the critique of variability to any currency linked to a standard, whether coin or paper money. In contrast, Ricardo advocated that to be a "nearly perfect" currency paper money should be "regulated by a standard." Steuart also suggested that an unfavourable exchange could be corrected by borrowing abroad at interest paid by the State, while for Ricardo the State should not interfere with the exchange, which could only be corrected through the domestic management of the note issue by an independent central bank. Steuart and Ricardo thus appear as squabbling bedfellows, sharing an approach to money at variance with the quantity theory inherited from Hume, but opposing each other on the question of the standard of money and on the relation between money and capital.