Introduction:

By the time England officially adopted the Gold Standard in 1821, or rather returned to it after the Suspension of Cash Payments in effect since 1797, Ricardo?s views on the working of the system and his prescriptions for the conduct of monetary affairs had gained wide acceptance and recognition. The main propositions in monetary policy can be summarised as follows: a) the monetary authorities are accountable only for those changes in money prices which can be imputed to a monetary disturbance; b) a desirable monetary regime is one in which such an occurrence is least likely to occur; c) targeting the quantity of money, in order to prevent a monetary disturbance, is both undesirable and ineffectual. In this paper I try to show how Ricardo derived these propositions from his monetary and value theory and discuss the role played by the concept of the ?natural? level of the quantity of money.

Ricardo firmly believed that it was possible to distinguish variations in money prices having a monetary origin from those originating in real causes. Changes in money prices that have a monetary cause could and (should) be prevented, while those due to a change in the conditions of production of commodities could (and should) not be avoided. The premise of the argument is a peculiar definition of value of money, which now sounds unfamiliar (but was common for most of the classical economists3), as the purchasing power of a unit of currency over the standard. 4 The standard is that particular commodity which ?in virtue of its own particular characteristics- is chosen to measure the value of money. If, then, gold is chosen as the standard, variations in the money price of gold are the measure of changes in the value of money. An increase in the price of gold, i.e. a change in the purchasing power of the currency over the standard, means a decrease in the value of money, i.e. a depreciation of the currency. (Conversely, for a decrease in the price of gold). ...

If the standard is gold, the price of gold measures the internal value of the currency, while the rate of exchange (the ratio between the official prices of gold at home and abroad, assuming that the other countries have also adopted a Gold Standard) measures the external value of the currency. Whenever the market price of gold shows no deviation from the official price and the market rate of exchange (the price of foreign bills of exchange) is close to the par of the exchange, the purchasing power of the currency over gold ? therefore its value ? is equalised at home and abroad. This configuration of the system is attained when the quantity of money is at its ?natural? level. This is not a quantity that can be given a numerical value ? targeted by the monetary authority ? but rather a benchmark signalled by the foreign and domestic value of money ? on the evidence of which it can be seen when that level is not attained. When both the market price of gold at home and the market rate of exchange deviate from their official values, provided the internal and external convertibility of the currency is maintained, forces are at work that will restore that level.

Summing up, Ricardo?s belief that it was possible to separate ?monetary? from ?real? causes of variations in money prices rests on two presuppositions: (i) there is a market mechanism which ensures that the value of money, once the price of the standard is fixed in terms of the currency at home and abroad, remains constant; (ii) there is an actual commodity which is ?invariable? in value.