David Ricardo (1772-1823) was one of the most influential economic theorists of the first half of the nineteenth century. Born in London, England, his father’s family were orthodox Jews originally from Portugal who had moved to England from Holland. His father was a highly successful stockbroker. David Ricardo learned the family business, and most likely would have inherited it from his father.
Ricardo said it was all a matter of taking advantage of profit opportunities, while not waiting too long to gain the positive return.
But he fell in love with an English Quaker, converted from Judaism to Christianity, and at the age of 21 eloped without his family’s knowledge. His father disowned him and his mother never spoke to him again. He, therefore, had to go out on his own and set up his own brokerage company. He soon showed himself to be an expert at all financial and brokerage dealings. Making a fortune, including dealing in British government securities during Britain’s long war with Revolutionary and then Napoleonic France, Ricardo retired from business in his early 40s to an estate in the English countryside.
Ricardo became interested in economics when he read Adam Smith’s The Wealth of Nations during a holiday in 1799. He began to write on economic topics in 1809 with a series of articles and a monograph on the causes for inflation in Great Britain that gained him wide notoriety.
The publication of The Principles of Political Economy and Taxation in 1817 soon established his permanent reputation as one of the leading economists in the world.
He also served as a member of the House of Commons in the British Parliament from 1819 until his death in 1823, when he was 52 years old.
Ricardo’s Method of Making Money
What was Ricardo’s “secret” for success in business? Shortly before his death, a friend asked how he had been able to accumulate such a large fortune when he was still a relatively young man. Ricardo said it was all a matter of taking advantage of profit opportunities, while not waiting too long to gain the positive return:
“My whole art in getting rich lay in my always being contented with small profits; or, in other words, never holding on to the commodities or goods in my possession too long, when small profits could be had, in an ill-grounded expectation of realizing eventually a higher rate of profit. I had my eyes, for example, upon every new road, bank, or other joint stock concern, and, where I deemed the prospect of success to be a fair one, I was ever ready to buy a certain number of shares. These shares, from the nature of all new undertaking of a joint-stock character, seldom failed, after a short time, to rise in value beyond the point about which they would afterwards have a tendency to fluctuate. Before the full accomplishment of this rise, however, my shares were in most instances already disposed of to others, and the proceeds invested in a different manner.”
This resulted in a reputation as a shrewd businessman who others attempted to emulate, often following his buying and selling to try to ride on his profit-making coattails. Explained Ricardo:
“It was then that a new element of success was spontaneously presented to me. Many persons, who had heretofore been unsuccessful in acting on the suggestions of their own judgments, preferred now to be guided in their speculations by what they supposed me to be doing. My example was continually referred to on change. One said not infrequently to another – ‘Mr. Ricardo has purchased this and that article or stock, and depend on it, you cannot do better.’ In this state of things, it must be manifest that I may often have created that very demand that enabled me to dispose of the article purchased, with a small profit, only a very short time afterwards. At length, such had my reputation as a successful speculator become, that I had sometimes thought it possible for me to have gone into the market and purchased at random, no matter what, with a good prospect of advantage to be gained by selling out again promptly.”
War, Government Debt and Paper Money Inflation
Ricardo’s reputation as an economist emerged out of his writings during the long war that broke out between Great Britain and Revolutionary France in 1793, and which was almost continuous until 1815, with the defeat of Napoleon in the famous Battle of Waterloo in Belgium.
The Bank of England insisted that the inflation had nothing to do with the issuance of banknotes to cover the government’s war borrowing.
The British government’s war costs increasingly grew to cover the expenses of its own fighting forces, and the subsidized war expenditures of other European countries that were fighting France, as well, at various times. By 1797, the British government was covering over 70 percent of its expenditures with borrowed money from the Bank of England, a private bank with the “privilege” of having a monopoly of issuing banknotes in Great Britain.
The Bank of England supplied the necessary loans by the issuance of increasing amounts of banknotes. As the government spent the banknotes, the paper money passed into the hands of people in the private sector, who proceeded to spend it, in turn, on desired goods and services. Prices began to rise, resulting in a growing demand to redeem the banknotes for gold from the Bank of England by people wishing to either hoard valuable gold rather than hold depreciating paper money or to export gold to buy less expensive goods from other countries.
Fearing insolvency, or even eventual bankruptcy, the Bank of England said it could no longer extend loans to the government under these conditions. As a consequence, the British government passed the Restriction Act of May 3, 1797, freeing the Bank of England from redeeming banknotes for gold. The banknotes, therefore, were no longer claims to gold previously left on deposit by bank customers, but were de facto legal tender – irredeemable paper money.
The Restriction Act of 1797 remained in effect until May 1, 1823. During the remaining war years, the government continued borrowing from the Bank of England. Between 1797 and 1801, the quantity of Bank of England notes in circulation had almost doubled from 9.7 million to nearly 17 million. The value of the paper pound fell nearly 10 percent against gold, while the foreign exchange rate of the paper pound lost more than 13 percent of its value.
The supply of Bank of England notes continued to expand until 1817, two years after the defeat of Napoleon and the end of the wars with France, when it reached nearly 30 million, three times the money supply twenty years earlier when the Restriction Act had been imposed. The Bank of England notes reached their greatest degree of loss of value against gold in 1813, when it had decreased by 36 percent; that same year saw the foreign exchange value of the paper pound down by 30 percent on the Hamburg exchange market. The gold and foreign exchange value of the paper pound only returned to near