Monetary Disequilibrium and the Demand for Money in Ricardo and Thornton

Abstract

This chapter explores the different explanations of Ricardo and Thornton for the depreciation of sterling after convertibility of sterling into gold was suspended during the Napoleonic Wars. Ricardo held that only overissue by the Bank of England could have caused depreciation of sterling while Thornton believed that other causes, like a bad harvest, could also cause depreciation. Applying the conditions of international commodity arbitrage under the gold standard, Ricardo argued that a bad harvest could not cause depreciation of sterling. But the conclusion follows only under the implicit assumption that the demand for money is unchanged despite a bad harvest. In contrast, Thornton, anticipating Wicksell’s natural-rate theory, did not take a uniform international price level as a benchmark given the suspension of convertibility. But, like Ricardo, Thornton implicitly made the untenable assumption of unchanged demand for money.