David Ricardo and the Role of Central Banks

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Central banks across the globe use a common set of policy tools to achieve their inflation and employment goals – regulating the money supply and interest rates, and occasionally implementing measures such as quantitative easing. That toolkit can trace its origins to the intellectual contributions of David Ricardo, one of the earliest opponents of a gold standard.

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”1. Readers of Advisor Perspectives will recognize this most famous of all quotations about the influence of academic ideas on actual economic events. Much more difficult to find are the opposite circumstances: when sound ideas are excluded from economic theory because they have practical rather than academic origins.

David Ricardo is the best example of a counterfactual to Keynes’ witticism. He is a “defunct economist” of note, whose thoughts on the labor theory of value, comparative advantage, and the law of diminishing returns can be found in references in the academic literature. What goes largely unnoted (and completely absent from his Wikipedia page) are Ricardo’s practical conclusions about what works best as a currency system.

Ricardo began working in the City of London in 1786 at the age of 14 as a clerk and runner for his father’s brokerage firm. By age 21 he was an established bill broker – a trader in the exchanges of Bank of England notes, trade bills, gold guineas and silver sterling. He then took what was, in retrospect, the largest single gamble of his life. He and Priscilla Anne Wilkinson eloped and married. Each of them was immediately and permanently disowned when their families learned the news: Ricardo for marrying anyone other than a Jew, Wilkinson for marrying anyone not a Quaker. From that day forward, neither of their families spoke or wrote to them again.

After being banished, Ricardo was able to join a firm run by John Lubbock, a speculator. Lubbock and his partners were busy using Newton’s calculus to make their bets on the spreads between bank paper, sovereign debt, and gold and silver coin and bullion. Within a generation the Lubbocks and others in the City were regularly incorporating academically-trained mathematicians in their operations.