David Ricardo, Paper Money, and the Abuse of Power

About a century later, in 1794, the Crown decreed a suspension on the redemption of banknotes by the BoE and started to take loans from the bank in order to pay for the Napoleonic wars.

The bank obliged, issuing banknotes, now without the constraint of being required to redeem those notes in gold coins and inflationary war finance ensued.

When David Ricardo first published “The Principles of Political Economy and Taxation” in 1817, two years after Napoleon’s final defeat at Waterloo, the currency in England remained unconvertible. It was only in 1821, the same year of his final edition of the book that redemption was finally resumed.

Not that the suspension during the Napoleonic was the first case in history of abuses of paper money. The case of John Law’s Bank Royale in early 18th century France and the case of the Assignats, more recently, in revolutionary France were certainly in Ricardo’s mind when he was writing about currency and banks.

It is only with reference to the arrangements of modern finances with suspended redemption of the currency still in place in England at the time of this writings, six years after the end of the war, that we can fully understand Ricardo’s admonitions about the abuses of nonconvertible currency, both by the state and the bank.