I received your letter last Sunday, and in the evening of that day Mrs. Ricardo and the rest of my family arrived here. I have been showing them all the beauties of this place, and my time has been pretty well engrossed by them these three last days.... The fall in Omnium is I believe to be attributed to our continued expenses, and the expectation of another loan before the payments on the present are completed. The present state of the Exchanges seem to indicate a real fall in the value of foreign currencies; it cannot be attributed to any change of taste for particular commodities, or any other caprice. I expected that Peace would lower the value of foreign currency, but I confess not in the degree which has taken place. It leaves the question between us undecided—namely, whether the exchange is not operated upon solely by the relative preponderance of currency. Peace has rendered the currency of the continent much more efficacious to the business to be done.
With regard to our present question, we differ as to effects which must necessarily follow from restrictions on the importation of foreign corn. I do not think that a diminution of capital is a necessary, but a probable effect. We agree as to the consequences which will attend a diminution of capital, but I should say that a real diminution of capital will diminish the work to be done, and consequently will affect the wages of labour, and the demand for food. In the case supposed, restrictions on importation of corn, encouragement is given to the further cultivation of our own land,—but if accompanied by a diminution of capital a discouragement is also given to the cultivation of the land, and whether profits rise or fall must in my opinion depend upon the degree of these contra-operating causes. It is true that the woollen or cotton manufacturer will not be able to work up the same quantity of goods with the same capital if he is obliged to pay more for the labour which he employs, but his profits will depend on the price at which his goods when manufactured will sell. If every person is determined to live on his revenue or income, without infringing on his capital, the rise of his goods will not be in the same proportion as the rise of labour, and consequently his percentage of profit will be diminished if he values his capital, which he must do, in money at the increased value to which all goods would rise in consequence of the rise of the wages of labour. In such case I should say that the effective demand had diminished, because the same quantity of commodities could not be annually consumed. If the same quantity of commodities continued to be consumed, then it must be evident that it would be at the expense of capital. In such case capital would diminish faster than demand, which would tend to keep up profits. But how long will [people] continue to indulge in luxuries at the expense of a continual diminution of capital? It is the road to ruin, and, though frequently persisted in by a few individuals, it is not often found to be the folly of nations. On the contrary, if any causes interrupt the progress of nations, if restrictions on their trade, or expensive wars, tend to diminish their capital, at such times more economy is practised, and, as Adam Smith has observed, the profusion of governments is counteracted by the frugality of individuals. If so, I cannot be incorrect in saying that, though for a short period capital and produce may diminish faster than demand,—yet in the long run effective demand cannot augment or continue stationary with a diminishing capital. You say, what I did not before understand you to admit, 'that the whole amount of demand will from advanced prices diminish of course, but the proportion of demand to supply, which is always the main point in question, as determining prices and profits, may continue to increase, as it does in all countries the capital of which is retrograde;' but I do not agree even to this explanation, and it appears to me to be at variance with an opinion which I have often heard you express, viz. The temptation to save from revenue to augment capital is always in proportion to the rate of profits, and, if from accumulation of capital profits and interest should fall very low indeed, at that point accumulation would nearly stop, because it would be almost without an object. In this opinion I most cordially agree, and I cannot help thinking that it is at variance with the above sentence which I have quoted from your letter. I maintain, as I think you have done, that consumption as compared with production is always greatest where capital is most accumulated. Diminish the capital of England one half, and you undoubtedly augment profits, but it will not be in consequence of a greater proportion of demand but of a greater proportion of production; demand as compared with production could hardly fail to diminish. Individuals do not estimate their profits by the material production, but nations invariably do. If we had precisely the same amount of commodities of all descriptions in the year 1815 that we now have in 1814, as a nation we should be no richer; but, if money had sunk in value, they would be represented by a greater quantity of money, and individuals would be apt to think themselves richer. I shall be in town either next week or the week after. I wish you would return here with me. We would discuss these important points in our shady groves. With kind regards to Mrs. Malthus,
I am, yours truly,
David Ricardo.
XVIII.
Gatcomb Park, Minchin Hampton,
30th Aug., 1814.
My dear Sir,
I left London on the 19th, the day before your letter arrived there, having dispatched all my business in four days. The appearance of the Omnium was not sufficiently inviting to induce me to protract my stay longer than was absolutely necessary. David[63], who is come to pass his holidays with us, brought me your letter. I regret that I shall not see you for some time, as you cannot come here, and I shall not have it in my power at present to visit Hail[e]ybury. I expected to have a great deal of leisure time in the country, but as yet I have not had any. Walking and riding with my family, and friends who have visited us, have entirely occupied me; besides which, the only room in my house which is not finished is the library, owing to the tedious time which they have taken to fix my bookcases.
I think if we could talk together we should not very much differ on the question which has lately engaged us; our principal difference is about the permanence of the effects. It will often happen that the scarcity of a commodity or the increasing demand for it will for a time increase profits; but it is not therefore correct to say that, where profits are high, they are so because the demand for produce is great compared with supply. There are many other causes which will occasion profits to be permanently high. There may be two countries, in one of which, from bad government and the consequent insecurity of property, or from the little disposition to saving in the people, profits may be permanently high and interest at 12 per cent., whilst in the other, where these causes do not operate, profits may be permanently low and interest at 5 per cent. It would surely be incorrect to say that the cause of the high profits was the greater proportion of demand for produce, when in both countries the supply would be or might be precisely equal to the demand and no more. In America profits are higher than in England, and yet I can have no doubt that the proportion of supply to demand is greater in the former country. I think it must necessarily be so in all countries which are most rapidly increasing in riches, for from whence do riches come but from production preponderating over consumption? Profits are sometimes high when corn is scarce and dear; but this arises from the stimulus which the high prices give to industry. If the population could immediately accommodate itself to the scanty supply, no such effects would follow; and in fact they only continue till time has gradually equalised them.
I sometimes suspect that we do not attach the same meaning to the word 'demand.' If corn rises in price, [you] perhaps attribute it to a greater demand. I should [attribute it to] a greater competition. The demand cannot, I think, be said to increase if the quantity consumed be diminished, although much more money may be required to purchase the smaller than the larger quantity. If it were to be asked what the demand was for port-wine in England in the years 1813 and 1814, and it were to be answered that in the first year she had imported 5000 pipes, and in the next 4500, should we not all agree that the demand was greater in 1813? Yet it might be true that double the quantity of money was paid for the 4500 pipes.
Have you read the report of the Lord[s'] Committee on the Corn question? It discloses some important facts; but how ignorant the persons giving evidence appear to be of the subject as a matter of science! The Editor's remarks too are very unworthy of his paper.