EXCHANGE

EXCHANGE, in commerce, is the receiving or paying of money in one country for the like sum in another, by means of bills of exchange.

The security which merchants commonly take from one another when they circulate their business, is a bill of exchange, or a note of hand: these are looked upon as payment. See BILL, and Merchandise LAWS.

The punctuality of acquitting these obligations is essential to commerce; and no looner is a merchant's accepted bill protested, than he is considered as a bankrupt. For this reason, the laws of most nations have given very extraordinary privileges to bills of exchange. The security of trade is essential to every society; and were the claims of merchants to linger under the formalities of courts of law when liquidated by bills of exchange, faith, confidence, and punctuality would quickly disappear, and the great engine of commerce would be totally destroyed.

A regular bill of exchange is a mercantile contract, in which four persons are concerned, viz. 1. The drawer, who receives the value: 2. His debtor, in a distant place, upon whom the bill is drawn, and who must accept and pay it: 3. The person who gives value for the bill, to whose order it is to be paid: and, 4. The person to whom it is ordered to be paid, creditor to the third.

By this operation, reciprocal debts, due in two distant parts, are paid by a sort of transfer, or permutation of debtors and creditors.

(A) in London is creditor to (B) in Paris, value 100l. (C) again in London is debtor to (D) in Paris for a like sum. By the operation of the bill of exchange, the London creditor is paid by the London debtor; and the Paris creditor is paid by the Paris debtor; consequently the two debts are paid, and no money is sent from London to Paris nor from Paris to London.

In this example, (A) is the drawer, (B) is the acceptor, (C) is the purchaser of the bill, and (D) receives the money. Two persons here receive the money, (A) and (D); and two pay the money, (B) and (C); which is just what must be done when two debtors and two creditors clear accounts.

This is the plain principle of a bill of exchange. From which it appears, that reciprocal and equal debts only can be acquitted by them.

When it therefore happens, that the reciprocal debts of London and Paris (to use the same example) are not equal, there arises a balance on one side. Suppose London to owe Paris a balance, value 100l. How can this be paid? Answer, it may either be done with or without the intervention of a bill.

With a bill, if an exchanger, finding a demand for a bill upon Paris for the value of 100l. when Paris owes

Exchange owes no more to London, sends 100l. to his correspondent at Paris in coin, at the expence (supposed) of 1l. and then, having become creditor on Paris, he can give a bill for the value of 100l. upon his being repaid his expence, and paid for his risk and trouble.

Or it may be paid without a bill, if the London debtor sends the coin himself to his Paris creditor, without employing an exchanger.

This last example shows of what little use bills are in the payment of balances. As far as the debts are equal, nothing can be more useful than bills of exchange; but the more they are useful in this easy way of business, the less profit there is to any person to make a trade of exchange, when he is not himself concerned either as debtor or creditor.

When merchants have occasion to draw and remit bills for the liquidation of their own debts, active and passive, indolent parts, they meet upon 'Change'; where, to pursue the former examples, the creditors upon Paris, when they want money for bills, look out for those who are debtors to it. The debtors to Paris again, when they want bills for money, seek for those who are creditors upon it.

This market is constantly attended by brokers, who relieve the merchant of the trouble of searching for those he wants. To the broker every one communicates his wants, so far as he finds it prudent; and by going about among all the merchants, the broker discovers the side upon which the greater demand lies, for money or for bills.

He who is the demander in any bargain, has constantly the disadvantage in dealing with him of whom he demands. This is nowhere so much the case as in exchange, and renders secrecy very essential to individuals among the merchants. If the London merchants want to pay their debts to Paris, when there is a balance against London, it is their interest to conceal their debts, and especially the necessity they may be under to pay them; from the fear that those who are creditors upon Paris would demand too high a price for the exchange over and above par.

On the other hand, those who are creditors upon Paris, when Paris owes a balance to London, are as careful in concealing what is owing to them by Paris, from the fear that those who are debtors to Paris would avail themselves of the competition among the Paris creditors, in order to obtain bills for their money, below the value of them, when at par. A creditor upon Paris, who is greatly pressed for money at London, will willingly abate something of his debt, in order to get one who will give him money for it.

From the operation carried on among merchants upon 'Change', we may discover the consequence of their separate and jarring interests. They are constantly interested in the state of the balance. Those who are creditors on Paris, fear the balance due to London; those who are debtors to Paris, dread a balance due to Paris. The interest of the first is to dissemble what they fear; that of the last, to exaggerate what they wish. The brokers are those who determine the course of the day; and the most intelligent merchants are those who despatch their business before the fact is known.

Now, how is trade in general interested in the que-

tion, Who shall outwit, and who shall be outwitted, in this complicated operation of exchange among merchants?

The interest of trade and of the nation is principally concerned in the proper method of paying and receiving the balances. It is also concerned in preserving a just equality of profit and loss among all the merchants, relative to the real state of the balance. Unequal competition among men engaged in the same pursuit, constantly draws along with it bad consequences to the general undertaking; and secrecy in trade will be found, upon examination, to be much more useful to merchants in their private capacity, than to the trade they are carrying on.

Merchants endeavour to simplify their business as much as possible; and commit to brokers many operations which require no peculiar talents to execute. This of exchange is of such a nature, that it is hardly possible for a merchant to carry on the business of his bills without their assistance, upon many occasions. When merchants come upon 'Change', they are so full of fear and jealousies, that they will not open themselves to one another, lest they should discover what they want to conceal. The broker is a confidential man, in some degree, between parties, and brings them together.

Besides the merchants who circulate among themselves their reciprocal debts and credits arising from their importation and exportation of goods, there is another set of merchants who deal in exchange; which is the importation and exportation of money and bills.

Were there never any balance on the trade of nations, exchangers and brokers would find little employment; reciprocal and equal debts would easily be transacted openly between the parties themselves. No man feigns and dissembles, except when he thinks he has an interest in so doing.

But when balances come to be paid, exchange becomes intricate; and merchants are so much employed in particular branches of business, that they are obliged to leave the liquidation of their debts to a particular set of men, who make it turn out to the best advantage to themselves.

Whenever a balance is to be paid, that payment costs, as we have seen, an additional expence to those of the place who owe it, over and above the value of the debt.

If, therefore, this expence be a loss to the trading man, he must either be repaid this loss by those whom he serves, that is, by the nation; or the trade he carries on will become less profitable.

Every one will agree, that the expence of high exchange upon paying a balance is a loss to a people, no way to be compensated by the advantages they reap from enriching the few individuals among them who gain by contriving methods to pay it off; and if an argument is necessary to prove this proposition, it may be drawn from this principle, viz. whatever renders the profit upon trade precarious or uncertain, is a loss to trade in general; this loss is the consequence of high exchange; and although a profit does result from it upon one branch of trade, the exchange business, yet that cannot compensate the loss upon every other.

Exchange. We may, therefore, here repeat what we have said above, that the more difficulty is found in paying a balance, the greater is the loss to a nation.

The course of exchange is the current price betwixt two places, which is always fluctuating and unfettled, being sometimes above and sometimes below par, according to the circumstances of trade.

When the course of exchange rises above par, the country where it rises may conclude for certain that the balance of trade runs against them. The truth of this will appear, if we suppose Britain to import from

any foreign place goods to the value of 100,000l. at par, and export only to the value of 80,000l. In this case, bills on the said foreign place will be scarce in Britain, and consequently will rise in value; and after the 80,000l. is paid, bills must be procured from other places at a high rate to pay the remainder, so that perhaps 120,000l. may be paid for bills to discharge a debt of 100,000l.

Though the course of exchange be in a perpetual flux, and rises or falls according to the circumstances of trade; yet the exchanges of London, Holland, Hamburg, and Venice, in a great measure regulate those of all other places in Europe.

In Holland there are two sorts of money, bank and current. The bank is reckoned good security; demands on the bank are readily answered; and hence bank money is generally rated from 3 to 6 per cent. better than the current. The difference between the bank and current money is called the agio.

Bills on Holland are always drawn in bank money; and if accounts be sent over from Holland to Britain in current money, the British merchant pay these accounts by bills, and in this case has the benefit of the agio.

PROB. I. To reduce bank money to current money.

RULE. As 100 to 100 + agio, so the given guilders to the answer.