In commercial economy the term "Exchange" is commonly employed to designate that description of mercantile transactions, by which the debts of individuals residing at a distance from each other are liquidated, without the intervention of money. The object of this article is to explain the nature of these transactions, and the principles on which they depend.

This will be best effected by treating, first, of the exchange between different parts of the same country; and, secondly, of that between different and independent countries.

Inland Exchange.—Suppose a merchant of London orders his agent in Glasgow to send him a thousand pounds' worth of cottons, and that it does not suit the agent to commission goods of equal value from his London correspondent, the latter may, notwithstanding, be under no necessity of remitting cash to Glasgow in discharge of his debt. Among countries or cities having a considerable intercourse together, the debts mutually due by each other are found, in ordinary cases, to be nearly equal. The Glasgow agent, who has shipped the cottons for London, does not, therefore, transmit the bill drawn by him on his correspondent for their price to London to be cashed, as that would subject him to the expense of conveying the money home to Glasgow; but he gets its value from some other party in Glasgow, who has a payment to make in London on account of tea or some other article bought in that city, and who, unless he could procure such a bill, would be obliged to remit its price in money. The bill on account of the cottons is, therefore, either drawn in favour of the party in London who furnished the tea, or it is drawn in favour of the tea-dealer in Glasgow, and indorsed by him to the former, who, on presenting it to the purchaser of the cottons, receives its value, and consequently the price of the cottons, and the price (or part of the price) of his tea, at the same moment. This simple contrivance obviates the expense and risk attending the transmission, first, of money from London to Glasgow to pay the cottons, and, second, of money from Glasgow to London to pay the tea. The debtor in one is charged for the debtor in the other; and both accounts are settled without the intervention of a single farthing.

The bill drawn and negotiated in such a transaction as this is termed an inland bill of exchange. If the transaction had taken place between London or Glasgow and a foreign city, it would have been termed a foreign bill of exchange.

A bill of exchange may, therefore, be defined to be, "an order addressed to some person residing at a distance, directing him to pay a certain specified sum to the person in whose favour the bill is drawn, or his order."

The price of bills fluctuates according to their abundance or scarcity compared with the demand. If the debts reciprocally due by London and Glasgow be equal, whether they amount to L100,000, L500,000, or any other sum, they may be discharged without the intervention of money, and the price of bills of exchange will be at par; that is, a sum of L100 or L1000 in Glasgow will purchase a bill for L100 or L1000 payable in London, and vice versa. But if these cities be not mutually indebted in equal sums, then the price of bills will be increased in the city which has the greatest number of payments to make, and reduced in that which has the fewest. If Glasgow owe London L100,000, whilst the latter only owes the former L90,000, it is clear, inasmuch as Glasgow has a larger sum to remit to London than London has to remit to Glasgow, that the price of bills on London will rise in Glasgow because of the increased demand, and that the price of bills on Glasgow will fall in London because of the diminished demand. A larger sum would consequently be required to discharge a debt due by Glasgow to London, and a less sum to discharge an equal debt due by the latter to the former; or, which is the same thing, the exchange would be in favour of London, and against Glasgow. Bills on London would sell in Glasgow at a premium, and bills on Glasgow would sell in London at a discount; the premium in the one case being equal to the discount in the other.

On the supposition that the balance of L10,000, due by Glasgow, depresses the exchange on London one per cent., it appears, at first sight, that it will cost Glasgow L101,000 to discharge her debt of L100,000 due to London; and that, on the other hand, L89,100 would be sufficient to discharge the debt of London to Glasgow. But a very little consideration will serve to show that this would not be the case. Exchange transactions cannot take place between different cities until debtors and creditors of the one reside in the other. And hence, when the exchange became unfavourable to Glasgow, the premium paid by its merchants for bills on London would not go into the pockets of their creditors in the latter, but into those of their neighbours in Glasgow to whom London was indebted, and from whom the bills were purchased. The loss to Glasgow would, therefore, be limited to the premium paid on the balance of L10,000. Thus, supposing that A of Glasgow owes D of London L100,000, and that C of London owes B of Glasgow L90,000; A will pay to B L91,000 for a bill or order on C to pay D L90,000. In this way the L90,000 of London debt at Glasgow would be cleared off; the premium, which is lost by the debtor to London in Glasgow, being gained by its creditor in the same place. If the business had been transacted in London, C with L89,100, would have purchased of D a bill for L90,000, payable by A; so that, in this case, the gain would have fallen to the share of the debtor C, and the loss to that of the creditor D, both of London. The complexity of real transactions does not affect the principles on which they are founded. And whatever may be the amount of the debts reciprocally due by different places, the only disadvantage, under which any of them could be placed by a fall of the exchange would be the unavoidable one of paying the expense of remitting the balance of debt.

The expense of transmitting money from one place to another limits the fluctuations in the exchange between them. If 20s. sufficed to cover the expense and risk attending the transmission of L100 from Glasgow to London, it would be indifferent to a merchant, in the event of the exchange becoming unfavourable to the former, whether he paid one per cent. premium for a bill on London, or remitted money direct to the latter. If the premium were less than one per cent., it would be clearly his interest, to make his payments by means of bills rather than by remittances; and that it could not exceed one per cent. is obvious, for every

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1 In mercantile phraseology, the person who draws a bill is termed the drawer; the person in whose favour it is drawn, the remitter; the person on whom it is drawn, the donee; and after he has accepted, the acceptor. Those persons into whose hands the bill may pass previously to its being paid, are, from their writing their names on the back, termed indorsers; and the person in whose possession the bill is at any given period, is termed the holder or possessor. Exchange individual would rather directly remit money than incur an unnecessary expense by purchasing bills on London at a greater premium than would suffice to cover the expense of a money remittance. If, owing to the badness of roads, disturbances in the country, or any other cause, the expense of remitting money from Glasgow to London were increased, the difference in the rate of exchange between them might also be proportionally increased. But in every case the extent to which this difference could attain would be limited by, and could not for any considerable period exceed, the cost of remitting cash.

Exchange transactions become more complex when one place, as is often the case, discharges its debts to another by means of bills drawn on a third place. Thus, though London should owe nothing to Glasgow, yet if Glasgow be indebted to London, London to Manchester, and Manchester to Glasgow, the latter may wholly or partially discharge her debt to London by remitting bills on Manchester. She may wholly discharge it, provided the debt due to her by Manchester exceed or is equal to the debt due by her to London. If, however, it be not equal to the latter, Glasgow will either have to remit money to London to pay the balance of debt, or bills on some other place indebted to her.

Transactions in inland bills of exchange are almost entirely conducted by bankers, who charge a certain rate per cent. for their trouble, and who, by means of their credit and connections, are able, on all occasions, to supply the demands of their customers. London, because of its extensive correspondence with other parts of the country, occasioned partly by its immense commerce, partly by its being the seat of government and the place to which the revenue is remitted, and partly by its currency consisting of Bank of England paper, for which the notes of the country banks are rendered exchangeable, has become the grand focus in which the money transactions of the United Kingdom centre, and in which they are all ultimately adjusted. These circumstances, but especially the demand for bills on London to remit revenue, and the superior value of Bank of England paper, render the exchange between London and other parts of the country invariably in her favour. Bills on London drawn in Edinburgh and Glasgow were formerly made payable at forty days' date, which was equivalent to a premium of about $\frac{1}{2}$ per cent.; but, owing to the greater facility of communication, this premium is now reduced to twenty days' interest, or to about $\frac{1}{4}$ per cent. Bills for remitting the revenue from Scotland are now drawn at thirty days; previously to 1819 they were drawn at sixty days.

These statements are sufficient to show that, how well soever bills of exchange may be fitted for facilitating the operations of commerce, and saving the trouble and expense attending the transportation of money, mercantile transactions cannot be adjusted by their means except in so far as they mutually balance each other. A real bill of exchange is merely an order entitling the holder to receive payment of a debt due by the person on whom it is drawn. It is essential to the existence of such bill that an equivalent amount of debt should be contracted. And hence, as the amount of the real bills of exchange drawn on any number of merchants cannot exceed the amount of their debts, if a greater sum be owing by them than they owe to others, the balance must either be paid in money or by the delivery of some sort of commodities. If, as in the case referred to, Glasgow owe London L100,000, while London only owes Glasgow L90,000, a reciprocal transfer of debts may be made to the extent of L10,000. But the Glasgow merchants cannot discharge the additional L10,000 by means of bills on London; for, by the supposition, London only owed them L90,000, and they have drawn for its amount. This balance must therefore be discharged by an actual money payment, or by the delivery of some species of produce, or by bills on some third party indebted to Glasgow.

It is not meant by this to insinuate that fictitious bills of exchange, or bills drawn on persons who are not really indebted to the drawer, are either unknown or very rare. In commercial countries bills of this description are always to be met with; but they are a device for obtaining loans, and cannot transfer real debts. A of London may form a connection with B of Glasgow, and draw bills upon him payable a certain number of days after date, which the latter may retire by selling bills upon A. The merchants who purchase, or the bankers who discount these bills, advance their value to the drawers, who, by means of this system of drawing and redrawing, command a borrowed capital equal to the amount of the fictitious paper in circulation. It is clear, however, that the negotiation of such bills cannot assist in transferring and settling the bona fide debts of two or more places. Fictitious bills mutually balance each other. Those drawn by London on Glasgow equal those drawn by Glasgow on London, for the one set is drawn to pay the other—the second destroys the first, and the result is nothing.

The raising of money by means of fictitious bills has been severely censured by Adam Smith, who says it entails a ruinous expense on those engaged in it, and is resorted to only by projectors, or persons of suspicious credit. When fictitious bills are drawn at two months' date, it is common to charge, in addition to the ordinary interest, a commission of half or quarter per cent., which must be paid every time the bill is discounted, or, at least, six times a-year. The total expense of money raised in this way could not, therefore, supposing the transaction to be always on account of the same individual, and interest 4 per cent., be estimated at less than $\frac{3}{4}$ or 7 per cent. per annum, ex stamps; and the payment of so high an interest on borrowed capital, in a country where the ordinary rate of mercantile profit is not supposed to average more than from six to eight per cent., could not fail to be frequently productive of ruin to the borrower. But it seldom happens that, in the negotiation of fictitious bills, the charge for commission falls on one individual only. Loans obtained in this way are usually on account of two or more parties. At one time a fictitious bill is drawn by A of London on B of Glasgow; and, in this case, the latter will, before the bill becomes due, draw upon A for its amount, including interest and commission. At another time, the transaction will be on account of B, who in that case has to pay commission to his friend in London; so that each party may, on the whole, as Mr Thornton has observed, gain about as much as he pays in the shape of commission.

It is often extremely difficult to distinguish fictitious bills from those which have arisen out of real transactions. Neither does it seem to be of any very material importance. The character and credit of the parties whose names are attached to bills, are the only criteria by which merchants or bankers can judge whether they ought to negotiate them. The circumstance of an individual offering accommodation paper for discount, ought unquestionably, if it be known, to excite suspicions of his credit. But unless in so far as the drawing of fictitious bills may be held to be indicative of overtrading, or of a deficiency of capital to carry on the business in which the party is engaged, there does not appear to be any very good reason for refusing to discount them.

Within the last few years, it has been the practice to grant money orders, payable on presentation at the different post-offices, for sums of L5 and under. These orders cost 3d. for sums of L2 and under, and 6d. for sums between L2 and L5 inclusive; and as they are not paid unless the parties in whose favour they are drawn, or other parties well known to the postmasters by whom they are payable, Exchange appear to receive payment, there is no risk of the money getting into improper hands. This system has been found to be a very great accommodation to the public, especially to those having small sums to remit, and has been very extensively resorted to. In 1850, 4,439,713 money orders were issued in the United Kingdom; the aggregate sum transferred by their agency being £8,494,458, 10s. 7d.

These observations will, perhaps, suffice to explain the manner in which transactions between different parts of the same country are settled by means of bills of exchange. They are, in general, extremely simple. The uniform value of the currency of a single country renders unnecessary any comparison between the value of money at the place where the bill is drawn and negotiated, with its value where it is to be paid; while the constant intercourse maintained amongst different parts of the same kingdom, and the usual absence of those occurrences by which the intercourse between distant and independent countries is always subject to be interrupted, prevent those sudden fluctuations which frequently arise in the prices of foreign bills of exchange. We shall, therefore, leave this part of our subject, and proceed to investigate the circumstances which influence the course of exchange between different and independent countries.

Foreign Exchange.—The price of foreign bills of exchange depends on two circumstances: first, On the value of the currency of the place where they are made payable, compared with the value of the currency of the place where they are drawn; and, secondly, On the relation which the supply of bills in the market bears to the demand.

If the value of the different coins and moneys which circulate in nations having dealings with each other were invariable, the exchange would be exclusively influenced by circumstances affecting the supply and demand for bills. But, in addition to variations in its cost in particular countries, the weight and fineness of the bullion contained in their coins are liable to all sorts of variations. And it is almost needless to say, that the price of bills, as of everything else, necessarily varies with these variations, increasing when the value of the money in which they are estimated falls, and falling when it increases. But these, it is plain, are merely nominal or numerical variations. They grow out of changes in the standard employed to measure values, and not in the values themselves. It is otherwise, however, with variations of price occasioned by changes in the supply of bills, or in the demand for them; that is, by changes in the payments a country has to make compared with those it has to receive. These are real, not nominal variations, for they affect the values in bills, and not the money in which these values are expressed. And hence the distinctions of nominal, real, and computed exchange. The first depends on alterations in the value of the currencies compared together; the second depends on the supply of bills in the market compared with the demand; and the third, or computed exchange, depends on the combined effects of the other two. For the sake of perspicuity we shall treat of these separately.

Sect. I.—Nominal Exchange.

Bullion being everywhere recognised as the standard currency of the commercial world, the comparative value of the currencies of particular countries depends—1st, On the value of bullion in those countries; and, 2dly, On the quantity of bullion contained in their coins, or on the quantity of bullion for which their paper money, or other circulating media, will exchange.

1. The value of freely produced commodities being commonly proportioned to the cost of their production, including therein the cost of their conveyance from where they have been produced to where they are to be made use of, it follows, were the trade in the precious metals perfectly open, and the commodities produced in different countries about equally well fitted for exportation, that the value of bullion in one, compared with its value in another, would be chiefly determined by their respective distances from the mines. Thus, on the supposition that neither England nor Poland had any article except corn to exchange with the Americans or Australians for bullion, it is evident that the precious metals would be more valuable in Poland than in England, because of the greater expense of sending so bulky a commodity as corn the more distant voyage, and also of the somewhat greater expense of conveying the gold to Poland. Had Poland succeeded in carrying her manufactures to a higher pitch of improvement than England, her merchants might be able, notwithstanding the disadvantage of distance, by exporting commodities possessed of great value in small bulk, the freight of which would be comparatively trifling, to buy bullion on cheaper terms than those of England. But when, as is actually the case, the advantages of skill and machinery are on the side of England, another reason is added to that derived from our less distance from the mines, why gold and silver should be less valuable here than in Poland, and why the money price of commodities should be higher.

Hence, among nations which have attained to different degrees of excellence in manufacturing industry, the value of bullion does not wholly depend on their distance from the mines. But, whatever variations a different progress in the arts may occasion in its value in different countries, it is always less valuable in those into which it is imported, than in those in which it is produced. Like everything else, it is exported to find, not to destroy, its level. And unless its value in Europe exceeded its value in America and Australia by a sum sufficient to cover the expense of its importation, including ordinary profits to the importers, we should not, though the mines in these quarters were infinitely more productive, import from them a single ounce of bullion in the ordinary course of trade. It is obviously incorrect, therefore, to lay it down as a general proposition, "that the par of exchange between two countries is that sum of the currency of either of the two, which, in point of intrinsic worth, is precisely equal to a given sum of the other; that is, contains precisely an equal weight of gold and silver of the same fineness." For a given quantity of gold and silver is not always, as is here assumed, of the same intrinsic value in different countries. It may differ but little among nations bordering upon or near each other, and which are all destitute of mines. But though, to use a familiar illustration, the value of sugar approaches nearly to a level in the great trading cities of Europe, it cannot surely be maintained that its value in the West Indies is as great as in Bordeaux or Liverpool, or that the exchange would be really at par, if a bill, which cost a hundred hogsheads of sugar in London, only brought a hundred in Jamaica. Now, in respect of principle, this is precisely the case with bullion. Though the values of gold and silver, compared with corn, labour, &c., may, and indeed must, vary very considerably among different nations, these variations are only the necessary result of their different progress in industry, and of the different quality of their cultivated lands, &c. Such differences of price are in the natural order of things; and bullion has not found its proper level till a quantity has been introduced into those countries which excel in manufactures, sufficient to raise the price of their

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1 Supposing every country to be in possession of its proper supply of bullion, the exchange may be said to be nominally affected by the amount of the difference between the market and mint price of bullion, and to be really affected by any deviation from par exceeding or falling short of that difference. Ricardo, Principles of Political Economy, &c., first ed., p. 175. Bullion Report, p. 22, 8vo ed. Exchange corn and labour. These variations have, therefore, no influence over the exchange. Notwithstanding this difference of price, an ounce of bullion in one country, owing to the facility of intercourse, is very near equivalent to an ounce of bullion in another; and, supposing the trade in the precious metals to be perfectly free, the exchange will be at true par when bills are negotiated on this footing. But when we compare the values of these metals in distant countries, especially in those where they are produced, with those into which they are imported, there are very considerable differences. Gold and silver, like iron, coal, tin, &c., are necessarily cheaper in countries possessed of extraordinarily productive mines, than in those possessed only of mines of a secondary degree of fertility, or where they have to be entirely brought from abroad. And the exchange between such places is not a true par, unless adequate allowance be made for this difference of value. Thus it, because of the expense of carriage, the value of bullion in Great Britain be 5 per cent. greater than in San Francisco, 100 ounces of pure gold in the latter would not be worth 100 ounces of pure gold in London, but 5 per cent. less; and the exchange would be at true par when bills for 105 ounces standard bullion, payable in San Francisco, sold in London for 100 ounces.

The different values of the precious metals in different countries do not depend alone on their respective distances from the mines, or on their greater or less progress in the arts. The opinion formerly so very prevalent, that gold and silver were the only real wealth, led most nations to fetter and restrain their exportation, and to adopt a variety of measures intended to facilitate their importation. But these, even when most vigorously enforced, were singularly ineffectual. The great value and small bulk of the precious metals rendered it not only advantageous, but comparatively easy, clandestinely to export them, whenever their relative value declined.

"When," says Adam Smith, "the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary laws of Spain and Portugal are not able to keep their gold and silver at home. The continual importations from Peru and Brazil exceed the effectual demand of those countries, and sink the price of those metals there below that in the neighbouring countries. If, on the contrary, in any particular country their quantity fell short of the effectual demand, so as to raise their price above that of the neighbouring countries, the government would have no occasion to take any pains to import them. If it were even to take the pains to prevent their importation, it would not be able to effectuate it. Those metals, when the Spartans had got wherewithal to purchase them, broke through all the barriers which the laws of Lycurgus opposed to their entrance into Lacedaemon. All the sanguinary laws of the customs are not able to prevent the importation of the teas of the Dutch and Gottenburg East India Companies, because somewhat cheaper than those of the British Company. A pound of tea, however, is about a hundred times the bulk of one of the highest prices, 16s., that is commonly paid for it in silver, and more than two thousand times the bulk of the same price in gold, and consequently just so many times more difficult to smuggle."

But, though ineffectual to prevent their egress, the restrictions on the exportation of the precious metals have nevertheless contributed to occasion some slight variations in their value in different countries. The risk formerly incurred by the clandestine exporters of bullion from Spain, is supposed to have been equivalent to about two per cent.; or, which is the same thing, it is supposed that the restrictions maintained such an excess of gold and silver in that country as to sink them two per cent. below their value in countries having a free trade in bullion. In calculating the true par of exchange between different countries, circumstances of this kind must be taken into account. For, to whatever extent bullion in one country may be sunk below its value in those with which it maintains an intercourse, the nominal exchange will necessarily be unfavourable to that extent.

It consequently results, that whatever occasions a rise or fall of the value of the precious metals in one country affects to the same extent its nominal exchange with other countries. If more coin, or convertible paper, circulated in Great Britain, compared with the business it has to perform, than in other countries, its relative value would be proportionally less. Foreign bills would sell for a premium, the amount of which would measure the excess of the value of the precious metals in the foreign market, caused by their redundancy in the home market. And, on the other hand, in the event of our currency becoming relatively deficient, its value would be proportionally increased; bills drawn on foreign countries would sell at a discount, the amount of which would equal the excess of the value of our currency over that of other countries.

2. In estimating the quantities of bullion contained in the coins of different countries, a particular coin of one, such as the British pound sterling, is selected for a standard by which to compare the others, and the proportion between it and them, supposing them to be all of their standard weight and fineness, is ascertained by experiment. A par of exchange is thus established, or rather it is ascertained change, that a certain amount of the standard currency of one country contains as much gold or silver of the same fineness, as is contained in the coin or integer with which it has been compared. This relation, or par, as it is technically termed, is considered invariable; and allowance is made for subsequent variations in the coins of countries trading together, by rating the exchange at so much above or below par. In mercantile language, that country, by a comparison with one or other of whose coins the par of exchange has been established, is said to give the certain for the uncertain, and conversely. Thus, in the exchange between London and Paris, London and Hamburg, &c., London gives the certain, or the pound sterling, for an uncertain or variable number of francs, florins, &c. Hence, the higher the exchange between any two countries, the more is it in favour of that which gives the certain; and the lower, the more is it in favour of that which gives the uncertain.

On the supposition that 25 francs contain the same quantity of standard bullion as a pound sterling (25 fr. 57 cent. is about the exact par), and supposing also that the value of bullion is the same in both countries, the exchange between London and Paris will be at par when a bill drawn in the one on the other sells at that rate; that is, when a bill of exchange for 2500, or 25,000 francs, payable in Paris, sells in London for L.100 or L.1000, and vice versa. It is but seldom, however, that the coins of any country correspond exactly with their mint standard. Unless when newly issued, they are either more or less worn; and whenever this defect becomes sensible, an allowance corresponding to the difference between their actual value and their mint value is made in estimating "the sum of the existing currency of either of two countries which contains precisely the same quantity of bullion as is contained in a given sum of the other." Thus, if our pound sterling were so worn,

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1 *Wealth of Nations*, p. 190. 2 All restraints on the exportation of the precious metals were abolished in Great Britain in 1819. Their effect for many years previously could not be estimated at above one-fourth per cent. Exchange clipped, or rubbed, as not to contain so much bullion as 25 fr., but 10 per cent. less, the exchange between London and Paris would be at real par when it was nominally 10 per cent. against London; and if, on the other hand, the pound sterling were equal to its mint standard, while the franc was 10 per cent. less, it would be at par when it was nominally 10 per cent. against Paris and in favour of London. If the currencies of both countries were equally reduced below the standard of their respective mints, there would obviously be no variation of the par; but whenever the currency of countries trading together is unequally depreciated, the exchange is nominally in favour of that country whose currency is least, and nominally against that whose currency is most depreciated.

It is almost unnecessary to refer to examples to show the practical operation of this principle; and we shall content ourselves with selecting the following, from an infinite number of equally conclusive instances.

Previously to the great recoinage in the reign of William III., silver being at the time legal tender, the exchange between England and Holland, calculated by the standard of their respective mints, was nominally twenty-five per cent. against England. Inasmuch, however, as English silver coins were then, owing to rubbing and clipping, depreciated more than twenty-five per cent. below their mint value, the real exchange was probably at the time in our favour. And the circumstance of the nominal exchange having become favourable to us as soon as the new coin was issued, tends to confirm this conjecture.

The guinea was so much worn and degraded, previously to the gold recoinage in 1774, as to be from 2 to 3 per cent. under its standard weight. Inasmuch, however, as the coins then circulating in France were nearly of their standard weight and purity, the exchange between London and Paris was nominally from 2 to 3 per cent. against the former. We say nominally, for as soon as guineas of full weight were issued, the exchange rose to par.

The Turkish government, during the past century, has made successive reductions in the value of its coin. Before the first of these in 1770, the piastre contained nearly as much silver as the English half-crown; and, in exchange, the par was estimated at eight piastres to the pound sterling. But, in the interval, the degradation in the value of the piastre has been such that it is now worth only about 2½d.; and the exchange is said to be at par when Constantinople gives about 109 piastres for L.1 sterling. It is needless almost to say, that the nominal exchange, estimated by the old par of eight piastres to L.1, became more and more unfavourable to Turkey with every successive enfeeblement of the coin, though it is doubtful whether the real exchange, or that depending on the balance of payments, was not all the while in her favour.

When one country uses gold as the standard of its currency, and another silver, the par of exchange between them is affected by variations in the relative values of these metals. When gold rises as compared with silver, the exchange becomes nominally favourable to the country which has the gold standard, and vice versa. And hence, in estimating the par of exchange between countries using different standards, it is always necessary to inquire into the comparative values of the metals selected for standards.

"For example," to use the words of Mr. Mushet, "if 34 schillings 11 groats and ¼ of Hamburg currency be equal Exchange, in value to a pound sterling, or ½ of a guinea, when silver is at 5s. 2d. per oz., they can no longer be so when silver falls to 5s. 1d. or 5s. an oz., or when it rises to 5s. 3d. or 5s. 4d.; because a pound sterling in gold being then worth more or less silver, is also worth more or less Hamburg currency.

"To find the real par, therefore, we must ascertain what was the relative value of gold and silver when the par was fixed at 3¼. 11½g. Hamburg currency, and what is their relative value at the time we wish to calculate it.

"For example, if the price of standard gold was L.3, 17s. 10½d. per oz., and silver 5s. 2d., an ounce of gold would then be worth 15½ ounces of silver, and twenty of our standard shillings would then contain as much pure silver as 35s. 11 groats and ¼ Hamburg currency. But if the ounce of gold were L.3, 17s. 10½d., and silver 5s. (which it was on 2d January 1798), the ounce of gold would then be worth 15½ ounces of silver. If L.1 sterling at par, therefore, be worth 15½ ounces of silver, then at 15½ it would be at three per cent. premium; and three per cent. premium on 3¼. 11½d. is 1 schilling 1 groat and ¾½, so that the par, when gold is to silver as 15½ to 1, will be 36 schillings 1 groat and ¾½. The above calculation will be more easily made by stating, as 15½:1¼::15½:36½-1¼½."

As it is their intrinsic worth in bullion which determines the value of coins in exchange transactions, those of equal weight and purity are reckoned equivalent to each other, though some of them may have been coined at the expense of the state, and others charged with a duty or seigniorage on their coinage. The latter may, if not issued in excess, pass current in the country in which they are coined for their value in bullion plus the duty; but they will not pass anywhere else, except at their bullion value.

But the principal source of fluctuations in the nominal price of bills of exchange, is to be found in the varying value of the paper currency of commercial countries. The disorders which arose in remoter ages from diminishing the bullion contained in coins of the same denomination have since been reproduced in another form, and often to a still more ruinous extent, in the depreciation of paper currency.

The impossibility of retaining a comparatively large quantity of coin or bullion, or of paper convertible into coin, in a of a particular country, limited the issues of the Bank of England previously to the Restriction Act of 1797; and it has equally limited them since the resumption of specie payments in the ex-1821, and sustained the value of our currency on a level change, with gold. When the bank starves the circulation, or issues less paper than is necessary, bullion is imported, sent to the mint to be coined, and thrown upon the market. And when, on the other hand, the bank issues too much paper, and thereby depresses its value relatively to gold, it becomes profitable to demand payment of its notes, and to export the specie thus obtained either as coin or as bullion. In this way the vacuum is filled up when bank-notes are deficient, the excess removed when they are redundant, and the value of the currency preserved nearly equal.

But from 1797 down to 1821 this principle was suspended. During that period, the bank was relieved from the obligation to pay her notes in gold; while, owing to their being made legal tender, their circulation was insured. Hence, their value exclusively depended (see article Money) on the Exchange extent to which they were issued compared with the demand.

There is no difference in its influence over the exchange between a degraded metallic and a depreciated paper currency. And when a country with either the one or the other has any dealings with another whose currency is of its full value, the exchange is nominally against her to the extent of the degradation or depreciation. The nominal exchange between any two or more places, is, in fact, always adjusted according to the values of their currencies, being most favourable to that whose currency approaches nearest to its standard, and most unfavourable to that whose currency is most degraded or depreciated.

The intercourse between Great Britain and Ireland subsequently to the restriction on cash payments in 1797, furnishes some striking proofs of the effect which inordinate issues of paper have in depressing the exchange.

The nominal value of the Irish shilling being raised in 1689 from 12d. to 13d., L108, 6s. 8d. Irish money became equal to only L100 of British money, so that the exchange between Great Britain and Ireland was said to be at par when it was nominally 3½ per cent. against the latter. In the eight years previous to 1797, when the paper currency of both countries was convertible into gold, the exchange between London and Dublin fluctuated from 7½ to 9 per cent., that is, from ½ per cent. in favour of Dublin to ¾ per cent. against it. In September 1797 it was at 6 per cent., or 2½ per cent. in favour of Dublin. The amount of bank of Ireland notes in circulation in January 1797 was only L621,917; whereas in April 1801 they had increased to L2,286,471, and the exchange was then at 14 per cent., or 5½ per cent. against Dublin. In 1803, the Bank of Ireland notes in circulation averaged L2,707,956, and in October that year the exchange was quoted at 17 per cent., that is, 8½ per cent. against Dublin!

The fact of the exchange between London and Dublin having fluctuated so little from par for the eight years previously to the restriction, shows that the circulating medium of Great Britain and Ireland had then been adjusted nearly according to the wants of the two countries. But, in these circumstances, it was evidently impracticable, supposing the value of British currency to remain nearly stationary, that the amount of Irish bank paper could be more than quadrupled in the short space of six years, without rendering the currency of Ireland redundant, and sinking its value below that of England. Had the Bank of England increased its notes in something like the same ratio as the Bank of Ireland, then, as the currency of both countries would have been equally depreciated, the exchange between London and Dublin would have continued at par. While, however, the notes of the Bank of Ireland were increased from L621,917 to L2,707,956, or in the proportion of 1 to 4½, those of the Bank of England were only increased from L9,181,843 (their number on 7th January 1797), to L16,505,272, or in the proportion of 1 to 1½. But for this addition to its issues by the Bank of England, the exchange, it is plain, would have been still more unfavourable to Dublin.

In the debates on the Bullion Report, it was contended that the increase of Bank of Ireland paper could not have been the cause of the unfavourable exchange upon Dublin, seeing that it had again become favourable after the issues of the Bank of Ireland had been still further increased. But to give this reasoning the least weight, it should have been shown that the currency of Great Britain retained its value in the interim, or that it had not been depreciated to the same extent as that of Ireland. For it is obvious that the depreciation of Irish bank paper might go on successively to 1804, and yet if English bank paper were depreciated still more rapidly, the exchange would become more in favour of Dublin. This is merely supposing the circumstances which took place in the first six years of the restriction to be reversed in the second six. Let us inquire how the fact stands.

We have seen that, in 1803, when the exchange was nominally 10 per cent. against Dublin, the issues of the Bank of England amounted to L16,505,272, and those of the Bank of Ireland to L2,707,956. And by referring to the accounts of the issues of the latter from 1797 to 1819, published by authority, it is seen that in 1805–1808 they were rather diminished; and that in 1810 they amounted to only L3,251,750, being an increase of not more than L5,437,794 in the space of seven years, or at the rate of 24 per cent. per annum; but in the same period (from 1803 to 1810) the issues of the Bank of England were increased from L16,505,272 to L22,541,523, or at the rate of 5 per cent. per annum. And this is not all. According to Mr Wakefield there were fifty registered bankers in Ireland in 1804, and only thirty-three in 1810, of which fourteen were new houses, thirty-one of the old establishments having disappeared; and "I believe," says Mr Wakefield, "for the most part failed." This extraordinary diminution of the country paper of Ireland, for the reduction of the issues was at least proportional to the reduction in the number of banks, could not fail greatly to raise its value, and to counteract a corresponding increase in the issues of the national bank. Now, the reverse of all this took place in Britain. In 1800 there were 386 country banks in this country; and in 1810, this number, instead of being diminished as in Ireland, had increased to 721, having at least three times the number of notes in circulation in the latter as in the former period!

It appears, therefore, that when, in the period between 1797 and 1804, the amount of paper in circulation in Ireland was increased, and its value depressed, faster than in England, the exchange between London and Dublin became proportionally unfavourable to the latter; and, on the other hand, it appears, that when, in the six years subsequent to 1804, the paper currency of England was increased more rapidly than that of Ireland, its relative value was diminished, and the nominal exchange became more favourable to Dublin.

This is sufficiently conclusive. But there is still better evidence to show that the unfavourable exchange of Dublin upon London, in 1802, 1803, 1804, &c., was entirely owing to the comparative redundancy or depreciation of Irish bank paper. The linen manufacturers and weavers, with the majority of the other inhabitants of a few counties in Ulster, being, at the period of the restriction, strongly disaffected towards government, very generally refused to receive bank-notes in payment either of commodities or wages. The landlords having also stipulated for the payment of their rents in specie, a gold currency was maintained in the northern long after it had been banished from the southern parts of Ireland. If, therefore, the depression of the exchange between London and Dublin had been occasioned, as many contended, by an unfavourable balance of trade between Ireland and Great Britain, or by remittances from the former on account of absentees, it would have been equally depressed between London and the commercial towns in the northern counties. But so far was this from being the case, that in December 1803, when the exchange of Dublin on London was at 16½ per cent., that of Belfast on London was at 5½; or, in other words, at the very time that the exchange between Dublin, which had a paper currency, and London, was about 8 per cent. against Ireland,

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1 By a proclamation of James II. The arrangement was continued by the revolutionary government, and was confirmed by proclamation, 26th September 1737. But in 1825 the currencies of Great Britain and Ireland were assimilated.

2 Account of Ireland, vol. ii., p. 171. Exchange. the exchange between Belfast, which had a gold currency, and London, was about 3 per cent. in its favour. And this is not all; for, while there was a difference of 11 per cent. in the rate of exchange between Dublin and London, and Belfast and London, the inland exchange between Dublin and Belfast was about 10 per cent. in favour of the latter; that is, bills drawn in Dublin, and payable in the gold currency of Belfast, brought a premium of 10 per cent., while bills drawn in Belfast, and payable in the paper currency of Dublin, sold at 10 per cent. discount.

It is unnecessary to refer to the history of the French assignats, or of the paper currency of the continental powers generally, and of the United States, to corroborate what has been advanced. Such of our readers as wish for farther information upon these points may have recourse to the fourth volume of the "Cours d'Economie Politique" of M. Storch, where they will find an instructive account of the influence of inordinate issues of paper on the price of bullion and the exchange, in almost every country of Europe. They are, in every case, similar to those now stated.

It only remains to determine the influence of fluctuations in the nominal exchange over exports and imports.

When the exchange is at par, the operations of the merchant are regulated entirely by the difference between foreign prices and home prices. He imports such commodities as sell at home for so much more than they cost abroad as will indemnify him for freight, insurance, &c., and yield, besides, an adequate remuneration for his trouble, and for the capital employed in the business; and he exports those whose price abroad is sufficient to cover all expenses, and to afford a similar profit. But when the nominal exchange becomes unfavourable to a country, the premium which its merchants receive on foreign bills has been said to enable them to export with profit, in cases where the difference between the price of the exported commodities at home and abroad might not be such as to permit their exportation with the exchange at par. Thus, if the nominal exchange were 10 per cent. against this country, a merchant who had consigned goods to his agent abroad, would receive a premium of 10 per cent. on the sale of the bill; and if we suppose freight, insurance, mercantile profit, &c., to amount to 6 or 7 per cent., it would at first sight appear as if we might, in such circumstances, export commodities, although their price at home were 3 or 4 per cent. higher than in other countries. If, on the other hand, the nominal exchange were in our favour, or if bills on this country sold at a premium, it would appear as if foreigners would then be able to consign goods to our merchants, or the latter to order goods from abroad, when the difference of real prices would not of itself lead to an importation.

But a very little consideration will suffice to show that fluctuations in the nominal exchange have no such effects. That fall in the value of the currency which renders the exchange unfavourable, and causes foreign bills to sell at a premium, equally increases the price of commodities. And hence, however great, the premium which exporters gain by selling bills on their correspondents abroad, merely indemnifies them for the enhanced price of the goods exported. In such cases, mercantile operations are conducted precisely as they would be were the exchange really at par; that is, by a comparison of real prices at home and abroad, meaning by real prices, the prices at which commodities would be sold provided there were no depreciation of the currency. If these admit of exportation or importation with a profit, the circumstance of the nominal exchange being favourable or unfavourable will make no difference whatever on the transaction.

"Suppose," says Mr Blake, who has very successfully illustrated this part of the theory of exchange, "the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that sugar, which, from its abundance in London, sold at L50 per hogshead, from its scarcity at Hamburg would sell at L100. The merchant in this case would immediately export. Upon the sale of his sugar, he would draw a bill upon his correspondent abroad for L100, which he could at once convert into cash by selling it in the bill market at home, deriving from this transaction a profit of L50, under deduction of the expenses of freight, insurance, commission, &c. Now, suppose no alteration in the scarcity or abundance of sugar in London and Hamburg, and that the same transaction were to take place after the currency in England had been so much increased that the prices were doubled, and, consequently, the nominal exchange 100 per cent. in favour of Hamburg, the hogshead of sugar would then cost L100, leaving apparently no profit whatever to the exporter. He would, however, as before, draw his bill on his correspondent for L100; and, as foreign bills would bear a premium of 100 per cent., he would sell this bill in the English market for L200, and thus derive a profit from the transaction of L100 depreciated, or L50, estimated in undepreciated currency,—deducting, as in the former instance, the expense of freight, insurance, commission, &c.

"The case would be precisely similar, mutatis mutandis, with the importing merchant. The unfavourable nominal exchange would appear to occasion a loss amounting to the premium on the foreign bill which he must give in order to pay his correspondent abroad. But if the difference of real prices in the home and foreign markets were such as to admit of a profit upon the importation of produce, the merchant would continue to import, notwithstanding the premium; for that would be repaid to him in the advanced nominal price at which the imported produce would be sold in the home market.

"Suppose, for instance, the currencies of Hamburg and London being in their due proportions, and therefore the nominal exchange at par, that linen which can be bought at Hamburg for L50 will sell here at L100. The importer immediately orders his correspondent abroad to send the linen, for the payment of which he purchases at L50 a foreign bill in the English market; and, on the sale of the consignment for L100, he will derive a profit amounting to the difference between L50 and the expense attending the import.

"Now, suppose the same transaction to take place without any alteration in the scarcity or abundance of linen at Hamburg and London, but that the currency of England has been so augmented as to be depreciated to half its value, the nominal exchange will then be 100 per cent. against England, and the importer will not be able to purchase a L50 foreign bill for less than L100. But as the prices of commodities here will have risen in the same proportion as the money has been depreciated, he will sell linen to the English customer for L200, and will, as before, derive a profit amounting to the difference between L100 depreciated, or L50 estimated in undepreciated money, and the expenses attending the import.

"The same instances might be put in the case of a favourable exchange; and it would be seen, in the same manner, that nominal prices and the nominal exchange being alike dependent on the depreciation of currency, whatever apparent advantage might be derived from the former would be counterbalanced by a loss on the latter, and vice versa."

1 Farther information on this subject may be obtained from the Report, 1804, of the Committee of the House of Commons upon the state of the circulating paper in Ireland, its specie, &c.; from Sir Henry Parnell's pamphlet on the same subject; and from the pamphlets of Lord King, Huskisson, &c.

2 Paris, 1823, 4 vols. Svo. It appears, therefore, that fluctuations in the nominal exchange have no effect on trade. A fall in the exchange obliges the country to which it is unfavourable to expend a greater nominal sum in discharging a foreign debt than would otherwise be necessary; but it does not oblige it to expend a greater real value. The depression of the nominal exchange can neither exceed nor fall short of the comparative depreciation of the currency. If British currency were depreciated 10 or 15 per cent., the nominal exchange would be 10 or 15 per cent. against us; and we should be compelled, in all transactions with foreigners, to give them 22s. or 23s. for what might otherwise have been procured for 20s. But as neither 22s. nor 23s. of such depreciated paper is more valuable than 20s. of paper undepreciated, payment of a foreign debt would, it is evident, be as easily made in the one currency as in the other; and mercantile transactions would, in such circumstances, be conducted exactly as they would have been had there been no depreciation, and the nominal exchange at par.

Sect. II.—Real Exchange.

Having thus endeavoured to trace the influence which variations in the value of currencies have over the exchange, we proceed to consider how far it is influenced by fluctuations in the supply and demand for bills. To facilitate this inquiry, we shall exclude all consideration of changes in the value of money, and suppose the currencies of the different countries having an intercourse together to be equal in weight and purity to their mint standards, and that each has its proper supply of bullion.

When two nations trade together, and each purchases of the other commodities of the same value, their debts and credits are equal, and the real exchange is, of course, at par. But it rarely happens that the debts reciprocally due by any two countries are equal. There is almost always a balance owing on one side or other, which affects the exchange. If, for example, the debts due by London to Paris exceed those due by the former to the latter, the demand in London for bills on Paris will be greater than the demand in Paris for bills on London; and the real exchange will, consequently, be in favour of Paris and against London.

The expense of transferring bullion from one country to another limits the range within which the rise and fall of the real exchange between them is confined. In this respect, as in most others, transactions between foreign countries depend on the same principles which govern those between different parts of the same country. We have already seen that the fluctuations in the real exchange between London and Glasgow cannot exceed the expense of transmitting money between those cities. And this principle holds universally. Whatever may be the expense of transmitting bullion, which is the money of the commercial world, between London and Paris, London and Hamburg, New York, &c., the real exchange of the one on the other cannot, for any considerable period, be depressed to a greater extent. No merchant will pay a higher premium for a bill to discharge a debt abroad, than will suffice to cover the expense of transmitting bullion to his creditor.

Hence it appears that whatever obstructs or fetters the intercourse among different countries, proportionally widens the limits within which fluctuations in the real exchange may extend. And hence the reason why it varies so much more in war than in peace. The amount of the bills drawn on a country engaged in hostilities is liable, from various causes, to be suddenly increased; though, whatever may be the amounts thus thrown upon the market, the depression of the exchange cannot, for any length of time, exceed the expense of conveying bullion from the debtor to the creditor country. But during war this expense, which consists of freight, insurance, &c., is sometimes much augmented. The evidence annexed to the Report of the Bullion Committee shows that the cost of conveying gold from London to Hamburg, which, prior to the Revolutionary war, amounted to two or two and a half, had increased, in the latter part of 1809, to about seven per cent.; so that the limits within which fluctuations in the real exchange might range in 1809 were about three times as great as those within which they were confined in 1793.

Owing to our having the complete command of the sea, and our commerce not being subjected even to the depredations of privaters, the cost of freight and of the conveyance of bullion between this country and others has not been affected by the war in which we are now (1855) unluckily engaged.

The real exchange between neighbouring countries is generally, on the principle now explained, less likely to fluctuate than that between distant countries. It costs considerably less to transmit bullion from London to Dublin or Paris, than to New York or Canton. And, as fluctuations in the real exchange are limited by this cost, they may evidently extend proportionally farther between distant places than between such as are contiguous.

We have next to investigate the circumstances which give rise to a favourable or an unfavourable balance of payments, and to appreciate their effects on the real exchange, and on trade in general.

A very great, if not the principal, source of the errors into which merchants, and the majority of writers on exchange, payments, have been betrayed in regard to the balance of payments, appears to have originated in their confounding the sum which imported commodities fetch in the home market, with their cost abroad. It is obviously, however, by the amount of the latter only, that the balance of payments, and consequently the real exchange, is influenced. A cargo of corn, for example, which cost £3000 free on board at Odessa, may be worth £4500 when imported into England; but the foreign merchant would not, unless he sent hither the corn, be entitled to draw on London for more than its original cost, or £3000. It is clear, therefore, on the slightest consideration, that the fact of the imports being more valuable than the exports does not authorize the conclusion that the balance of payments is against us. A favourable or an unfavourable balance depends entirely on the sum due to foreigners for commodities bought from them being less or more than the sum due by them for commodities bought from us. It has nothing to do with the prices eventually obtained for the imported or exported commodities.

The mercantile system of commercial policy, which continues to preserve a powerful influence in most countries, had for its grand object the creation of a favourable balance of payments, by facilitating exportation and restricting importation. It is foreign to our purpose to make any inquiry in regard to the principles of this system, except in so far as they are connected with exchanges. But it may be easily shown, in opposition to the commonly received opinions, that under ordinary circumstances the value of the imports into commercial countries always exceeds the value of their exports; and that this excess or balance has not, speaking generally, any tendency to render the real exchange unfavourable.

It is the business of the merchant to carry the products of different countries from those places where their value is least, to those where it is greatest; or, which is the same thing, to distribute them according to the effective demand. There could, however, be no motive to export any article, unless that which was to be imported in its stead were more valuable. When an English merchant orders a quantity of Polish wheat, he supposes it will sell for so much more than Exchange, its price in Poland as will suffice to pay the cost of freight, insurance, &c., and to yield, besides, the ordinary rate of profit on the capital employed in the transfer. If the wheat did not sell for this much, its importation would be productive of loss. Merchants never export but in the view of importing articles of greater value. Instead of an excess of exports over imports being any criterion of an advantageous commerce, it is quite the reverse. And the truth is, notwithstanding all that has been said and written to the contrary, that unless the value of the imports exceeded that of the exports, foreign trade could not be carried on. Were this not the case—were the value of the exports always greater than that of the imports, there would be a loss on every transaction with foreigners, and the trade with them would either not be undertaken, or, if begun, would be speedily relinquished.

In England, the rates at which exports and imports are officially valued were fixed so far back as 1696. The very great alteration which has since taken place in the value of money, and in the cost of the greater number of the commodities of this and other countries, has rendered this official valuation, though valuable as a means of determining their quantity, of no use whatever as a criterion of the true value of the imports and exports. To obviate this defect, accounts of the real or declared value of the exports, prepared from the declarations of the merchants, are annually laid before parliament. There is, however, no such account of the imports; and it is, perhaps, impossible to frame one with anything like accuracy. It has also been alleged, and apparently with some foundation, that merchants have frequently exaggerated the value of articles entitled to drawbacks. But the extension and improvement of the warehousing system, and the decrease in the number of drawbacks, has very materially lessened whatever fraud or inaccuracy may have arisen from that source. The declared value of the exports may now be considered as pretty near the truth, at least sufficiently so for all practical purposes.

If perfectly accurate accounts could be obtained of the values of the exports and imports, there can be no manner of doubt that in all ordinary years the latter would considerably exceed the former. The value of an exported commodity is estimated when it is shipped, before its value is increased by the expense incurred in transporting it to the place of its destination; whereas the value of the commodity imported in its stead is estimated after it has arrived at its destination, and been enhanced by the charges on account of freight, insurance, &c., sorter's profits, &c.

It is of little importance, in so far at least as the interests of commerce are concerned, whether a nation carries its own imports and exports, or employs others. A carrying nation appears to derive a comparatively large profit from its commercial transactions. But this excess of profit is seldom more than a fair remuneration for the capital it employs, and the risk it incurs, in transporting commodities. Were the trade between this country and France wholly carried on in British bottoms, our merchants, in addition to the value of the exports, would also receive the cost of their carriage to France. This, however, would be no loss to the French. They must pay the freight of the commodities they import. And if English ships sail on cheaper terms than those of their own country, there is no good commercial reason, though there may be others of a different kind, why they should not employ them in preference.

In the United States the value of the imports, deducted from the custom-house returns, almost always exceeds the value of the exports. And though we have been accustomed to consider the excess of exports over imports as the only sure criterion of an advantageous commerce, the practical politicians of America early discovered "that the Exchange real gain of the United States has been nearly in proportion as their imports have exceeded their exports." The great excess of imports into the Union is in part occasioned by the Americans generally exporting their own surplus produce, and receiving from foreigners not only an equivalent for the exports, but also for the cost of their conveyance to their markets. "In 1811," says the author just quoted, "flour sold in America for 9 dol. 50 cents per barrel, and in Spain for 15 dol. The value of the cargo of a vessel carrying 5000 barrels of flour would, therefore, be estimated, at the period of its exportation, at 47,500 dol.; but as this flour would, because of freight, insurance, exporter's profits, &c., sell in Spain for 75,000 dol., the American merchant would be entitled to draw on his agent in Spain for 27,500 dol. more than the flour cost in America, or than the sum for which he could have drawn had the flour been exported on account of a Spanish merchant. But the transaction would not end here; the 75,000 dol. would be vested in some species of Spanish or other European goods fit for the American market; and the freight, insurance, &c., on account of the return cargo would perhaps increase its value to 100,000 dol.; so that, in all, the American merchant might have imported commodities worth 52,500 dol. more than the flour originally sent to Spain."

It is as impossible to doubt that this transaction is advantageous, as it is to doubt that its advantage consists in the value of the imports exceeding that of the exports. And it is clear that America might have the balance of payments in her favour, though such transactions as the above were multiplied to any conceivable extent.

Instead, therefore, of endeavouring to limit the trade with countries from which the imports exceed the exports, we should give it every possible facility. Every man considers that market as the best in which he obtains the highest price for his goods. Why then exclude him from it? Why compel a merchant to sell a cargo of muslin, iron, &c., for L.10,500, rather than L.11,000 or L.12,000? The wealth of a state is made up of the wealth of individuals. And what more effectual method of increasing individual wealth can be devised than to permit buying in the cheapest and selling in the dearest markets?

It would be difficult to estimate the mischief which absurd notions relative to the balance of trade have occasioned in most commercial countries. They have been particularly injurious to Great Britain. The restrictions imposed on the trade with France originated in the prevalence of prejudices to which they gave rise. The great, or rather the only, argument insisted on by those who prevailed on the legislature to declare the French trade a nuisance, was founded on the alleged fact, that the value of the imports from France considerably exceeded the value of the exports to her. The balance was termed a tribute paid by England; and it was sagaciously asked, what had we done that we should be obliged to pay so much money to our natural enemy? Those considerate and patriotic persons seem to have supposed that our merchants brought commodities from France for no better reason than that they were French, or to oblige that ingenious people. But they were not quite so disinterested. They imported French wines, silks, and so forth, for the same reasons that they imported the sugar of the West Indies, the teas and spices of the East, and the timber of the Baltic, that is, because there was a demand for them, and because they were worth more in our markets than the native products exported in their stead. The reason assigned for prohibiting the trade affords a conclusive proof of its having been advantageous. There cannot, indeed, be a doubt, that an unlimited freedom of

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1 Such was always the case till the late extraordinary export of gold from California. 2 Pitkin on the Commerce of the United States, 2d ed., p. 280. 3 Prohibition Act, 1st William and Mary. Exchange. intercourse between the two countries would be of great service to both. Supposing it to be so arranged, does anyone imagine that we should export or import any commodity to or from France, provided we could either sell or buy it on better terms anywhere else? If restrictions on the trade with any particular country be not injurious, that is, if it be either a losing or a less advantageous trade than that with other countries, we may be assured that the throwing it completely open would not make a single individual engage in it.

Everybody knows that these conclusions are not only theoretically true, but have been practically verified. The abolition of the discriminating duty on French wines, the reduction of the exorbitant duty on brandy, the repeal of the prohibition against importing silks, and the opening of our ports to French corn and flour, have all been advantageous. And though it be true that the prejudices of the French, and the high duties which they continue to impose on most articles of British produce, confine the trade within comparatively narrow limits, they have not made it unprofitable, and are more injurious to themselves than to us. It is a curious fact, that notwithstanding the great amount of our imports from France, and our expenditure in that country on account of absenteeees, the state of the exchange shows that the balance of payments is usually in our favour.

But the partisans of the exclusive or mercantile system may perhaps say, that they do not mean to contend that it is profitable to export more than is imported; but that, by exporting an excess of raw and manufactured produce, the balance of payments is rendered favourable, and that this balance (which they regard as representing the entire net profit made by the country on its transactions with foreigners) is always paid in bullion.

It may, however, be easily shown that this statement is altogether erroneous; that a balance, whether on the one side or the other, is seldom or never cancelled by means of bullion; and that it is not a measure, and has, indeed, nothing to do with the profit or loss attending foreign commercial transactions.

If the premium on foreign bills, in a country with an unfavourable real exchange, be less than the cost of sending bullion abroad, it would be contradictory to suppose that it should be exported. And though the premium on such bills were to increase, till it become equal to, or for it cannot exceed, the cost of exporting the precious metals, it does not follow that they will then be exported. That would depend on whether bullion were, at the time, the cheapest exportable commodity; or, in other words, whether a remittance of bullion was the most advantageous way in which a debt might be discharged. If a London merchant owe L1,000, or other sum, in Paris, he endeavours to find out the cheapest method of paying it. On the supposition that the real exchange is 2 per cent. below par, and that the expense of remitting bullion is also 2 per cent., it will be indifferent to him whether he pay L20 of premium for a bill of L1,000, payable in Paris, or incur an expense of L20 in remitting L1,000 worth of bullion direct to that city. If the prices of cloth in Paris and London be such, that it would require L1,030 to purchase and send as much cloth to Paris as would sell for L1,000, he would no doubt prefer buying a bill or exporting bullion. But if, by incurring an expense of L1,010, the debtor may send as much hardware or cotton to Paris as would sell for L1,000, he would as certainly prefer paying his debt by exporting the one or the other. It would save him 1 per cent. more than if he bought a foreign bill or remitted bullion, and 2 per cent. more than if he exported cloth. Had there been any other commodity which might have been exported with more advantage, he would have used it in preference.

It is obvious, therefore, that the trade in bullion is governed by the same principles which govern the trade in other things. It is exported when its exportation is advantageous; that is, when it is less valuable at home, and more valuable abroad, than anything else; and it will not otherwise be exported. The balance of payments might be twenty or thirty millions against a country, without depriving it of a single ounce of bullion. No merchant would remit L1,000 worth of gold or silver from England to discharge a debt in Paris, if he could invest L970, L980, L990, or any sum under L1,000, in any other species of merchandise which, exclusive of expenses, would sell in France for that amount. Those who deal in the precious metals are as much alive to their interests, as those who deal in coffee, or sugar, or indigo. But who would attempt to discharge a foreign debt by exporting coffee which cost L100, if he could effect the same object by exporting indigo which cost only L95? No bullion will ever be exported unless its value be less in the exporting country than in that to which it is sent; and unless it be, at the same time, the most advantageous article of export.

2. It is in vain to contend that an unrestricted freedom of trade might render some unfortunate country indebted to another so happily situated that it had no demand for any sort of ordinary merchandise, and would only accept of cash or bullion in exchange for its exports. A case of this sort never did, and never will, occur. It is not even possible. A nation which is in want of money must be in want of other things; for men desire money only because it is the readiest means of increasing their command over necessaries and enjoyments. The extreme variety, too, in the soils and climates—in the machinery, skill, and industry of the people of different countries—occasion extraordinary differences in their products and prices. Some articles of the highest utility are peculiar to certain districts. And there will ever be a demand, not only for such articles, but also for those which, though they may be produced at home, may be imported of a better quality, or at a lower price. Nor, till the passion of accumulation be banished from the human breast, will there cease to be a desire to send commodities from places where their exchangeable value is least, to those where it is greatest.

3. In treating of the nominal exchange, we endeavoured to show that no single country can continue, for any length of time, to import or export a greater amount of bullion than may be necessary to preserve the precious metals in it in their proper relation to those of other countries; or, which is the same thing, to have the real exchange either permanently favourable or unfavourable. But though this principle be strictly true in reference to its aggregate exchanges, it may be incorrect if its exchange with one country only be considered. Great Britain, for example, may generally have the exchange in her favour with America, provided she have it generally, and to a nearly equal extent, against her with the East Indies, or some other country. "She may," to use the words of Mr Ricardo, "be importing from the north the bullion which she is exporting to the south. She may be collecting it from countries where it is relatively abundant, for others where it is relatively scarce, or where, from some particular causes, it is in great demand. Spain, who is the great importer of bullion from America, can never have an unfavourable exchange with her colonies; and as she must distribute the bullion she receives among the different nations of the world, she can seldom have a favourable exchange with the countries with which she trades."

On this principle, Lord King successfully accounted for the favourable exchange between this country and Hamburg from 1770 to 1799. He showed that the importation of bullion from Hamburg and other parts was not more than

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1 See Reply to Mr Bonsquet's Observations on the Report of the Bullion Committee, p. 17. Exchange equivalent to the exports to the East Indies and the home consumption; that the demand corresponded to the supply; and that its value remained pretty stationary. The extraordinary influx of bullion into this country from the Continent at the era of the Bank restriction in 1797, and the favourable state of the exchange, were undoubtedly owing to the reduction in the issues of bank paper, and to the diminution of the gold currency caused by the hoarding of guineas. In 1797 and 1798, above five millions of guineas were coined at the mint; and this extraordinary demand for gold is of itself abundantly sufficient to account for the very favourable exchange of that period, and for the length of time during which it continued. But, at the same time that the demand for gold bullion for the mint was thus increased, the demand for silver bullion, for export to India, was proportionally augmented.

In 1795, the quantity exported by the East India Company and private parties amounted to... 151,795 ounces. In 1796, to... 290,777 1797... 962,889 1798... 3,665,691 1799... 7,287,327

From this period the exportation rapidly declined; and, in the years in which the exchange was most unfavourable, little or no silver was sent to India.

Instead, therefore, of the extraordinary importation of bullion from Hamburg in 1797 and 1798 affording, as Mr Bosanquet and others supposed, a practical proof of the fallacy of the opinion of those who contend that it is impossible, for any length of time, to subvert the natural equality in the value of bullion in different countries, it is a striking example of its truth. Without this influx, bullion in this country could not have maintained its proper comparative value. We imported it, because the reduction of the paper currency, and the increased exports of the East India Company, rendered its value higher here than on the Continent; and made it advantageous for the continental merchants to send it to us, in the same manner as they would have sent corn, or anything else for which we had an unusual demand. For, however favourable the real exchange between Hamburg and London might have been to the latter, we should not have imported an ounce of bullion, had it not been, at the time, the article with which Hamburg could most advantageously discharge her debt to London.

4. In the absence of other arguments, it would be sufficient to state, that it is physically impossible that the excess of exports over imports, as indicated by the custom-house returns, should be paid in bullion. Every country, with the exception of the United States, has its apparently favourable balance; and, of course, if they really existed, they would have to be paid by an influx of bullion from the mines correspondent to their aggregate amount. It is certain, however, that, previously to the late discoveries in California and Australia, the entire produce of the mines, though it had been increased in a tenfold proportion, would have been insufficient for this purpose! This fact is decisive of the degree of credit which ought to be attached to the commonly received opinions on this subject.

5. In the last place, the profit on transactions with foreigners does not consist in the quantity of bullion imported from abroad, but in "the excess of the value of the imports over the value of the exports." If, in return for exported commodities worth ten or twenty millions, we import such as are worth fifteen or thirty, we shall gain 50 per cent. by the transaction, though the exports should consist entirely of bullion, and the imports of corn, sugar, coffee, &c. It is a ridiculous prejudice that would make bullion be imported rather than any other article. But whatever the partisans of the exclusive system may say about its being a preferable product, a merchandise par excellence, we may be assured that it will seldom appear in the list of exports or imports, while there is any other Exchange thing with which to carry on trade that will yield a larger profit.

Thus it appears that the excess of exports over imports, instead of being any proof of an advantageous commerce, is distinctly and completely the reverse; that the value of the imports into commercial countries may, and almost always does, exceed the value of their exports, without rendering them indebted to foreigners; and that when a balance of debt has been contracted, that is, when the sum payable to foreigners for imports is greater than the sum receivable from them for exports, bullion will not be sent from the debtor to the creditor country, unless it be at the time the most profitable article of export.

We have in the previous section shown that fluctuations in the nominal exchange have no influence over foreign trade. When the currency is depreciated, the premium which an exporter derives from the sale of bills on his correspondent abroad, is barely equivalent to the increase in the price of the exports, occasioned by the depreciation. But when the premium on foreign bills is not caused by a fall in the value of money, but by a deficient supply of bills, there is no rise of prices, and then the unfavourable exchange undoubtedly operates as a stimulus to exportation. As soon as the real exchange diverges from par, the mere inspection of price currents is no longer enough to guide the operations of the merchant. If it be unfavourable, the premiums which the exporters receive on the sale of bills must be included in the estimate of the profit they are likely to derive from the transaction. The greater that premium, the less will be the difference of prices necessary to make them export. An unfavourable real exchange has, in truth, exactly the same effect on exportation as a bounty equal to the premium on foreign bills.

But for the same reason that an unfavourable real exchange increases exportation, it diminishes importation. When it is unfavourable, the prices of foreign products brought to our markets must be so much under their prices here, as not merely to afford, exclusive of expenses, the ordinary profit on their sale, but also to pay the premium which the importer must give for a foreign bill, if he remit one to his correspondent, or for the discount, added to the invoice price, if the latter draw upon him. A less quantity of foreign goods will therefore suit our markets when the exchange is really unfavourable; and fewer payments having to be made abroad, the competition for foreign bills is diminished, and the exchange rendered proportionally favourable. A favourable real exchange, consequently, operates as a duty on exportation and a bounty on importation.

Hence it is obvious that fluctuations in the real exchange have a necessary tendency to correct themselves. They can never, for any considerable period, exceed the expense of transmitting bullion from the debtor to the creditor country. And the exchange cannot continue permanently favourable or unfavourable even to this extent. When favourable, it corrects itself by restricting exportation and facilitating importation; and when unfavourable, it produces the same effect by stimulating exportation and obstructing importation. The true par forms the centre of these oscillations. And though the thousand circumstances which daily and hourly affect the state of debt and credit, prevent the ordinary course of exchange from being almost ever precisely at par, its fluctuations, whether on the one side or the other, are confined within certain limits, and have a constant tendency to disappear.

The natural tendency which the exchange has to correct itself is powerfully assisted by the operations of the bill merchants.

England, for example, may owe an excess of debt to Amsterdam, yet, as the aggregate amount of the debts due Exchange, by a commercial country, is generally balanced by the amount of those which it has to receive; the deficiency of bills on Amsterdam in London will most probably be counterbalanced by their redundancy in some other quarter. And, it is the business of the merchants who deal in bills, as of those who deal in bullion or any thing else, to buy them where they are cheap, that they may sell them where they are dear. They, therefore, buy up the bills drawn by other countries on Amsterdam, and dispose of them in London; and, by so doing, prevent any great fall in the price of bills on the former in the countries in which their supply exceeds the demand, and any great rise in Great Britain and the countries in which their supply happens to be deficient.

In our trade with Italy, the bills drawn on England generally amount to a greater sum than those drawn on Italy. The bill merchants, however, by buying up the excess of Italian bills on London, and selling them in France, Holland, and other countries indebted to England, prevent the real exchange from being much depressed.

An unusual deficiency in the supply of corn, or of any article of prime necessity, by causing a sudden augmentation of imports, materially affects foreign debts and credits, and depresses the exchange. In time of war, the balance of payments is liable to be still further disturbed; the amount of the bills drawn on a country carrying on foreign hostilities, being increased by the whole expense of its armaments abroad, and of subsidies to foreign powers. But neither the conjoint nor separate influence of both or either of these causes has any permanent influence over the exchange. A sudden increase in the accustomed supply of bills must, in the first instance, by glutting the market, occasion their selling at a discount; but this effect will only be temporary. The unusual facilities which are then afforded for exportation, and the difficulties which are thrown in the way of importation, never fail speedily to bring the real exchange to par.

During a period of peace we may, in the too great ardour of speculative enterprise, export an excess of produce, overload the foreign market, and occasion such a decline in the prices of our goods abroad, as to make the imports less valuable than the exports with which they have been purchased. But such a state of things can only be of limited duration. The distress of which it is productive, assisted by the fall of the exchange, occasions a diminution of exports. The supply of our commodities in the foreign markets is rendered more nearly commensurate with the demand; till in no long time the value of the imports again exceeds, as it always ought to do, the value of the exports. But when a country has a large foreign expenditure to sustain, its exports are proportionally augmented. Whatever may have been the foreign expenditure of Great Britain during the late war, it is evident it could not be defrayed otherwise than by our annually exporting an equal amount of the produce of our land, capital, and labour, for which payment was not received, as in ordinary cases, by a corresponding importation of foreign commodities, but from the treasury at home. This is strictly true, even though the expenditure should have happened to be, in the first instance, discharged by remittances of bullion; for the increased supply of bullion which was thus required could be obtained only by an equally increased exportation of other products to the countries possessed of mines, or from which it was imported. Foreign expenditure, by increasing exports in proportion to its own amount, has no permanent influence over the exchange.

Thus it appears that an excess of exports, instead of being any criterion of increasing wealth at home, is only a certain indication of commercial losses, or of expenditure abroad. "When," says Mr Wheatley, "the exports exceed the imports, as they must do when there is a large Exchange foreign expenditure, the equivalents for the excess are received abroad in as full and ample a manner as if the produce which they purchased were actually imported and entered in the custom-house books, and afterwards sent to the seat of war for consumption. But from the circumstance of its not being inserted in the custom-house entries as value received against the produce exported for its payment, the latter is deemed to constitute a favourable balance, when it is in reality exported to liquidate a balance against us."

But how conclusive soever this reasoning may appear, it has been said to be at variance with the fact; and the rise of the exchange at the end of the late war, during the suspension of cash-payments, has been appealed to as showing that its previous low rate had not been occasioned by any depreciation of the paper currency, but by the excessive amount of the bills drawn upon this country to defray war expenditure. The question, however, is not whether the exchange recovered from its depression during the suspension of cash-payments, for the influence of that measure depended entirely on the use made of it; but whether its recovery took place without the amount of bank paper of all sorts, or of the currency, being diminished? The statements made in the article MONET are decisive upon this point. They show that the currency was very greatly diminished in 1814, 1815, and 1816; and that this diminution occasioned the rise in its value, and in the nominal exchange.

Mr Francis Horner, the well-informed chairman of the Committee on the High Price of Bullion, made the following statement in regard to this very question in his place in the House of Commons:

"From inquiries he had made, and from the accounts on the table, he was convinced that a greater and more sudden reduction of the circulating medium had never taken place in any country than had taken place since the peace in this country, with the exception of those reductions that had taken place in France after the Mississippi scheme, and after the destruction of the assignats. The reduction of the currency had originated in the previous fall of the prices of agricultural produce. That fall had produced a destruction of country-bank paper, to an extent which would not have been thought possible, without more ruin than had actually ensued. The Bank of England had also restricted its issues. As appeared by the accounts recently presented, the average amount of its currency was not, during the last year, more than between £25,000,000 and £26,000,000; while two years ago it had been nearer £29,000,000, and at one time even amounted to £31,000,000. But, without looking to the diminution of Bank of England paper, the reduction of the country paper was enough to account for the rise which had taken place in the exchange."

Hence it appears that the rise of the exchange in 1815 and 1816, had nothing, or but little, to do with the cessation of hostilities, and was entirely, or mainly, a consequence of the increased value of the currency, caused by the reduction of its quantity. Instead of being at variance with the principles we have been endeavouring to elucidate, this fact affords a strong confirmation of their correctness. And having been sanctioned by the fullest experience, they may be considered as beyond the reach of cavil and dispute.

An objection of a different sort has been made, to another part of the theory maintained in this section, which it may be proper to notice.

When the exchange becomes unfavourable, the premium, procured by the sale of the bill drawn on a foreign merchant to whom bullion has been consigned, is no greater than would be obtained by consigning to him an equivalent

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1 Wheatley, on the Theory of Money, p. 219. 2 The real exchange might probably be affected to the extent of one or two per cent. Exchange. amount of coffee, tea, sugar, indigo, &c. An unfavourable real exchange permits a merchant to export commodities which could not be exported were it at par, or favourable. But the advantage still remains of exporting those commodities in preference, whose price in the country from which they are sent, compared with their price in that to which they are sent, is lowest. Suppose, for example, that the expense of transmitting bullion from this country to France is three per cent., that the real exchange is four per cent. against us, that the price of bullion is the same in both countries, and that coffee, exclusive of the expenses of carriage, is really worth four per cent. more in France than in England. In such a case, it is obvious that the exporters of bullion would realise a profit of only one per cent., while the exporters of coffee would realise, inclusive of the premium on the sale of the foreign bill, a profit of seven per cent. And hence the opinion maintained by Colonel Torrens, that when the exchange becomes unfavourable, those commodities which contain the greatest value in the smallest bulk, or on which the expense of carriage is least, are exported in preference, appears to have no good foundation. The prices of the commodities which nations trading together are in the habit of exporting and importing, are regulated not merely by the cost of their production, but also by the expense of their carriage from where they are produced to where they are consumed. If Great Britain were in the habit of supplying France with cottons and bullion, the average price of cottons in France, because of the expense required to convey them there, would probably be from 5 to 6 per cent. higher than in Britain; while, because of the comparative facility with which bullion may be transported from the one to the other, its value in Paris would not, perhaps, exceed its value here more than 1 per cent. Now, suppose that, when the prices of cottons and bullion in England and France are adjusted according to their natural proportions, the real exchange becomes unfavourable to us, it is clear that its fall gives no greater advantage to the exporters of bullion than to those of cottons. The rise in the price of foreign bills does not increase the expense of exporting the one or the other. It leaves the cost of their reduction and transportation exactly where it found it. During the depression of the exchange, the exporters of both articles get the premium on the bills drawn on their correspondents. But there is no inducement to export bullion in preference to cottons, unless the price of bullion increase more rapidly in France, or decline more rapidly in Great Britain, than that of cottons.

Whatever, therefore, may be the depression of the exchange, the merchant selects those commodities for exportation which, exclusive of the premium, yield the greatest profit on their sale. If bullion be one of these, it will of course be exported; if not, not. But of all commodities, bullion is that of which the value approaches nearest to an equality in different countries, so that it is the least likely to be exported during an unfavourable exchange. The demand for it is comparatively steady, and no great surplus quantity could be imported into one country without reducing, or exported from another without raising, its value, so as to unfit it either for exportation or importation. In most cases a small part only of an unfavourable balance is paid in bullion. The operations of the bullion merchants are chiefly confined to the distribution of the fresh supplies obtained from the mines, in proportion to the wants of different countries.

Sect. III.—Computed Exchange.

Having thus endeavoured to point out the manner in which variations in the values of the currencies of nations trading together, and in the supply and demand for bills, separately affect the exchange, it now only remains to ascertain their combined effect, or the computed or actual course of exchange.

From what has been already stated, it is obvious, that when the nominal and real exchange are both favourable or both unfavourable, the computed exchange will express their sum; and that when the one is favourable and the exchange other unfavourable, it will express their difference.

When, for example, the currency of Great Britain is of the mint standard and purity, while that of France is 5 per cent. degraded, the nominal exchange will be 5 per cent. in our favour. But the real exchange may, at the same time, be either favourable or unfavourable. If it be, also, favourable to the extent of one, two, three, &c., per cent., the computed exchange will be six, seven, eight, &c., per cent. in our favour. And, on the other hand, if it be unfavourable to the extent of one, two, three, &c., per cent., the computed exchange will be only four, three, two, &c., per cent. in our favour. When the real exchange is in favour of one country, and the nominal exchange equally against it, the computed exchange is at par, and vice versa.

A comparison of the market with the mint price of bullion affords the best and readiest means by which to ascertain the state of the exchange. When there are no restrictions on the trade in the precious metals, the excess of the market over the mint price of bullion affords an accurate measure of the depreciation of the currency. If the market and mint price of bullion at Paris and London exactly corresponded, then, inasmuch as the real value of bullion must be very nearly the same in both countries, the nominal exchange would be at par; and whatever fluctuations the computed exchange might exhibit, must, in such case, be traced to fluctuations in the real exchange, or in the supply and demand for bills. If, when the market price of bullion in Paris is equal to its mint price, it exceeds it 2 per cent. in London, it is a proof that our currency is 2 per cent. depreciated, and consequently the nominal exchange between Paris and London must be 2 per cent. against the latter. Instead, however, of the computed or actual course of exchange being 2 per cent. against London, it may be against it to a greater or less extent, or in its favour. It will be more against it provided the real exchange be also unfavourable; it will be less against it provided the real exchange be in favour of London, though to a less extent than the adverse nominal exchange; and it will be in favour of London, should the favourable real exceed the unfavourable nominal exchange. Thus, if, while British currency is 5 per cent. depreciated, and French currency at par, the computed or actual course of exchange between Paris and London were 10 or 12 per cent. against the latter, it would show that the real exchange was also against this country to the extent of 5 or 7 per cent. And if, on the other hand, the computed exchange were only 2 or 3 per cent. against London, it would show that the real exchange was 3 or 4 per cent. in its favour, and so on.

It has been already shown, that, in so far at least as the question of exchange is involved, the differences in the value of bullion in different countries are limited by the expense of its transit from one to another. And hence, by ascertaining whether a particular country exports or imports bullion to or from other countries, we may determine its comparative value in these countries. Suppose, for example, that the expense of conveying bullion from this country to France, including the profits of the bullion dealer, is 1 per cent.; it is clear, inasmuch as bullion is exported only to find its level, that whenever our merchants begin to export it to France, its value there must be at least 1 per cent. greater than in England; and, on the contrary, when they

1 Comparative Estimate, &c. Exchange import bullion from France, its value here must be, at least, 1 per cent. greater than in France. In judging of the exchange between any two countries, this circumstance should always be attended to. If no bullion be passing from the one to the other, we may conclude that its value is nearly the same in both; or, at all events, that the difference of its value is not more than the expense of transit. On the supposition that the entire expense, including profit, of conveying bullion from San Francisco to London is 5 per cent., and that London is importing bullion, it is clear provided the real exchange be at par, and the currency of both cities at their mint standards, that the nominal, or, which in this case is the same thing, the computed exchange, will be 5 per cent. in favour of London. But if the currency of London be 5 per cent. depreciated, or, in other words, if the market price of bullion at London be 5 per cent. above its mint price, the computed exchange between it and San Francisco, supposing the real exchange to continue at par, will obviously be at par. It may therefore be laid down as a general rule, that when bullion begins to pass from one country to another, the expense of transit, provided the mint and market price of bullion in the exporting country correspond, will indicate how much the value of bullion in it is below its value in the country into which it is imported, and will be identical with its unfavourable nominal exchange; and that, when the market exceeds the mint price of bullion in the exporting country, the expense of transit added to this excess will give the total comparative reduction of the value of the precious metals in that country. The converse of this takes place in the country importing bullion. When its currency is of the mint standard, the expense of transit is the measure of its favourable nominal exchange; but when its currency is relatively redundant or degraded, the difference between the expense of transit and the excess of the market above the mint price of bullion, will measure the extent of the favourable or unfavourable nominal exchange. It will be favourable when the depreciation is less than the expense of transit, and unfavourable when it is greater.

From 1809 to 1815 inclusive, Great Britain continued to export gold and silver to the Continent. During this period, therefore, we must add the expense of its export to the excess of the market over the mint price of bullion, to get at the true relative value of British currency, and the state of the real exchange. Mr Goldsmid stated to the bullion committee that, during the last five or six months of 1809, the expense of transporting gold to Holland and Hamburg, including freight, insurance, exporter's profits, &c., varied from 4 to 7 per cent. But at the time that the relative value of bullion in Britain was at 5½ (medium of 4 and 7) per cent. below its value in Hamburg, the market price of gold bullion exceeded its mint price 16 or 20 per cent., or 18 per cent. at an average; so that the currency of this country, as compared with that of Hamburg, which differed very little from its mint standard, was depreciated to the extent of about 23½ per cent. Now, as the computed or actual course of exchange varied, during the same period, from 19 to 21 per cent. against London, it is plain that the real exchange could not be far from par. Had the computed exchange been less unfavourable, it would have shown that the real exchange was in favour of London; had it been more unfavourable, it would, on the contrary, have shown that the real exchange was against London.

Provided an accurate account could be obtained of the expense attending the transit of bullion from this country to the Continent during the subsequent years of the war, it would, most likely, be found, notwithstanding the extraordinary depression of the nominal, that the real exchange varied but little from par; and that the exportation of gold and silver was not a consequence of the balance of payments being against us, but of its being more valuable on the Continent, because of its being more valuable on the Continent. None will contend that, in 1809, 1810, &c., gold and silver were so redundant in this country as to sink their relative value. Any such supposition is out of the question. During the period referred to, they were sent abroad, because the depreciation of paper exceeded the cost of the transit of bullion; and it was everybody's interest to pay their debts in the depreciated currency, and to export that which was undepreciated to countries where it passed at its full value as coin, or in which bullion was in greater demand. Had our paper currency been sufficiently reduced, the supply of gold in the kingdom in 1809, 1810, &c., compared with the demand which must, under such circumstances, have been experienced, was so very small, that instead of exporting, we should have imported the precious metals from all parts of the world.

The extraordinary exportation of British goods to the Continent during the latter years of the war, has been very generally supposed to have been in great measure owing to the depression of the exchange. But, in so far as this depression was occasioned by the redundancy or depreciation of the currency, it could have no such effect. It is impossible, indeed, to form any opinion as to the influence of fluctuations in the computed exchange on export and import trade, without previously ascertaining whether they are a consequence of fluctuations in the real or nominal exchange. It is only by an unfavourable real exchange that exportation is facilitated; and it may be favourable when the computed exchange is unfavourable. "Suppose," to use an example given by Mr Blake, "the computed exchange between Hamburg and London to be 1 per cent. against this country, and that this arises from a real exchange which is favourable to the amount of 4 per cent., and a nominal exchange unfavourable to the extent of 5 per cent.; let the real price of bullion at Hamburg and London be precisely the same, and, consequently, the nominal prices different by the amount of the nominal exchange, or 5 per cent.; now, if the expenses of freight, insurance, &c., on the transit of bullion from Hamburg are 3 per cent., it is evident that a profit would be derived from the import of that article, notwithstanding the computed exchange was 1 per cent. against us. In this case the merchant must give a premium of 1 per cent. for the foreign bill, to pay for the bullion: L100 worth of bullion at Hamburg would therefore cost him L101, and the charges of importation would increase the sum to L104. Upon the subsequent sale, then, for L105 of depreciated currency in the home market, he would derive from the transaction a profit of L1. This sum is precisely the difference between the real exchange and the expenses of transit, that part of the computed exchange which depends on the nominal producing no effect; since whatever is lost by its unfavourable state is counterbalanced by a corresponding inequality of nominal prices." In the same manner it may be shown that, though the computed be favourable, the real exchange may be unfavourable; and that, consequently, it may be really advantageous to export, when it is apparently advantageous to import. But it would be tedious to multiply instances, which, as the intelligent reader will readily conceive, may be infinitely varied, and which have been sufficiently explained in the foregoing sections.

The real cause of the extraordinary importation of British produce into the Continent, in 1809, 1810, 1811, &c., notwithstanding the anti-commercial system of Napoleon, is to be found in the annihilation of the neutral trade, and our monopoly of the commerce of the world. The entire produce of the East and West was at our disposal. The Continental nations could neither procure colonial products, nor Exchange raw cotton for the purposes of manufacturing, except from England. British merchandise was thus almost indispensable; and to this our immense exportation, in spite of all prohibitions to the contrary, is to be ascribed.

HISTORY AND INFLUENCE OF BILLS OF EXCHANGE.

It is not easy to discover the era when bills of exchange were first employed to transfer and adjust the mutual claims and obligations of merchants. Their invention has been ascribed to the Arabians and Jews of the middle ages. But it seems certain that they were in use in remote antiquity. Isocrates states that a stranger who brought some cargoes of corn to Athens, furnished a merchant of the name of Stratocles with an order or bill of exchange on a town on the Euxine, where money was owing to him; and, because the person who had drawn the bill had no fixed domicile, Stratocles was to have recourse on a merchant in Athens, in the event of its being protested. The merchant, says Isocrates, who procured this order found it extremely advantageous, inasmuch as it enabled him to avoid risking his fortune on seas covered with pirates, and the hostile squadrons of the Lacedemonians.

There is also good evidence to show that the method of transferring and cancelling the debts of parties residing at a distance by means of letters of credit, which are in effect the same as bills of exchange, was not unknown to the Romans. Cicero, in one of his epistles to Atticus, inquires whether his son must carry cash to defray the expense of his studies with him to Athens, or whether he might not save this trouble and risk by obtaining an assignment for an equivalent sum from a creditor in Rome on his debtor in Athens. It is evident, from a subsequent epistle of Cicero, that the latter method had been preferred, and that the transference of the money had, in consequence, been rendered unnecessary.

Macpherson states, that the first mention of bills of exchange in modern history occurs in 1255. The pope, having quarrelled with Manfred, king of Sicily, engaged, on Henry III. of England agreeing to indemnify him for the expense, to depose Manfred, and raise Henry's second son, Edmund, to the Sicilian throne. The enterprise misgave. But the merchants of Sienna and Florence, who originally advanced the money to carry it into effect, or rather to gratify the pope's rapacity, were paid by bills drawn on the prelates of England, who, although they protested that they knew nothing at all about the transaction, were nevertheless compelled, under pain of excommunication, to pay the bills and interest.

Cappmany, in his "Memoirs" respecting the Commerce, &c., of Barcelona, gives a copy of an ordinance of the magistracy, dated in 1394, enacting that bills should be accepted within twenty-four hours after their presentation; a sufficient proof that they were in general use in the end of the fourteenth century.

But whatever be the era of the introduction of bills of exchange, few inventions have redounded more to the public advantage. Without this simple and ingenious contrivance, commerce could have made no great progress. Had there been no means of adjusting the mutual claims of Exchange-debtors and creditors otherwise than by the intervention of metallic money (for bank paper is only another species of bills of exchange), a very large portion of that capital which is setting productive labour in motion in every quarter of the globe, and ministering to the wants and enjoyments of mankind, must have been employed in effecting those exchanges which are much better effected by the agency of a few quires of paper. Instead of a perpetual importation and exportation of gold and silver, necessarily attended with an immensity of trouble and expense, bills, possessing little or no intrinsic worth, and which are transferred with the utmost facility, suffice to adjust the most extensive and complicated transactions. But the mere setting free of an immense productive power, engaged in a comparatively unprofitable employment, is only one of the many benefits we owe to the use of bills. By cheapening the instruments by which commerce is carried on, they have materially reduced the prices of most articles. And have, in consequence, increased the command of all classes over necessaries and luxuries, and accelerated the progress of civilization, by occasioning a more extensive intercourse and intimate connection between different and independent countries than would otherwise have taken place.

In a political point of view their effects have been equally salutary. They enable individuals imperceptibly to transfer their fortune to other countries, and to preserve it safe alike from the caprice of their own governments and the hostile attacks of others. The security of property has, in consequence, been vastly augmented. And though we should concede to the satirist that paper credit has "lent corruption lighter wings to fly," it has, at the same time, powerfully contributed to render subjects less dependent on the policy, and less liable to be injuriously affected by the injudicious measures of their rulers. In countries in a low stage of civilization the inhabitants endeavour, by burying all the gold and silver they can collect, to preserve a part of their property from the despots by whom they are alternately plundered and oppressed. This was universally the case in the middle ages; and in Turkey, India, Persia, and other eastern, and also in some European, countries, the practice is still carried on to a greater or less extent. Some economists have endeavoured to account for the long-continued importation and high value of the precious metals in India, by the loss which necessarily attends the practice of hoarding; and undoubtedly this locking-up of capital, while it evinces an extreme degree of insecurity, is a main cause of the poverty of these countries. But the security afforded by bills of exchange is infinitely greater than any which can be derived from the barbarous expedient of trusting property to the bosom of the earth. "Pregnant with thousands flits the scrap unseen," and in a moment places the largest fortune beyond the reach of danger. Mr Harris was therefore right in saying, "that the introduction of bills of exchange was the greatest security to merchants, both as to their persons and effects, and consequently the greatest encouragement to commerce, and the greatest blow to despotism, of anything that ever was invented."

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1 De Pauw, Recherches sur les Grèces, I., 258. 2 Epist. ad Atticum, xlii., 24. 3 Epist. ad Atticum, xli., 27. "De Cicerone, ut scribite, ita faciam: ipsi permittam de tempore: numinorum quantum opus est ut permutaretur tu videlicet." 4 Epist. ad Atticum, xli., 24. In his notes on a parallel passage, Gravina remarks, "Pramutatio est quod nunc barbarae cambiae dicitur." 5 Epist. ad Atticum, xli., 24. 6 "Eloist paper credit! last and best supply! That lends corruption lighter wings to fly! Gold, imp'd by thee, can compass hardest things, Can pocket states, can fetch or carry kings; A single leaf shall waft an army o'er, Or ship of senators, to some distant shore; A leaf, like Sibyl's, scatter to and fro Our fates and fortunes, as the wind shall blow; Pregnant with thousands, flits the scrap unseen, And silent sells a king, or buys a queen."—POPE. 7 Harris on Coins, part i., p. 108. Exchange. Its extensive commerce, the wealth and punctuality of its merchants, and their intimate connection with all the other great trading cities of the world, made Amsterdam, previously to the peace of 1763, the chief place where the accounts of commercial countries were balanced and adjusted. But the loss of foreign trade, and the other vexations to which Holland was subjected during the ascendancy of the French, nearly divested Amsterdam of all share in this business; and it has not since recovered its former superiority. London is now the trading metropolis of Europe and of the world, universi orbis terrarum emporium. The vast extent of its commercial dealings necessarily renders it the great mart for bills of exchange. Its bill-merchants, a class of men remarkable for their shrewdness, and generally possessed of large capitals, assist in trimming and adjusting the balance of debt and credit between the most remote countries. They buy up bills where they are cheap, and sell them where they are dear, and, by the extent of their correspondence and the magnitude of their transactions, give a steadiness to the exchange to which it could not otherwise attain.

NEGOTIATION OF BILLS OF EXCHANGE.

Bills of exchange may be made payable on demand (the variable term of payment in the case of checks), at sight, at a certain specified time after sight or after date, or at usance, which is the usual term allowed by the custom or law of the place where the bill is payable. Generally, however, a few days are allowed for payment beyond the term when the bill becomes due, which are denominated days of grace, and which vary in different countries. In Great Britain and Ireland, three days' grace are allowed on all bills except those payable on demand, which must be paid as soon as presented. The following is a statement of the usance and days of grace for bills drawn upon some of the principal commercial cities:

\[ \text{[m.d., m.s., d.d., d.s., d.a., respectively denote months after date, months after sight, days after date, days after sight, days after acceptance.]} \]

| London | Usance | Days of Grace | |--------|--------|--------------| | Amsterdam | 1 m.d. | 0 | | Rotterdam | 1 m.d. | 0 | | Antwerp | 1 m.d. | 0 | | Hamburg | 1 m.d. | 12 | | Altona | 1 m.d. | 12 | | Danzig | 14 d.a. | 10 | | Paris* | 30 d.d. | 0 | | Frankfort | 14 d.w. | 4 | | Bremen | 60 d.d. | 14 | | Barcelona | 30 d.d. | 5 | | Geneva | 2 m.d. | 14 | | Madrid | 60 d.d. | 6 | | Cadiz | 2 m.d. | 14 | | Bilbao | 2 m.d. | 14 | | Gibraltar | 3 m.d. | 0 | | Leghorn | 14 d.a. | 0 | | Leipzig | 3 m.d. | 30 | | Genoa | 3 m.d. | 6 | | Venice | 14 d.a. | 3 | | Vienna† | 30 d.d. | 13 | | Malta | 3 m.d. | 3 | | Naples | 3 m.d. | 0 | | Palermo | 30 d.s. | 6 | | Lisbon | 30 d.s. | 6 | | Oporto | 30 d.s. | 6 | | Rio Janeiro | 30 d.s. | 6 | | Dublin | 21 d.s. | 3 | | New York | 60 d.s. | 3 |

* In France, days of grace were suppressed by the Code de Commerce, art. 135. † In Austria, bills payable at sight, or on demand, or at less than 7 days after sight or date, are not allowed any days of grace. In Petersburg, bills after date are allowed 10 days' grace, but after sight only 3 days' do.

In the dating of bills, the new style is used in every Exchange country of Europe, with the exception of Russia.

In London bills of exchange are bought and sold by brokers, who go round to the principal merchants and discover whether they are buyers or sellers of bills. A few of the brokers of most influence, after ascertaining the state of the relative supply and demand for bills, suggest a price at which the greater part of the transactions of the day are settled, with such deviations as particular bills, from their being in very high or low credit, may be subject to. The price fixed by the brokers is that which is published in Witenhall's List; but the first houses generally negotiate their bills on \( \frac{1}{2}, 1, \frac{1}{2}, \) and 2 per cent. better terms than those quoted. In London and other great commercial cities a class of middlemen speculate largely on the rise and fall of the exchange; buying bills when they expect a rise, and selling them when a fall is anticipated.

It is usual, in drawing foreign bills of exchange, to draw them in sets, or duplicates, lest the first should be lost or miscarry. When bills are drawn in sets, each must contain a condition that it shall be payable only while the others remain unpaid; thus, the first is payable only, "second and third unpaid;" the second, "first and third being unpaid;" and the third, "first and second unpaid."

All bills of exchange must be drawn upon stamps as under:

**INLAND BILL OF EXCHANGE**, Draft, or Order, for the Payment to the Bearer, or to Order, at any Time otherwise than on Demand, of any Sum of Money L. s. d.

Not exceeding \( \frac{1}{2} \) L. 0 0 1 Exceeding \( \frac{1}{2} \) L. and not exceeding 10 0 2 ... 25 ... 25 0 3 ... 50 ... 50 0 6 ... 75 ... 75 0 9 ... 100 ... 100 1 0 ... 200 ... 200 2 0 ... 300 ... 300 3 0 ... 400 ... 400 4 0 ... 500 ... 500 5 0 ... 750 ... 750 7 6 ... 1000 ... 1000 10 0 ... 1500 ... 1500 15 0 ... 2000 ... 2000 20 0 ... 3000 ... 3000 30 0 ... 4000 ... 4000 40 0

4000 and upwards 2 5 0

**FOREIGN BILL OF EXCHANGE** drawn in, but payable out of, the U. K.

If drawn singly or otherwise than in a Set of Three or more, the same duty as on an Inland Bill of the same Amount and Tenor.

If drawn in Sets of Three or more, for every Bill of each Set.

Where the Sum payable thereby shall not exceed \( \frac{1}{2} \) L. 0 0 1 And where it shall \( \frac{1}{2} \) L. and not exceed, 50 0 2 ... 50 ... 75 0 3 ... 75 ... 100 0 4 ... 100 ... 200 0 8 ... 200 ... 400 1 4 ... 300 ... 600 2 0 ... 400 ... 800 2 8 ... 500 ... 1000 3 4 ... 750 ... 1500 5 0 ... 1000 ... 2000 6 8 ... 1500 ... 3000 10 0 ... 2000 ... 4000 13 4 ... 3000 ... 4000 15 0

4000 and upwards 2 5 0

**FOREIGN BILL OF EXCHANGE** drawn out of the U. K., and payable within the U. K., the same Duty as on an Inland Bill of the same Amount and Tenor.

**FOREIGN BILL OF EXCHANGE** drawn out of the U. K., and payable out of the U. K., but indorsed or negotiated within the U. K., the same Duty as on a Foreign Bill drawn within the U. K., and payable out of the U. K.

The Act 17th and 18th Vict., cap. 83, § 3, directs that Exchange. The duties on bills of exchange shall be denoted by adhesive stamps, to be furnished by the Commissioners of Inland Revenue.

Bills of exchange purporting to be drawn at any place out of the United Kingdom are to be deemed to be foreign bills, and are to be liable to the stamp-duty on such bills, though they may, in fact, have been drawn in the United Kingdom.—§ 4.

The holders of foreign bills, or bills drawn out of the United Kingdom, are to affix proper adhesive stamps to the same before negotiating them, under a penalty of L.50.—§ 5.

No one acquainted with the fundamental rules of arithmetic can have any difficulty whatever in estimating how much a sum of money in one country is worth in another according to the state of the exchange at the time. The common arithmetical books abound in examples of such computations. But in conducting the business of exchange a direct remittance is not always preferred. When a merchant in London, for example, means to discharge a debt due by him in Paris; it is his business to ascertain not only the state of the direct exchange between London and Paris, and, consequently, the sum which he must pay in London for a bill on Paris equivalent to his debt, but also the state of the exchange between London and Hamburg, Hamburg and Paris, &c.; for it frequently happens that it may be more advantageous for him to buy a bill on Hamburg, Amsterdam, or Lisbon, and to direct his agent to invest the proceeds in a bill on Paris, rather than remit directly to the latter. This is termed the Arbitration of exchange. An example or two will suffice to show the principle on which it is conducted.

Thus, if the exchange between London and Amsterdam be 35s. Flemish (old coinage) per pound sterling, and between Paris and Amsterdam 1s. 6d. Flemish per franc, then, in order to ascertain whether a direct or indirect remittance to Paris would be most advantageous, we must calculate what would be the value of the franc in English money, the difference between the two Holes, &c., for if it be less than that resulting from the direct exchange, it will obviously be the preferable mode of remitting. This is determined by stating, as 35s. Flem. (the Amsterdam currency in a pound sterling); 1s. 6d. Flem. (Amsterdam currency in a franc): L.1:10d., the proportional or arbitrated value of the franc. Hence, if the English money, or bill of exchange, to pay a debt in Paris, were remitted by Amsterdam, it would require 10d. to discharge a debt of a franc, or L.1 to discharge a debt of 24 francs; and therefore, if the exchange between London and Paris were at 24, it would be indifferent to the English merchant whether he remitted directly to Paris, or indirectly via Amsterdam; but if the exchange between London and Paris were above 24, then a direct remittance would be preferable; while, if, on the other hand, the direct exchange were less than 24, the indirect remittance ought as plainly to be preferred.

Suppose, to borrow an example from Kelly's Universal Cambist, vol. ii., p. 137), "the exchange of London and Lisbon to be at 68½ per milre, and that of Lisbon on Madrid 500 rees per dollar, the arbitrated price between London and Madrid is 34½ sterling per dollar; for, as 1000 rees:68½::500 rees:34½. But if the direct exchange of London on Madrid be 33½ sterling per dollar, then London, by remitting directly to Madrid, must pay 35½ for every dollar; whereas, by remitting through Lisbon, he will pay only 34½; it is therefore the interest of London to draw directly on Madrid through Lisbon. On the other hand, if London draws directly on Madrid, he will receive 35½ sterling per dollar; whereas, by drawing indirectly through Lisbon, he would receive only 34½; it is therefore the interest of London to draw directly on Madrid." Hence the following rules:

1. Where the certain price is given, draw through the place which produces the lowest arbitrated price, and remit through that which produces the highest.

2. Where the uncertain price is given, draw through that place Exchange, which produces the highest arbitrated price, and remit through that which produces the lowest."

In compound arbitration, or when more than three places are concerned, then, in order to find how much a remittance passing through them all will amount to in the last place, or, which is the same thing, to find the arbitrated price between the first and the last, we have only to repeat the different statements in the same manner as in the foregoing examples.

Thus, if the exchange between London and Amsterdam be 35s. Flem. for L.1 sterling; between Amsterdam and Lisbon 42½ Flem. for 1 old crusade; and between Lisbon and Paris 480 rees for 3 francs: what is the arbitrated price between London and Paris?

In the first place, as 35s. Flem.:L.1::42½ Flem.:1 old crusade = 1 old crusade.

Second, as 1 old crusade, or 400 rees:2s. sterling::480 rees:2s. 4½d. sterling = 3 francs.

Third, as 2s. 4½d. sterling:3 francs::L.1 sterling:25 francs, the arbitrated price of the pound sterling between London and Paris.

This operation may be abridged as follows:

| L.1 sterling | = | 35s. Flemish | |-------------|---|-------------| | 3½ shillings Flem. | = | 1 old crusade | | 1 old crusade | = | 400 rees | | 480 rees | = | 3 francs |

Hence \( \frac{35 \times 400 \times 3}{480 \times 2} = \frac{4200}{168} = 25 \text{ francs} \).

This abridged operation evidently consists in arranging the terms so that those which would form the divisors in continued statements in the Rule of Three are multiplied together for a common divisor, and the other terms for a common dividend. The ordinary arithmetical books abound with examples of such operations.

The following account of the manner in which a very large transaction was actually conducted by indirect remittances, will sufficiently illustrate the principles we have been endeavouring to explain.

In 1804, Spain was bound to pay to France a large subsidy; and, in order to do this, three distinct methods presented themselves:

1. To send dollars to Paris by land. 2. To remit bills of exchange directly to Paris. 3. To authorise Paris to draw directly on Spain.

The first of these methods was tried, but it was found too slow and expensive; and the second and third plans were considered likely to turn the exchange against Spain. The following method by the indirect or circular exchange was therefore adopted.

A merchant or banquier at Paris was appointed to manage the operation, which he thus conducted:—He chose London, Amsterdam, Hamburg, Cadiz, Madrid, and Paris, as the principal hinges on which the operation was to turn; and he engaged correspondents in each of these cities to support the circulation. Madrid and Cadiz were the places in Spain from whence remittances were to be made; and dollars were, of course, to be sent to where they bore the highest price, for which bills were to be procured on Paris, or on any other places that might be deemed most advantageous.

The present plan being thus established, it only remained to regulate the extent of the operation, so as not to issue too much paper on Spain, and to give the circulation as much support as possible from real business. With this view, London was chosen as a place to which the operation might be chiefly directed, as the price of dollars was then high in England; a circumstance which rendered the proportional exchange advantageous to Spain.

The business was commenced at Paris, where the negotiation of drafts issued on Hamburg and Amsterdam served to answer the immediate demands of the state; and orders were transmitted to these places to draw for the reimbursements on London, Madrid, or Cadiz, according as the course of exchange was most favourable. The proceedings were all conducted with judgment, and attended with complete success. At the commencement of the operation, the course of exchange of Cadiz on London was 264½; but by the plan adopted, Spain got 39½d., or above 8 per cent. by the remittance of dollars to London; and considerable advantages were also gained by the circulation of bills through the several places on the Continent. (Kelly's Cambist, vol. ii., p. 108; Dubois' Elements of Commerce, 2d ed., p. 228.) Exchange. Table specifying the Value of the Monies of Account of the principal Places with which this Country has Exchange Transactions, taking Silver Exchange at 5s. an oz., and specifying also the Par of Exchange with such Places on this Hypothesis.—(Abstracted from Tate's Modern Cumbier, to which the reader is referred for farther explanations.)

| Place | 100 coins | 1 rouble | 3½ lsd. giving 6 roub. 40 cop. = L1 | |----------------|-----------|----------|-------------------------------------| | Petersburg | 100 copecs| 1 rouble | 3½ lsd. giving 6 roub. 40 cop. = L1 | | Berlin | 30 sil. gr. | 1 Pruss. doll. | 2½ lsd. giving 6 doll. 27 s. g. = L1 | | Copenhagen | 90 skilling | 1 Rig. doll. | 2½ lsd. giving 6 doll. 10 sk. = L1 | | Hamburg | 16 shillings | 1 mark | 1½ lsd. giving 13 mks. 10 sch. = L1 | | Amsterdam | 100 centimes | 1 florin | 1½ lsd. giving 11 fl. 97 cents = L1 | | Antwerp | 100 centimes | 1 florin | 1½ lsd. giving 11 fl. 97 cents = L1 | | Paris | 100 centimes | 1 franc | ¾ lsd. giving 25 fr. 57 cents = L1 | | Frankfort | 243 gold. or flor. | 1 mark | 1½ lsd. giving 12½ gulden = L1 | | Vienna | 60 kreuzers | 1 florin | 2½ lsd. giving 9 fl. 50 kr. = L1 | | Venice | 199 centesimi | 1 lira Austriaca | 8½ lsd. giving 29 li. 32 cent. = L1 | | Genoa | 100 centesimi | 1 lira Nuova | 9½ lsd. giving 25 li. 22 cent. = L1 | | Leghorn | 100 centesimi | 1 lira Toscana | 7½ lsd. giving 30 li. 69 cent. = L1 | | Madrid | 8 reals | 1 dollar of Plate | 3½ lsd. giving 6 doll. 2½ reals = L1 | | Lisbon | 1000 reis | 1 milreis | 4½ lsd. giving 4 mil. 285 reis = L1 | | New York | 100 cents | 1 dollar | 2½ lsd. giving 4 doll. 80 cents = L1 | | Rio Janeiro | 1000 reis | 1 milreis | 2½ lsd. giving 4 doll. 80 cents = L1 | | Havana | 100 cents | 1 dollar | 4½ lsd. giving 4 doll. 44 cents = L1 |

It is easy from this table to calculate the value of any of the above coins, taking silver at 5s. 2d., 5s. 6d., an oz., or any other price, and thence to deduce the par of exchange at such rates.

LAW OF BILLS OF EXCHANGE.

The chief legal privileges appertaining to bills are, first, that though only a simple contract, yet they are always presumed to have been originally given for a good and valuable consideration; and, secondly, they are assignable to a third person not named in the bill or party to the contract, so as to vest in the assignee a right of action, in his own name; which right of action, no release by the drawer to the acceptor, nor set-off or cross demand due from the former, can ever affect.

All persons, whether merchants or not, being legally qualified to contract, may be parties to a bill. But no action can be supported against a person incapable of binding himself, on a bill drawn, indorsed, or accepted by such incapacitated person; at the same time the bill is good against all other competent parties thereto.

Bills may be drawn, accepted, or indorsed by the party's agent or attorney verbally authorized for that purpose. When a person has such authority, he must either write the name of his principal, or state in writing that he draws, &c., as agent, thus: per procurat., for A. B.

Where one of several partners accepts a bill drawn on the firm, for himself and partners, or in his own name only, such acceptance binds the partnership if it concerns the trade. But the acceptance of one of several partners on behalf of himself and partners, will not bind the others, if it concern the acceptor only in a separate and distinct interest; and the holder of the bill, at the time he becomes so, was aware of that circumstance. If, however, he be a bona fide holder for a sufficient consideration, and had no such knowledge at the time he first became possessed of the bill, no subsequently acquired knowledge of the misconduct of the partner in giving such security will prevent him from recovering on such bills against all the partners.

Although no precise form of words is required to constitute a bill of exchange or promissory note, yet it is necessary that it should be payable at all events, and not depend on any contingency; and that it be made for the payment of money only, and not for payment of money and performance of some other act, as the delivery of a horse, or the like.

If, however, the event on which the payment is to depend must inevitably happen, it is of no importance how long the payment may be suspended; so a bill is negotiable and valid if drawn payable six weeks after the death of the drawer's father, or payable to an infant when he shall become of age.

Any material alteration of a bill after it has been drawn, accepted, or indorsed, such as the date, sum, or time of payment, will invalidate it; but the mere correction of a mistake, as by inserting the words "or order," will have no such effect.

The negotiability of a bill depends on the insertion of sufficient operative words of transfer; such as by making it payable to A. or order, or to A. or bearer, or to bearer generally.

Although a bill is presumed to have been originally drawn upon a good and valuable consideration, yet in certain cases a want of sufficient consideration may be pleaded in defence to an action on a bill. Certain considerations have been made illegal by statute; as for signing a bankrupt's certificate, for money won at gaming, or for money lent on aurious contract. But with respect to gaming, it is held that a bill founded on a gambling transaction is good in the hands of a bona fide holder; and by 58th Geo. III., cap. 93, a bill or note in the hands of an innocent holder, although originally founded on aurious contract, is not invalid.

In general, if a bill is fair and legal in its origin, a subsequent illegal contract or consideration on the indorsement thereof will not invalidate it in the hands of a bona fide holder.

A bill must be given in evidence in a court of justice, unless it be duly stamped, not only with a stamp of the proper value, but also of the proper denomination.

Acceptance of a Bill.—An acceptance is an engagement to pay a bill according to the tenor of the acceptance, which may be either absolute or qualified. An absolute acceptance is an engagement to pay a bill according to its request, which is done by the drawee writing "Accepted" on the bill, and subscribing his name, or writing "Accepted" only; or merely subscribing his name at the bottom or across the bill. A qualified acceptance is when a bill is accepted conditionally; as where goods conveyed to the drawee are sold, or when a navy bill is paid, or other future event which does not bind the acceptor till the contingency has happened.

An acceptance may also be partial, as to pay L100 instead of L150; or to pay at a different time or place from that required by the bill. But in all cases of a conditional or partial acceptance, the holder should, if he mean to resort to the other parties to the bill in default of payment, give notice to them of such partial or conditional acceptance.

In all cases of presenting a bill for acceptance, it is necessary to present the bill at the house where the drawee lives, or where it is made payable. By 1st and 2nd Geo. IV., cap. 78, all bills accepted payable at a banker's or other place are to be deemed a general acceptance; but if they are accepted payable at a banker's only and not otherwise or elsewhere, it is a qualified acceptance, and the acceptor is not liable to pay the bill, except in default of payment when such payment shall have been actually made at the banker's. The drawee is entitled to keep the bill twenty-four hours when presented for acceptance. The acceptance of an inland bill must be in writing on the face of the bill, or if there be more parts than one, on each of such parts; nothing short of this constitutes a valid acceptance.

When a bill is made payable at sight, or at a certain time after sight, it must, in either case, in order to fix the time when it is to be paid, be presented for acceptance; and the date of the acceptance should appear thus: "Accepted, 16th May 1855."

Due diligence is the only thing to be considered in presenting any description of bill for acceptance; and such diligence is a question depending on the situation of the parties, the distance at which they live, and the facility of communication between them.

When the drawee refuses to accept, any third party, after protesting, may accept for the honour of the bill generally, or for the drawee, or for the indorser; in which case the acceptance is called an acceptance supra protest.

The drawers and indorsers are discharged from liability, unless due notice of non-acceptance when presented for acceptance, or non-payment at the time the bill becomes due, is given. These notices must be given with all due diligence to all the parties to whom the holder means to resort for payment. Generally, in both foreign and inland bills, notice is given next day to the immediate indorser, and such indorser is allowed a day, when he should give fresh notice to the parties who are liable to him.

Notice may be sent by the post, however near the residence of the parties may be to each other; and though the letter containing such notice should miscarry, yet it will be sufficient; but the letter containing the notice should be delivered at the General Post Office, or at a receiving-house appointed by that office, not to the bellman. Exchange in the street. In all cases of notice, notice to one of several parties is held to be notice to all; and if one of several drawers be also the acceptor, it is not necessary to give notice to the other drawers.

In case of non-acceptance or non-payment of a bill, the holder, or a public notary for him, should protest it; that is, draw up a notice of the refusal to accept or pay the bill, and the declaration of the holder against sustaining loss thereby. Inland bills need not be protested; in practice they are usually only noted for non-acceptance; but this, without the protest, is wholly futile, and adds nothing whatever to the evidence of the holder, while it entails a useless expense on those liable to pay.

Indorsement of Bills.—An indorsement is the act by which the holder of a negotiable instrument transfers his right to another person, termed the indorsee. It is usually made on the back of a bill, and must be in writing; but the law has not prescribed any set form of words as necessary to the ceremony, and in general the mere signature of the indorsee is sufficient.

All bills payable to order or to bearer for L1 and upwards are negotiable by indorsement; and the transfer of them for a good consideration before they are payable gives a right of action against all the precedent parties on the bill, if the bills in themselves are valid; but a transfer after they are due will only place the holder in the situation of the person from whom he takes them.

Bills may be transferred either by delivery only, or by indorsement and delivery; bills payable to order are transferred by the latter mode only; but bills payable to bearer may be transferred by either mode. On a transfer by delivery, the person making it ceases to be a party to the bill; but on a transfer by indorsement, he is to all intents and purposes transferred as a new drawer.

A bill specially transferable may be restrained by restrictive words; for the payee or indorsee, having the absolute property in the bill, may, by express words, restrict its currency, by indorsing it "Payable to A. B. only" or "To A. B. for his use," or any other words clearly demonstrating his intention to make a restrictive and limited indorsement. Such special indorsement precludes the person in whose favour it is made from making a transfer, so as to give a right of action against the special indorser, or any of the precedent parties to the bill.

In taking bills to account or discount, it is important well to examine all special indorsements. Lord Tenterden decided that a person who discounts a bill indorsed "Pay to A. B. or order for my use," discounts it subject to the risk of having to pay the money to the special indorser, who so limited the application for my use; thus, a person who discounts such a bill is exposed to the bill twice over, unless he previously ascertaining that the payment has been made conformably to the import of the indorsement.

After the payment of part, a bill may be indorsed over for the residue.

Presentation for Payment.—The holder of a bill must be careful to present it for payment at the time when due, or the drawer and indorsers will be exonerated from their liability; even the bankruptcy, insolvency, or death of the acceptor, will not excuse a neglect to make presentment to the assignees or executor; nor will the insufficiency of a bill in any respect constitute an excuse for non-presentment: the presentment should be made at a reasonable time of the day when the bill is due; and if by the known custom of any trade or place bills are payable only within particular hours, a presentment must be within those hours. If a bill has a qualified acceptance, the presentment should be at the place mentioned in such qualified acceptance, or all the parties will be discharged from their obligations.

If a bill fall due on Sunday, Good Friday, Christmas Day, or any public fast or thanksgiving day, the presentment must be on the day preceding these holidays. By 7th and 8th Geo. IV., cap. 15, if a bill or note be payable on the day preceding these holidays, notice of the dishonour may be given the day following the holiday; and if Christmas Day fall on Monday, notice may be given on Tuesday.

Bills, however, payable at usance, or at a certain time after date or sight, or after demand, ought not to be presented for payment precisely at the expiration of the time mentioned in the bills, but at the expiration of what are termed days of grace. The days of grace allowed vary in different countries, and ought always to be computed according to the usage of the place where the bill is due. In many countries of Europe, France, they have been abolished. At Hamburg, the day on which the bill falls due makes one of the days of grace; but nowhere else.

On bills payable on demand, or when no time of payment is expressed, no days of grace are allowed; but they are payable instantly on presentment. On bank post bills no days of grace are claimed; but on bills payable at sight the usual days of grace are allowed from the sight or demand, as notified by the date of the acceptance.

Payment of a bill should be made only to the holder; and it may be refused unless the bill be produced and delivered up. On pay-

ment, a receipt should be written on the back; and when a part is Exchange paid, the same should be acknowledged upon the bill, or the party paying may be liable to pay the amount a second time to a bona fide indorser.

Promissory Notes and Cheats.—The chief distinction between promissory notes and bills of exchange is, that the former are a direct engagement by the drawer to pay them according to their tenor, without the intervention of a third party as a drawee or acceptor. Promissory notes may be drawn payable on demand to a person named therein, or payable at a fixed or generally ascertainable time, and are assignable and endorsable; and in all respects so nearly assimilated to bills, that the laws which have been stated as bearing upon the latter may be generally understood as applicable to the former.

It has been decided, in case an instrument is drawn so equivocally as to render it uncertain whether it be a bill of exchange or promissory note, the holder may treat it as either against the drawer.

The issue of any promissory note payable to bearer on demand for a less sum than L5 by the Bank of England, or any licensed English banker, is prohibited; and by 9th Geo. IV., cap. 65, it is provided, that no corporation or person shall utter or negotiate, in England, any such note which has been made or issued in Scotland, Ireland, or elsewhere, under a penalty not exceeding L20 nor less than L5. But this does not extend to any draft or order on bankers for the use of the drawer.

A check or draft is as negotiable as a bill of exchange, and vests in the assignee the same right of action against the assignor. If not presented within a reasonable time, payment may be refused.

Unstamped drafts or orders for any sum of money payable to bearer on demand, may be drawn upon bankers, or persons acting as such, provided the place where they transact business, or where the drafts or orders are to be paid, be within 15 miles of the place where they are issued. But all such drafts or orders when remitted or sent to any greater distance than 15 miles from their place of issue, must be duly stamped under a penalty of L50 (17th and 18th Vict., cap. 83, sect. 6).

Any person making, accepting, or paying any bill, draft, order, or promissory note, not duly stamped, is liable to a penalty of L50; for post-dating them, L100; and for not truly specifying the place where unstamped drafts are issued, L100; and any person knowingly receiving such unstamped draft, L20; and the banker knowingly paying it, L100; besides not being allowed such sum in account.

It used to be of especial importance to bankers and others taking bills and notes, that they should not only be aware of the responsibility of the acceptors and other parties to such bills and notes, but that they should have some knowledge of those from whom they received them; for, if the instrument turned out to have been lost or fraudulently obtained, they might be deprived of their security, on an action by the owner to recover possession. Lord Tenterden decided, "if a person take a bill, note, or any other kind of security, under circumstances which ought to excite suspicion in the mind of any reasonable man acquainted with the ordinary affairs of life, and which ought to put him on his guard to make the necessary inquiries, and he do not, then he loses the right of maintaining possession of the instrument against the rightful owner."—(Guildhall, Oct. 25, 1823.) But it has since been decided, in contravention of this doctrine, that the clause of the bond for holder of a bill or note that has been lost or stolen is not invalidating the effect of the summons or inquiries referred to by Lord Tenterden, or even by gross negligence; and that to defeat the holder's claim it must be shown that he took the instrument mala fide.—(Chitty on Bills, 9th ed. p. 257.) This is not only an important, but, as we think, a sound decision; it facilitates the negotiation of bills, and clears up and gives precision to the law.

Before concluding this article on mercantile paper, it may not be improper to introduce one or two cautions with regard to acceptances, and accommodation paper, and proceedings in case of the loss of bills.

First. A man should not put his name as acceptor to a bill of exchange without well considering whether he has the means of paying the same when due, as otherwise he may be liable not only to the costs of the action against himself, but also to the costs of the action against the other party to the bill; the shrewd tradesman is generally anxious to get the acceptance of his debtor, even a short one, well knowing that it not only fixes the amount of the debt, but is more speedily recoverable by legal procedure than a book debt.

Secondly. Traders who wish to support their respectable, and desire to succeed in business, should be cautious in resorting to what is called the system of cross-accommodation acceptances; it seldom ends well, and usually excites suspicion as to the integrity of the parties; it being an expedient often adopted by swindlers to defraud the public. Independent of the expense in stamps and discounts, and frequently in noting, interest, and law expenses, the Exchange also signifies a place in most considerable trading cities where merchants, agents, bankers, brokers, interpreters, and other persons concerned in commerce, assemble on certain days, at a fixed hour, to confer together in regard to matters relating to exchanges, remittances, payments, assurances, freights, &c. In Flanders, Holland, and France, these places are called Bourses, or Places de Change; and in the Hanse Towns, Borsehalle. The most considerable exchanges in Europe are those of London, Paris, and Amsterdam.

The ancient Romans had places for merchants to meet in most of the considerable cities of their empire. That which is said to have been built at Rome in the year n.e. 493 was called Collegium Mercatorum, of which it is alleged there are still some remains, called by the modern Romans Loggia, the Lodge, or place of St George.

EXCHEQUER BILLS are bills of credit issued by authority of parliament. They are for various sums, and bear interest (generally from 1\(\frac{1}{2}\)d. to 2\(\frac{1}{2}\)d. per diem, per L.100) according to the usual rate at the time. The advances of the Bank to government are made upon Exchequer bills; and the daily transactions between the Bank and government are principally carried on through their intervention. Notice of the time at which outstanding Exchequer bills are to be paid off is given by public advertisement. Bankers prefer vesting in Exchequer bills to any other species of stock, even though the interest be for the most part comparatively low; because the capital may be received at the treasury at the rate originally paid for it, the holders being exempted from any risk of fluctuation, except in the amount of the premium or discount at which they may have bought the bills. Exchequer bills were first issued in 1696, and have been annually issued ever since. The subjoined is an account of the unfunded debt in Exchequer bills, and of the annual charge thereon, on the 5th of January 1817, and on the 5th of January in every subsequent year down to 1855.

| Years ending Jan. 5. | Amount of Exchequer Bills | Rate of Interest per Diem. | Charge of Interest per Annum. | |---------------------|---------------------------|---------------------------|-----------------------------| | 1817 | 44,650,300 | 3d. Nov. 22, 1816 | 2,173,927 | | 1818 | 56,722,400 | 2d. Feb. 24, 1817 | 1,891,315 | | 1819 | 43,508,400 | 2d. Oct. 11, 1817 | 2,028,450 | | 1820 | 33,303,200 | | 847,091 | | 1821 | 30,955,900 | | 1,529,181 | | 1822 | 31,655,550 | | 2,009,311 | | 1823 | 35,281,150 | | 1,309,469 | | 1824 | 34,741,750 | 1d. June 24, 1824 | 1,111,220 | | 1825 | 32,939,450 | | 1,085,015 | | 1826 | 27,994,200 | 2d. Dec. 19, 1825 | 820,000 | | 1827 | 24,555,350 | | 770,000 | | 1828 | 27,346,850 | | 802,180 | | 1829 | 27,857,000 | 1d. Sept. 30, 1829 | 859,472 | | 1830 | 29,341,500 | 1d. Dec. 18, 1829 | 898,000 | | 1831 | 27,471,650 | | 725,455 | | 1832 | 27,133,350 | | 604,355 | | 1833 | 27,280,000 | | 577,320 | | 1834 | 27,905,900 | | 723,595 | | 1835 | 28,251,550 | | 633,417 | | 1836 | 28,976,600 | 2d. Sept. 29, 1836 | 688,701 | | 1837 | 28,976,600 | 2d. Nov. 21, 1836 | 692,095 | | 1838 | 24,044,550 | 2d. Dec. 14, 1837 | 871,309 |

The interest paid within each year is given in the column of charge, which interest has accrued upon the capital stated in the preceding year.

The interest upon the L.16,029,600, and upon L.1,750,000 of bills issued in April 1854, will be paid in 1855.

The interest upon the L.17,183,000, will not be payable till 1856, i.e., year ending January 5, 1857.

In 1853 Exchequer bonds were issued bearing interest at 2\(\frac{1}{2}\) per cent. for ten years, and thereafter 2\(\frac{1}{2}\) per cent. for thirty years, or till 1894, to such holders of South Sea, and 3 per cent. stock as chose to accept the same, a bond for L.100 being given for every L.100 stock subscribed (16th and 17th Vict., cap. 23). But only a very small sum (L.5000) has been invested in such bonds.

EXCHEQUER COURT or, an ancient court of record, so called from the chequed cloth, resembling a chess board, which covered the table. This court was derived from the Normans, and was at first intended principally to order the revenues of the Crown, and to recover the king's debts and duties. The judges were styled Barones Scaccarii, and the court was anciently held in the king's palace. The common-law part of their jurisdiction was acquired by usurpation, as at first it was merely for the benefit of the king's accountants, but afterwards a legal fiction obtained whereby the plaintiff suggested he was the king's debtor, quomiam sufficiens existit; by which he was less able to pay the king his debt. This suggestion not being controverted, the court became an ordinary court of justice between subject and subject, and at length by the Uniformity of Process Act, 2d Will. IV., cap. 39, a direct and proper jurisdiction was given without resorting to the legal fiction. There are two divisions of the court—the receipt of the Exchequer, managing the royal revenues, Exchequer and the judicial part of the court. Formerly the court of exchequer had power and jurisdiction as a court of equity, but the act 5th Vict., cap. 5, transferred this power to the court of chancery.

As a court of revenue it ascends and enforces the rights of the crown against subjects, and as a court of common law it takes cognizance of all personal actions like the other courts, with the exception of a few species of real actions. There are at present five judges, the lord chief baron and four puisné barons. An appeal lies from the decision of this court to the court of exchequer chamber. The Chancellor of the Exchequer is the treasurer, and holds the seal of the court.

EXCHEQUER CHAMBER, Courter or, was erected in England by the 31st Edw. III., cap. 12, to determine causes on writs of error from the common-law side of the court of exchequer, and consisted of the lord chancellor, the lord treasurer, and the justices of the king's bench and common pleas. By the 27th Eliz., cap. 8, a second court was established, consisting of the justices of the common pleas and the barons of the exchequer, to determine appeals from the king's bench. A new arrangement was made by the 11th Geo. IV., and 1 Will. IV., cap. 70, § 8, whereby the judgments of each of the superior common-law courts are subject to revision by the judges of the other two sitting as a court of error in the exchequer chamber. An appeal lies from this court to the House of Lords.