Front Page Titles (by Subject) CHAPTER III.: Of Exchanges. - A Select Collection of Scarce and Valuable Tracts on Money
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CHAPTER III.: Of Exchanges. - John Ramsay McCulloch, A Select Collection of Scarce and Valuable Tracts on Money 
A Select Collection of Scarce and Valuable Tracts on Money from the Originals of Vaughan, Cotton, Petty, Lowndes, Newton, Prior, Harris, and Others, with a Preface, Notes, and Index (London: Printed for the Political Economy Club, 1856).
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AS the accounts of particular persons living in remote places, are frequently liquidated and discharged by bills of exchange, without the intervention of money; and this being a subject of importance, and not generally understood, excepting by particular merchants, it may not be amiss in this place to give a brief account of the nature and use of exchanges.
Bills of exchange, what.
55. It hath been before observed, that the chief end or object of commerce betwixt nations, is a mutual exchange of commodities one with another; and this may be, and frequently is, carried to a great extent without the intervention of money. But nevertheless the accounts are every where kept and stated in money; and it is almost unavoidable, but that in all great trading towns, there will be merchants, some having bullion owing to them in one place, some in another; some or other again that are indebted to all those places, or to some other place which is indebted to some one of those; and so, by a kind of chain, all trading countries become in some sort accomptants with each other.
To avoid the charge, trouble and hazard of transporting bullion backwards and forwards, for the supplying of these different occasions; the method of discharging debts, by bills of exchange was introduced. This was an excellent* invention; these bills being as subservient in foreign commerce, as coins are in home traffic; for by shifting of debts and credits from one place to another, they so far answer all the purposes of money. Bills drawn betwixt places in the same country, are called Inland bills; as those drawn between different countries, are called Foreign bills of exchange.
In all countries there are peculiar laws and customs, relating to this business of exchanges, which merchants and others immediately concerned should be well versed in. It is not my design here to meddle with the practical part of this useful commerce, but to explain its theory or principles as briefly as I can. A part of what I here propose is so very well done to my hands in the*British Merchant, that I cannot do better in this place, than giving the following extract from that useful work.
“Suppose the tenant in Wiltshire is to pay for rent 100l. to his landlord in London; and the woollen-draper in London is to pay the like sum to his clothier in Wiltshire: Both these debts may be paid, without transmitting one farthing from the one place to the other, by bills of exchange, or by exchanging one debtor for the other, thus: That is, the tenant may receive his landlord’s order to pay 100l. to the clothier in the country; and the woollen-draper may receive his clothier’s order to pay the like sum to the landlord in town. These two orders are properly call’d bills of exchange; the debts are exchanged by them, that is, the woollen-draper in town, instead of the tenant in the country, is become debtor to the landlord; and the tenant in the country, instead of the woollen-draper in town, is become debtor to the clothier: And when these orders are comply’d with, the two debts between London and the country are discharged, without sending one shilling in specie from the one to the other.”
“In like manner, the warehouse-man in London is indebted in 100l. for stuffs, to the weaver in Norwich; and the linen-draper in Norwich is indebted in the like sum to the Hamborough merchant in London; both these debts may be paid by bills of exchange, or by the exchange of one debtor for the other, by placing one debtor in the other’s stead; that is, the warehouse-man may receive the order of his weaver, to pay 100l. to the Hamborough merchant; and the linen-draper may rereceive the order of the Hamborough merchant to pay the like sum to the weaver. These orders are bills of exchange; the debtor in one place, is changed for the debtor in the other; and thus both debts may be paid, without sending one single shilling in specie from the one city to the other.”
“If the debts reciprocally due between London and Norwich, are equal; whether they are 100l. or 10,000l. they may be all discharged in this manner by bills of exchange, without sending any money in specie from the one to the other.”
“But if the debts due from both places are not equal, then only the same quantity of debts on both sides, can be paid by bills of exchange. The ballance must be sent in money from the city, from whence the greatest sums are due. For example: If by the trade between London and Norwich, the former owes 10,000l. to the latter, and the latter no more than 9000l. to the former, it is manifest, that only the debts of 9000l. on each side can be discharg’d by bills of exchange; the ballance of 1000l. must be sent either from London or some other place indebted to London, to even the accompt between both the cities.”
“Let us suppose then, that to send and insure 1000l. in specie to Norwich, would cost 5l. or 10s. per Cent. which of the debtors in London would be willing to be at this charge? It is natural to believe that every one will endeavour to shift it off from himself, that every one will endeavour to pay his money by a bill of exchange; it is natural to believe that every one, rather than stand the cost and hazard of sending 100l. in specie, would pay 100l. 5s. in London for a debtor in Norwich, upon condition that the Norwich debtor should pay 100l. for him in that city. By which means the Norwich debtor would pay his debt of 100l. in London with less than that sum, while the London debtor would be obliged to give more than that sum for the payment of 100l. in Norwich. And if such for years together were the course of exchange between London and Norwich, there could be no question to which of the two cities a sum must be sent in specie to pay the ballance; that city undoubtedly pays the ballance that gives more than the par, that undoubtedly receives the ballance that gives less than the par for the bills of exchange. The course of exchange in this case would sufficiently decide, that the ballance of trade is on the side of that city that procures bills of exchange upon the most easy terms.”
Foreign exchanges further explained.
56. The above example taken between two English towns, explains the theory of exchanges very distinctly. And from hence it may be easily conceived, how the business of exchange may be carried on between any number of foreign towns. As, suppose that London is indebted to Paris in a sum of 100,000 ounces; Paris in a like sum to Hamborough; Hamborough in the same sum to Leghorn; Leghorn to Amsterdam; Amsterdam in the like sum to London. All these several debts may be cancelled and discharged by bills of exchange, without the transportation of one ounce of bullion or one penny of money. For instance, London discharges its debt at Paris, by a bill drawn upon Amsterdam; Amsterdam pays this bill by another drawn upon Leghorn; Leghorn again draws upon Hamborough; and lastly, by this rotation the debt from Paris to Hamborough becomes likewise discharged; and all the above named towns respectively are cleared of all accounts with each other. And the several debts above supposed being equal, the debts of the respective places will be discharged with the exchange at par, or without loss or gain to either. But as all the above towns may have mutual accounts, each with all the rest, and with many others; the real practice of exchange branches out into an immense labyrinth, not easily unfolded without much experience and application.
Parof exchange, what.
57. The exchange is said to be at par or even, between two places, when a given sum paid in the one, will purchase a bill for the like or a sum of the same intrinsic value, to be received in the other. To avoid all ambiguity, the several accounts in the preceding article were stated in ounces. But as all countries keep and state their accounts in their own money, and most places have pecuculiar coins of their own; this makes it necessary that merchants, who are citizens of the world in a stricter sense than any other, should know exactly the true proportional values of the monies of all countries in respect of one another; that is, how much fine silver, or fine gold, if the accompts are kept in gold, are contained in the respective standards or monies of the several countries to or with which they traffic. These proportions being known and stated, the monies of the world are thereby in effect reduced to one common standard; and it may be readily seen, how much of the money of one country is an equivalent to, or contains an equal quantity of silver with, a given sum in another country.
The equality of silver, expressed by different denominations of coins, constitutes what is usually called the par of exchange betwixt any two countries. In stating this par, some particular specie or sum of the money in one country, is usually made the unit or integer, which always remains fixed and unalterable; and the proportion or equality is expressed in specie of a smaller value of the other country; and it is in these specie that the price is expressed as the exchange varies: As if the exchange betwixt London and Paris be reckoned in pence and ecu’s, and a French ecu contains as much silver as there is in 29¼ pence sterling; then the ecu is the unit, and 29¼ is the par of exchange betwixt London and Paris. In the mercantile language of exchange, that country wherein the unit is established, as in the above instance Paris in respect of London, is said to give the certain for the uncertain; as London again gives to Paris the uncertain for the certain. London gives the certain for the uncertain, that is, the pound sterling for their schillings, to Holland, Flanders and Hamborough; and to France, Spain, Portugal and Italy, London gives an uncertain number of pence, as the exchange governs, for a certain sum in their money.
Those who are not accustomed to this business, are apt to be in doubt whether the exchange rising, for instance, be in our favour or against us. This doubt may be always cleared by this short rule: The higher the exchange between any two countries is, the more it is in favour of that wherein the unit or invariable sum is established; and the lower, the more in its disfavour. Thus, the higher is the exchange betwixt London and Amsterdam, the more is it in favour of London, as then the more Dutch schillings are given for the pound sterling. On the contrary, the higher is the exchange between London and Paris, the more is it against London, as then the French ecu exchanges for a greater number of pence sterling.
The true par of the exchange between different countries, difficult to be ascertained.
58. Those who have made the proper experiments, find that most of the foreign mints are very inaccurate; and this makes it difficult to ascertain what are the precise values in respect of one another, of the legal monies of different countries; and this is all that is usually aimed at by the calculators of the par of exchanges. But this knowledge, if it could be obtained with ever so much precision, would be of very little service to the merchant, as the state of the coins in most places now stands. What the merchant must regard, is, the amount in bullion of what he usually receives in consideration of a given sum of money.
If the ballance due from any country, be usually remitted in coins, and those coins be wore or otherwise diminished below the legal standard; this will make a seeming difference in the true par, and the exchange in appearance will be against that country when it is really even.
If in any country, gold be over-rated with respect to silver, this will naturally drain away its silver coin, and gold coins will become most current in large payments; In this case, the merchant will make gold his standard, and rate the exchange accordingly. This will create a difference from the nominal par of the exchange, which will be more or less, according as gold is more or less over-rated; and with this cause of over-rating gold, the lightness of the coins both gold and silver will also cooperate, in proportion to the quantities of them exported; from both which causes the difference between the true and nominal par may be very considerable.
These observations may serve to dispel the gloomy apprehensions which some are apt to entertain, from the course of exchange in general appearing so much against England; and they also plainly shew that the course of exchange betwixt different countries, is not so critical and exact a rule for measuring the ballance of trade, as is commonly imagined; since it is hardly possible to ascertain what is the true par. But the exportation of bullion, is a certain sign of the exchange being really in favour of that country to which it is sent; and the variations in the exchanges, point also the variations in the ballance of trade; though, in general, the rate of the exchange at a particular time, is scarce sufficient for determining on which side the ballance then turns.
Course of exchange, what.
59. The price at a certain time and place, of bills of exchange for given sums drawn upon another place, is called the course of exchange between those two places at that time; and this is frequently different from the par, and more or less than an equivalent in fine silver or fine gold is to be paid in one place, for a given sum to be received in the other. Thus, supposing the par of exchange betwixt London and Paris to be 29¼ pence sterling for a French ecu; it might happen at one time that a bill upon Paris might be purchased at London, at the rate of 28 pence for an ecu; and that at another time no bill could be had under 30½ or 31 pence.
As the ballance of accounts between the several trading nations of the world, must be continually varying, and frequently shifting to different sides; so the course of exchange will be ever fluctuating, and it will be more advantageous to make remittances through certain channels at one time, and by different ways at another. But as it would be difficult for the gross body of merchants to unravel these intricate clues, and to find out and supply each other’s wants and conveniences; particular persons apply themselves to this business, and drawing and remitting by bills of exchange is it self a distinct trade. The remitter* or trader in bills of exchange, must have a real stock or credit in the several places with which he corresponds; for bills, strictly speaking, pay no debts; they only transfer credit from one place to another; and whenever the demand for bills to one place, are greater than the remitters can answer by their credit or stock in other places, they must then transport as much bullion as will satisfy their correspondents. But the principal skill of a remitter consists in finding where and when bullion will fetch most, or where credit or bills are to be had cheapest, and where and when to transfer this credit to most advantage. For bills of exchange being substitutes for bullion, are themselves as much a commodity as bullion, or any thing else; and the dealers in them make their profits in the very same way that other merchants do, by observing the advantages of different markets.
Price of bullion, how influenced.
60. A demand for bills upon a particular place, raises their prices, as in other cases; and when these prices have got up to a certain degree above par, the price of bullion will be also advanced above the standard of the country. For, dearness of bills causes a demand for bullion to be exported, and in proportion of the demand to the stock in the market, the price of bullion will be raised. To take advantages when and wherever they offer, is the object and business of commerce. Again, by transporting of bullion the price of bills will be lowered; that again will gradually lower the price of bullion, until the prices of each are again brought to a par. The price of bills may be reduced below par; but bullion can never be lower than the established standard, the mint being always open to receive it at the standard or mint price.
National interest, how influenced by the course of exchange.
61. It seems, upon the first view of the thing, that a country which oweth a ballance to another, must pay a præmium upon all the bills that pass between them. As, supposing that in the accounts betwixt England and Holland, we owe the Dutch an 100,000 ounces; and that they owe us 90,000 ounces; and supposing also that this ballance of 10,000 ounces which we owe to them, brings the exchange against us one per cent. It seems, I say, as if we must pay this one per cent. not merely upon the ballance of 10,000, but upon the whole 100,000; and on the other hand, that we shall receive short from them one per cent. upon the whole 90,000 which they owed us; that is, that we must pay the Dutch 101,000, whilst they will discharge their debt to us with 89,100; so that our whole loss, upon the above suppositions, amounts to 1,900. This at first view seems to be the exact state of the case; but upon examining this matter a little closer, I think, it will appear that the loss to England by the exchange, is ordinarily no more than what falls upon the ballance of 10,000. Suppose the whole account at London to stand betwixt two persons, both Englishmen; B at London oweth D at Amsterdam an 100,000; C another Dutchman at Amsterdam oweth A at London 90,000. B pays to A 91,000 for a bill upon C to pay D 90,000; by this transaction the 90,000 Dutch debt at London is quite cleared, and what B lost was gained by A. If the affair had been transacted at Amsterdam, the gain would have fallen to the share of the debtor C, and the loss on the creditor D; for C with 89,100 would have purchased of D a bill for 90,000 upon B. But although affairs of this kind are always transacted between several persons, yet at last it comes to the same thing; and the whole gains, so far as bills will reach in liquidating the accounts, falls to the creditors on one side of the water, and to the debtors on the other. In the case above supposed, if some of the Dutch creditors reside at London, or some of the English creditors at Amsterdam, this will turn the scale to the prejudice of England. These observations plainly shew, that any calculations of national profit or loss from the course of exchange, must needs be very precarious. Yet is it almost certain that by these transactions, that country will sustain some loss against which the exchange bears; and there is no other way of bringing the ballance even, but by the exportation of goods or bullion.
The course of exchange influenced by various causes.
62. A demand for bills upon a particular place, may proceed from various causes; but these are chiefly reducible to the ballance of trade upon the whole, or between particular places. Bullion, like other commodities, traverses through different climes, and is ever of least value where it most abounds. Spain and Portugal being the chief sources from whence this commodity is drawn to the rest of Europe, it is there cheapest and their chief staple; and hence, in the usual phrase, the ballance of trade and the course of exchange will be every where against them. This is natural, and is no more to their prejudice, than it would be to the English to have the ballance against them, if the money of Europe was tin; as would then be the case, because we have the most considerable mines of that metal. In like manner, and for the same cause, it is natural that the ballance of trade, and with it the course of exchange, between the more southern and the northern parts of Europe, should be in favour of the latter; and this in general is the matter of fact.
The business of exchange between England and Germany, and the northern countries is chiefly transacted at London and Amsterdam. The course of exchange then between us and Holland, indicates how the state of accounts stands between us and all those countries in general, but not in respect of any one in particular. The ballance of our trade to Holland may be greatly in our favour, and yet the exchange to Amsterdam be generally against us; both which are supposed to be matters of fact. Our debt to foreigners operates in the same manner as a ballance of trade against us, to the whole amount of the dividends owing to them; and the same is true as to all foreign subsidies. If those dividends paid to foreigners contribute to enlarge our manufacturies and exports, our loss is thereby alleviated; but if they do not, that is, if our commerce remains in statu quo, we are losers to their whole amount, and that equally whether their produce is exported in goods or bullion; if they are sent in goods, they prevent so much bullion from coming to us. This is an affecting consideration, and the sources of this country must be prodigious great to be enabled to sustain so great a burden. But let us not be too secure, and neglect a matter of so much importance.
Bullion is not exported till the exchange is at a certain limit from par.
63. Merchants always prefer bills of exchange, whilst they are to be had at moderate rates, before bullion or cash, which with them is the same thing; and bullion is never transported from one place to another, till the exchange is at a certain distance from par; and this distance is again limited by the expence of transporting bullion, wherein is included, besides the freight, commission and insurance. And hence, the whole fluctuation in the course of exchange is very different between different places. Betwixt London and Paris, the exchange must vary about ¾ per cent. from par, before bullion, at least in any quantity, will be sent from either side. The freight of bullion from London to Calais is about ¼ per cent. from thence to Paris about ?, insurance in the whole to Paris about ?, which make altogether ¾ per cent.; and so much at least the exchange must be against us, before any bullion will be sent from London to Paris; and it must be as much in our favour, before any bullion will be brought hither from thence. By this reckoning, the exchange betwixt London and Paris may vary 1½ per cent. before gold or silver will move towards either side. To Amsterdam, the expence of transporting bullion from London, is less than to Paris; to some other places, this expence is greater, and accordingly the exchange varies less or more between different countries; because, as hath been before observed, the transportation of bullion keeps the course of exchange within a certain limit.
Bills are frequently drawn, and bullion carried, between two places that are even in their accounts, to pay debts in a third place. If the exchange betwixt Calais and Paris be against Calais, and it be at par directly between Calais, London and Paris; a merchant at Calais will pay his debts at Paris by a bill upon London: And if the exchange betwixt him and Paris and betwixt London and Paris will permit, our Calais merchant will purchase a London bill by sending gold thither, instead of sending it directly to Paris. It is in finding and taking the advantages of the several markets, that the mystery of this traffic by exchange doth principally consist.
This short account may suffice to explain the general theory of exchanges; a theory curious in it self, and the practical part is extreamly useful for the purposes of foreign commerce. But to meddle with that, doth not fall within the compass of my design.
The End of theFirst Part.
MONEY and COINS.
wherein is shewed,
That the established Standard of MONEY should not be violated or altered, under any pretence whatsoever.
Printed: Sold by G. Hawkins at Milton’s Head, by the Middle Temple-Gate, in Fleet-street.
TO THE RIGHT HONOURABLE HENRY BILSON LEGGE,
THE subject of the following sheets, peculiarly requires and deserves the protection of an able and honest patron; for, important as it is to the public welfare, few men perfectly understand it, and too many have industriously perplexed it, some perhaps, for private views of their own.
The free access which your friendship hath allowed me, hath given me many opportunities of observing the close application you are always ready to give to every subject, in which the interest of your country is concerned; and of admiring the happy talent you possess of explaining those which are of the most intricate nature, with the greatest clearness, strength, and precision.
Permit me therefore, Sir, to inscribe the following tract to you, as a token of the affection I bear to your private as well as of the respect I pay to your public character.