The Online Library of Liberty

A project of Liberty Fund, Inc.

• Notice.
• Mr M C Culloch’s Publications.
• Treaties and Essays On Subjects Connected With Economical Policy; With Biographical Sketches of Quesnay, Adam Smith, and Ricardo
• A Treatise On Money. 1
• Sect. I.—: Circumstances Which Led to the Use of Money. Principal Properties Which Every Commodity Used As Such Ought to Possess. Not a Sign Or a Measure of Value, But a Real Equivalent.
• Sect. II.—: Circumstances Which Regulate the Exchangeable Value of Money.
• Sect. III.—: A Moderate Seignorage On Coined Money Advantageous. Principles Which Should Regulate Its Amount. 1
• Sect. IV.—: Expense of a Currency Consisting of the Precious Metals.
• Sect. V.—: Paper Money. Principle On Which Its Value Is Maintained.
• Sect. VI.—: Whether Gold Or Silver Should Be Adopted As the Standard of the Currency, Or Whether It Should Consist of Both.
• Sect. VII.—: Standard of Money. Degradation of the Standard In Rome, France, Great Britain, and Other Countries. Effects of This Degradation.
• Tables Relative to the Money of the United Kingdom.
• Treatise On the Circumstances Which Determine the Course of Exchange.
• Inland Exchange.
• Foreign Exchange.
• Sect. I.—: Nominal Exchange.
• Sect. II.—: Real Exchange.
• Sect. III.—: Computed Exchange.
• History and Influence of Bills of Exchange.
• Essay On Interest and Usury Laws.
• A Treatise On the Letting and Occupancy of Land.
• 1.: Money Rents.
• 2.: Proportional Rents.
• 3.: Produce Rents.
• 4.: Service Rents.
• An Essay Showing the Erroneousness of the Prevailing Opinions In Regard to Absenteeism.
• Sketch of the History of Commerce, to the Sixteenth Century.
• Sect. I.—: PhŒnician Commerce.
• Sect. II.—: Grecian Commerce.
• Sect. III.—: Roman Commerce.
• Sect. IV.—: Italian Commerce In the Middle Ages.
• Sect. V.—: Vasco De Gama and Columbus.
• An Essay On the Rise, Progress, and Decline of Commerce In Holland.
• An Essay On the Rise, Progress, and Decline of the Hanseatic League.
• Essay On the Origin of the Compass.
• Sketch of the Progress of Maritime Law.
• An Essay On the Colonial System of the Ancients.
• Sketch of the Life and Writings of Francis Quesnay.
• Sketch of the Life and Writings of Adam Smith, Ll.d.
• Sketch of the Life and Writings of David Ricardo, Esq., M.P.

TREATISE ON THE CIRCUMSTANCES WHICH DETERMINE THE COURSE OF EXCHANGE.

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 treatise is to explain the nature of these transactions, and the principles on which they are founded.

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 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 changed 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.”1

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 £100,000, £500,000, 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 £100 or £1,000 in Glasgow will purchase a bill for £100 or £1,000 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 £100,000, whilst the latter only owes the former £90,000, 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 £10,000, due by Glasgow, depresses the exchange on London one per cent., it appears, at first sight, that it will cost Glasgow £101,000 to discharge her debt of £100,000 due to London; and that, on the other hand, £89,100 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 £10,000. Thus, supposing that A of Glasgow owes D of London £100,000, and that C of London owes B of Glasgow £90,000; A will pay to B £91,000 for a bill or order on C to pay D £90,000. In this way, the £90,000 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 £89,100, would have purchased of D a bill for £90,000, 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 £100 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 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 ½ per cent.; but, owing to the greater facility of communication, this premium is now reduced to twenty days’ interest, or to about ¼ 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 £100,000, while London only owes Glasgow £90,000, a reciprocal transfer of debts may be made to the extent of £90,000. But the Glasgow merchants cannot discharge the additional £10,000 by means of bills on London; for, by the supposition, London only owed them £90,000, 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 Dr 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 ½ or ¼ 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 5½ 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 generally 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. 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 £5 and under. These orders cost 3d. for sums of £2 and under, and 6d. for sums between £2 and £5 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, 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 £8,494,498, 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, by preventing those disturbances to which the intercourse between distant and independent countries is always subject, prevents those sudden fluctuations which frequently occur 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.1

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.

I. 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 other 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.1

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.”1 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 value of gold and silver, compared with corn, labour, etc., 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, etc. 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 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, etc., 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 at true par, unless adequate allowance be made for this difference of value. Thus if, 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 Dr 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 Lacedæmon. 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.”1

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.2

It consequently results, that whatever occasions a rise or fall of the value of the precious metals in one country, proportionally affects 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 diminished. 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.

II. 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, 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, etc., London gives the certain, or the pound sterling, for an uncertain or variable number of francs, florins, etc. 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 2,500 or 25,000 francs, payable in Paris, sells in London for £100 or £1,000, 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, clipped, or rubbed, as not to contain so much bullion as 25 fr., but ten per cent. less, the exchange between London and Paris would be at real par when it was nominally ten per cent. against London;1 and if, on the other hand, the pound sterling were equal to its mint standard, while the franc was ten per cent. less, it would be at par when it was nominally ten 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 re-coinage 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.1

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 2¼d.; and the exchange is said to be at par when Constantinople gives about 109 piastres for £1 sterling. It is needless almost to say, that the nominal exchange, estimated by the old par of eight piastres to £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 grotes and ¼ of Hamburg currency be equal in value to a pound sterling, or 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 34s. 11¼g. 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 £3, 17s. 10½d. per oz., and silver 5s. 2d., an ounce of gold would then be worth 15·07 ounces of silver, and twenty of our standard shillings would then contain as much pure silver as 35s. 11 grotes and ¼ Hamburg currency. But if the ounce of gold were £3, 17s. 10½d., and silver 5s. (which it was on 2d January 1798), the ounce of gold would then be worth 15·57 ounces of silver. If £1 sterling at par, therefore, be worth 15·07 ounces of silver, then at 15·57 it would be at three per cent. premium; and three per cent. premium on 34s. 11¼d. is 1 schilling 1 grote and , so that the par, when gold is to silver as 15·57 to 1, will be 36 schillings 1 grote and . The above calculation will be more easily made by stating, as 15·07 : 34-12¼ :: 15·57 : 36-1.”1

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 seignorage 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;1 but they will not pass anywhere else, except at their bullion value.2

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, are now 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 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 1821, and sustained the value of our currency on a level 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 (as shown in the previous treatise) on the 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.,1 £108, 6s. 8d. Irish money became equal to only £100 of British money, so that the exchange between Great Britain and Ireland was said to be at par when it was nominally 8⅓ 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 ⅚ per cent. in favour of Dublin to ⅔ per cent. against it. In September 1797 it was at 6 per cent., or 2⅓ per cent. in favour of Dublin. The amount of Bank of Ireland notes in circulation in January 1797 was only £621,917; whereas in April 1801 they had increased to £2,286,471, and the exchange was then at 14 per cent., or 5⅔ per cent. against Dublin. In 1803, the Bank of Ireland notes in circulation averaged £2,707,956, and in October that year the exchange was quoted at 17 per cent., that is, 8⅔ 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 £621,917 to £2,707,956, or in the proportion of 1 to 4·3, those of the Bank of England were only increased from £9,181,843 (their number on 7th January 1797), to £16,505,272, or in the proportion of 1 to 1·8. 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 subsequently 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 £16,505,272, and those of the Bank of Ireland to £2,707,956. 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 £3,251,750, being an increase of not more than £543,794 in the space of seven years, or at the rate of 2 per cent. per annum; but in the same period (from 1803 to 1810) the issues of the Bank of England were increased from £16,505,272 to £22,541,523, or at the rate of 5 per cent. per annum. And this is not all. According to Mr Wakefield1 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 countervail 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, etc., 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 banknotes 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 16¼ per cent., that of Belfast on London was at 5¼; 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, 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!1

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,2 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, etc., 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, etc., 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 £50 per hogshead, from its scarcity at Hamburg would sell at £100. The merchant in this case would immediately export. Upon the sale of his sugar, he would draw a bill upon his correspondent abroad for £100, which he could at once convert into cash by selling it in the bill market at home, deriving from this transaction a profit of £50, under deduction of the expenses of freight, insurance, commission, etc. 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 £100, leaving apparently no profit whatever to the exporter. He would, however, as before, draw his bill on his correspondent for £100; and, as foreign bills would bear a premium of 100 per cent., he would sell this bill in the English market for £200, and thus derive a profit from the transaction of £100 depreciated, or £50, estimated in undepreciated currency,—deducting, as in the former instance, the expense of freight, insurance, commission, etc.

“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 £50, will sell here at £100. The importer immediately orders his correspondent abroad to send the linen, for the payment of which he purchases at £50 a foreign bill in the English market; and, on the sale of the consignment for £100, he will derive a profit amounting to the difference between £50 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 £50 foreign bill for less than £100. But as the prices of commodities here will have risen in the same proportion as the money has been depreciated, he will sell his linen to the English consumer for £200, and will, as before, derive a profit amounting to the difference between £100 depreciated, or £50 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

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, etc., 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, etc., is necessarily 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 late war, amounted to 2 or 2½, had increased, in the latter part of 1809, to about 7, 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.

This principle also accounts for the greater steadiness of the real exchange between closely neighbouring countries. It costs considerably less to transmit bullion from London to Dublin or Paris, than to New York or Petersburg. 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, 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 £3,000 free on board at Odessa, may be worth £4,500 when imported into England; but the foreign merchant would not, unless he imported the corn, be entitled to draw on London for more than its original cost, or £3,000. It is clear, therefore, on the slightest consideration, that the fact of the imports being more valuable than the exports, does not authorise the conclusion that the balance of payments is unfavourable. A favourable or an unfavourable balance depends entirely on the sum due to foreigners for imported commodities being less or more than the sum due by them for commodities purchased 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 European countries, and in the United States, 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 we hope to be able to show, in opposition to the commonly received opinions, that, under ordinary circumstances, the value of the imports always exceeds the value of the 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 of greater value. When an English merchant orders a quantity of Polish wheat, he supposes it will sell for so much more than its price in Poland as will suffice to pay the cost of freight, insurance, etc., and to yield, besides, the ordinary rate of profit on the capital employed in the business. 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 more valuable products. 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 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, importer’s profits, etc.

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 the English sail ships on cheaper terms than their own countrymen, 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, deduced from the custom-house returns, almost always exceeds the value of the exports.1 And though our practical politicians have been accustomed to consider the excess of exports over imports as the only sure criterion of an advantageous commerce, “it is nevertheless true, that the real gain of the United States has been nearly in proportion as their imports have exceeded their exports.”2 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 5,000 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, etc., 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, etc., 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 we should otherwise import more than we exported, 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, etc., for £10,500, rather than £11,000 or £12,000? The wealth of a state is made up of the wealth of individuals. And we have yet to learn that any 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, and indeed the only, argument insisted on by those who prevailed on the legislature to declare the French trade a nuisance,1 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 highly advantageous. And there cannot be a doubt, that an unlimited freedom of intercourse between the two countries would be of great service to both. Supposing it to be so arranged, does any one 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 absentees, 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 nett 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, 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 £1,000, 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 £20 of premium for a bill of £1,000, payable in Paris, or incur an expense of £20 in remitting £1,000 worth of bullion direct to that city. If the prices of cloth in Paris and London be such, that it would require £1,030 to purchase and send as much cloth to Paris as would sell for £1,000, he would no doubt prefer buying a bill or exporting bullion. But if, by incurring an expense of £1,010, the debtor may send as much hardware or cotton to Paris as would sell for £1,000, 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 cannot be otherwise 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 £1,000 worth of gold or silver from England to discharge a debt in Paris, if he could invest £970, £980, £990, or any sum under £1,000, 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 £100, if he could effect the same object by exporting indigo which cost only £95? 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 their 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.”1

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 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 æra 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.

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 ten-fold 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, etc. 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 marchandise par excellence, we may be assured that it will seldom appear in the list of exports or imports, while there is any other 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 premium 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 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 countervailed 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 conjoined 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 pence 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 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.”1

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 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 statements made in the preceding treatise (p. 73), render it unnecessary to enter into any detailed examination of this opinion. The question 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? And the statements referred to 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 chairman of the Committee on the High Price of Bullion, and celebrated for the extent and accuracy of his information on such subjects, 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,1 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 amount of coffee, tea, sugar, indigo, etc. 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,1 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 production 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.

In corroboration of this argument, we may mention that it appears, according to the official statement, that the expenses incurred by this country on account of the armies acting in Portugal and Spain during the following years, were as under:—

Of which, according to the same official statement, only the following sums were remitted in coin or bullion:—

Of the sum of five millions voted to our allies in 1813 and 1814, not more than £300,000 was sent in bullion, the rest being made up by the exportation of manufactured goods and military stores.1 The high market price of gold and silver in 1809, 1810, etc., could not, therefore, be owing to the purchases made by Government, for they were not greater than the sums exported by the East India Company in 1798 and 1799, and in 1803, 1804, and 1805, when there was scarcely any perceptible rise in the price of bullion. The immense additions made to the paper currency in 1809, 1810, etc., sunk its value compared with bullion, and were the true cause of the unfavourable nominal exchange of that period.

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 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, etc., per cent., the computed exchange will be six, seven, eight, etc., per cent. in our favour. And, on the other hand, if it be unfavourable to the extent of one, two, three, etc., per cent., the computed exchange will be only four, three, two, etc., 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 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, etc., 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 advantageous to export bullion, because of its being more valuable on the Continent. None will contend that, in 1809, 1810, etc., 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 every body’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, etc., 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, etc., 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: £100 worth of bullion at Hamburg would therefore cost him £101, and the charges of importation would increase the sum to £104. Upon the subsequent sale, then, for £105 of depreciated currency in the home market, he would derive from the transaction a profit of £1. 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.”1 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, etc., 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 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.

[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 drawee, 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.

[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.

[1 ] Ricardo, “Principles of Political Economy,” etc., 1st ed. p. 175.

[1 ] Bullion Report, p. 22, 8vo. ed.

[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.

[1 ] It is necessary to observe, that it is here supposed that the clipped or degraded money exists in such a degree of abundance as only to pass current at its bullion value. If the quantity of clipped money were sufficiently limited, it might, notwithstanding the diminution of weight, pass current at its mint value; and then the par would have to be estimated, not by its relative weight to foreign money, but by the mint price of bullion. This principle must be constantly kept in view.

[1 ] Wealth of Nations, p. 210.

[1 ] An Inquiry into the Effects produced on the National Currency by the Bank Restriction Bill, etc., 2d edit., p. 94.

[1 ]Ante, p. 26.

[2 ] Previously to 1817, no seignorage had for a very long period been deducted from either the gold or silver coins of Great Britain; but in the great recoinage of that year, the value of silver was raised from 5s. 2d. to 5s. 6d. an ounce, or nearly in the proportion of 6½ per cent. The gold coins, however, are still coined free of expense, and no variation has been made in their standard. The proportion of silver to gold in the coins is now as 14 to 1; but their proportion to each other according to their mint valuation, is as 15 to 1.

[1 ] By a proclamation of James II. The arrangement was continued by the revolutionary government, and was confirmed by proclamation, 29th September 1737. But in 1825 the currencies of Great Britain and Ireland were assimilated.

[1 ] “Account of Ireland,” vol. ii. p. 171.

[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, etc.; from Sir Henry Parnell’s pamphlet on the same subject; and from the pamphlets of Lord King, Huskisson, etc.

[2 ] Paris, 1823, 4 vols. 8vo.

[1 ] Observations, etc., p. 48.

[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.

[1 ] Prohibition Act, 1st William and Mary.

[1 ] See “Reply to Mr Bosanquet’s Observations on the Report of the Bullion Committee,” p. 17.

[1 ] Wheatley “On the Theory of Money,” p. 219.

[1 ] The real exchange might, probably, be affected to the extent of one or two per cent.

[1 ] Comparative Estimate, etc.

[1 ] Edinburgh Review, vol. xxvi. p. 154.

[1 ] Observations, etc., p. 91.