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.

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.

[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.