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Subject Area: Economics
Topic: Free Trade

ESSAY No. XXIX. - Condy Raguet, The Principles of Free Trade [1835]

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The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

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ESSAY No. XXIX.

march 27, 1830.

Theory of the balance of trade being proved by the rate of exchange on England to be against the United Sates, shewn to be fallacious. Cause of the nominal high rate of exchange pointed out. The true par shewn.

THE Baltimore Gazette has recently re-published a pamphlet, entitled “Observations on the Currency,” which is full of those heresies in relation to the balance of trade and the rate of exchange, that must ever stand in the way of any correct understanding of the subject of currency. The writer talks of the balance of trade as having been so much against this country at one time, as to occasion a rise in the price of bills of exchange on London to 15 or 20 per cent. premium; as if any merchant, who had a debt to pay in England, would throw away so large a sum, when he could send the money, at an expense of two per cent., for freight and insurance. The well known fact that gold and silver can be shipped to Europe at a cost not exceeding one and a half, or two per cent., ought to put at rest all theories which teach that exchange amongst an intelligent, speculating, eagle-eyed, mercantile population, can ever depart from the true par, above or below, to a greater extent than the cost of trans-shipment of the precious metals.

But how happens it, some may ask, that exchange on London is now quoted in the prices current at 8 per cent. premium? The answer is simple enough. The currency of Great Britain, for all sums above 42 shillings, is gold; in the United States it is silver; and as the quantity of gold contained in the British pound sterling (or sovereign) is convertible, not only in England, but in France, and in all other parts of Europe, South America and the West Indies, and even in this country, into a greater quantity of silver than is contained in $4.44, that sum is no longer the par upon which any calculation is to be made of the rate of exchange. All estimates, therefore, which assume $4.44 in silver, as the par of a pound sterling in gold, will of necessity be erroneous.

That this position is true, can easily be seen by a reference to the rate of exchange on France and Amsterdam, where the currency, as with us, is silver. It is quoted in the same price current, on Paris, at 5 francs 35 centimes per dollar, that is, for one silver dollar here, a bill can be purchased, which in France will command 5f. 35c. Now what is the par of a dollar estimated in francs? The 5 franc piece of France is equivalent by tale, according to the report of the director of our mint, made in January 1829, to 93 hundredths and 2 mills of a dollar, and consequently, 5 francs 35 centimes are equivalent to about 99¾ cents, which is as near par as may be, taking into account a small difference which exists in the purity of the two coins.

On Amsterdam, the exchange is quoted at 39½ to 40 cents per guilder. The par of the guilder, in our silver currency, is 40 cents, so that, taking the rate of 39½ cents per guilder, it will appear, that for forty cents, American silver money, a bill can be bought on Amsterdam for 39½ cents silver money, which is an advance of one and a quarter per cent. The exchange on Hamburgh would give the same result. Now if the premium on sterling bills did not arise from the cause we have assigned, would not our merchants, who have debts to pay in England, buy bills on France, Amsterdam, or Hamburgh, which they can get at, or near par, and re-invest the amount in those countries in bills on England, so as to save 7 or 8 per cent.? Most assuredly they would. The reason, therefore, they do not attempt it, is, that they find in France, Amsterdam and Hamburgh, that the same premium is demanded for bills on London which they would have to pay here, and arising from the same cause, to wit, that the relative value of gold and silver, in all the markets of the trading world, including those countries where they are produced, has undergone a change, and that an ounce of gold, which, twenty years ago, was worth but fifteen ounces of silver, will now sell for sixteen ounces, or thereabouts. As further proof of this, let the British prices current for several years past be examined, and it will be seen that dollars have been generally quoted at about 4s. 10d. per ounce, which is equal to about 4s. 2d. each dollar. At this rate, a British pound sterling, or sovereign, will purchase in England 4 silver dollars and 80 hundredth parts of a dollar, which is precisely the amount which must be paid in the United States for a bill for this very pound sterling. Now we would ask any sensible man, if a bill on London can be purchased in this country for £100 sterling, by the payment of 480 silver dollars, which is the amount called for by the nominal premium of 8 per cent., and if the said bill can be converted in London into exactly 480 silver dollars, whether it can be said that exchange is against the country? And if not, what becomes of all the fallacy about the balance of trade, upon which so much of the reasoning of the Baltimore writer is founded? It all vanishes before the touch of analysis, as we shall shew upon a future occasion.

In regard to the 15 or 20 per cent. premium on bills, to which the writer above referred to alludes, it also was a mere appearance, and not a reality. It arose partly from the cause we have just explained, but chiefly from the difference between two paper currencies of different degrees of depreciation. We well recollect to have seen bills on London at 20 per cent. discount, and afterwards at 20 per cent. premium; and yet during the whole of this fluctuation, there was never a moment when real exchange varied more than 2 or 3 per cent. In one case the currency of Great Britain was greatly depreciated, whilst ours was sound; and in the other case, viz., in the year 1815, her currency had become greatly restored, whilst ours had become inconvertible paper.