Front Page Titles (by Subject) ESSAY No. LX. - The Principles of Free Trade
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ESSAY No. LX. - Condy Raguet, The Principles of Free Trade 
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. LX.
october 13, 1830.
The doctrine of exchange. Nominal advance of six per cent. above par, shewn to be below par.
IT is said that the freemasons have a method of discovering who is and who is not of the craft, by very slight indications. The same is true of the fraternity of political economists, who can discover in five minutes’ conversation whether a man understands the subject or not. One of the surest evidences of an entire want of acquaintance with the principles of the science, is, talking about the balance of trade being against the country, and draining the specie from it. Whenever a reasoner advances that doctrine, depend upon it he knows nothing of the matter of which he professes to be the expounder, and we advise all students whose minds have been imbued with that heresy, to wash themselves free from it, at the very outset. True it is, that the number of those who still hold on to it, is very limited, compared to what it formerly was. The main pillars of the theory were, the current rate of exchange on England, and the custom-house returns of the value of imports and exports. The former of these has been utterly demolished by the report of General Smith, made to the Senate last winter, and by the report of the Secretary of the Treasury, on the relative value of gold and silver. The latter pillar is fast tumbling to pieces, and we are quite sure, that if the restrictive system were not intimately allied to the fortunes of some political leaders, it would very soon go by the board, and be abandoned by every man of sense in the country.
As to the doctrine of exchange upon England, it has now been conclusively demonstrated, that a Spanish dollar is not the equivalent of 4s. 6d. sterling, as is commonly supposed, but has, for many years, been only equal to about 4s. 1d. to 4s. 2d. So that when we make a calculation upon 4s. 6d. as the par, we assume an erroneous starting point, and consequently exchange may appear to be above par, when it is in reality below par, as is the case at this moment, as we shall show.
The nominal rate of a bill on London, payable in gold, which is the currency in which all our merchants contract to pay for what they purchase, is at this moment six per cent. premium. This nominal rate, it will be observed, does not imply that 106 ounces of pure gold must be here paid for a bill on London that will there command 100 ounces of the same, but it simply means that, according to the mercantile custom of computing exchange, by which a Spanish dollar is erroneously supposed to be capable of discharging a debt of 4s. 6d., it would require 106 Spanish dollars to pay a debt for 100 times 4s. 6d. As soon, however, as the calculation is stripped of its fallacy, the true state of the case appears. It is perceived that the debt is due in gold, and that the tender of payment is made in silver, which the Englishman no more agreed to take than he did to take cotton or tobacco, and consequently, that, in estimating the real rate of exchange, the true value of the silver dollar in gold currency must be ascertained, that being the true and only par for the time being.
Now, by this rule, let us examine a particular case. A merchant imports an invoice of goods amounting to £100 sterling. The Spanish dollar is worth, in London, 4s. 2d., being at the rate of about 4s. 10d. per ounce. If he send dollars to London to pay this debt, it will require 480, and not 444,44, according to the common erroneous mode of computation. Unless, therefore, he is compelled to pay for his bill more than 480 dollars, it cannot be said to cost a premium. Now, what is the fact at the present moment? If a merchant buy a bill at sight upon London at 6 per cent., nominal premium, the broker will make out his account thus:
So that it costs the purchaser for his bill $7.71 less than the number of dollars he had contracted to pay, which, instead of being 6 per cent. against him, is, in reality, more than 1½ per cent. in his favour.
The real truth is, that the variation of exchange from the true par, between two great trading communities, one way or the other, can never, for any length of time, be greater than the expense of transporting the coin from one country to another. Two per cent. may be looked upon as constituting the utmost limits of fluctuation between this country and Europe, in times of peace; for, as the freight, insurance, commissions, brokerage, &c., united, do not exceed that amount, no merchant who has money to pay, or to receive, will agree to lose more. It is now fortunate for the country, that documents have been placed before the public, by the Secretary of the Treasury, sufficient to settle this matter for ever. It has been shown that, although between the years 1811 and 1817, nominal exchange in some of our cities, upon London, ranged from 20 per cent. below par, to 20 per cent. above par, yet that during that whole period, the real exchange, measuring gold against gold, or silver against silver, was never more than three per cent. The nominal variation arose partly from the same cause as that which now operates, to wit, a change in the relative value of gold and silver in the markets of the trading world, from the proportion of one to fifteen to that of about one to sixteen, but chiefly from another cause, which we shall briefly explain. Prior to 1814, the currency of the United States was gold and silver, and bank paper exchangeable for gold or silver, whilst that of Great Britain, for many years, was inconvertible paper, greatly depreciated. During that time nominal exchange was below par, because a silver dollar of United States’ currency was worth more than 4s. 6d. of British paper currency. In August, 1814, all the banks in the United States, south of New England, stopped payment, in consequence of which the currency of this country became depreciated, whilst that of Great Britain happened, at the same time, to become meliorated. Nominal exchange then rose above par, because 4s. 6d. of British paper currency was less depreciated than a paper dollar of our currency. In 1817, our currency was restored to a sound silver state, and in 1821, that of Great Britain was restored to a sound gold state, and since the latter period, the nominal premium on exchange between the two countries has been occasioned solely by the change in the relative value of gold and silver, which has been operative in a greater or less degree for fifteen years, controlled by the operations of commerce, which may influence, as we have stated, the exchange, to the extent of two per cent., one way or the other.
To all this reasoning, we are prepared to hear it urged, by the skimmers in political economy, “This is theory—let us have facts.” Well gentlemen, you shall have facts. The first we will give you is the following:
From the New York Gazette of Sept. 29.
“We understand, from an intelligent merchant, that specie is now on its way from London to the United States, and daily we remark arrivals of specie from almost every part of the world—a strong evidence that the United States stands now a creditor to all the leading marts of commerce.”
Will this answer your purpose? If not, perhaps the following will:
From the National Intelligencer of Oct. 6.
“All the World in Debt to the United States.—The packet-ship Robert Edwards, from London, has on board about $50,000 in specie. This is a profitless remittance, but the best one by which the merchants could get back the proceeds of their shipments. Exchange on the United States is therefore so much above par, in London, that the excess is sufficient to pay all charges of freight, insurance, &c., on the transmission of specie.—Journal of Commerce.”
Now, as this money was shipped at London in August, in consequence of orders, written no doubt by the American owners, in July, it is only necessary for us to know what was the rate of exchange on London, in this country, at the time those orders were written, to put the seal for ever upon this disputed question, and to settle it, so conclusively, that again to attempt to refute it would be as silly as to enter into a serious argument to prove that two and two are four.
We happen to have before us “Canfield’s American Argus,” of 19th July, 1830, containing prices current of stocks and exchange, in which bills on London at that period are quoted as follows:
Now, we would ask, would any merchant of common sense, if he could sell a bill at 6 per cent. premium, be so unmindful of his interest, or so ignorant of his business, as to prefer to import the money due to him in England, at the certain loss of that premium, besides the expenses of freight, insurance, and commissions incurred by the transmission of the coin? No one, however obtuse his intellects, will pretend to assert it, and we do really think that the balance-of-trade-men have now, by this draining of Great Britain of her specie, met with a blow, in their favourite theory of exchange, which they cannot survive.