Front Page Titles (by Subject) Part III, Chapter III: Further explanations of the nature of the Exchanges - Essai sur la Nature du Commerce en Général
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Part III, Chapter III: Further explanations of the nature of the Exchanges - Richard Cantillon, Essai sur la Nature du Commerce en Général 
Essai sur la Nature du Commerce en General, edited with an English translation and other material by Henry Higgs, C.B. Reissued for The Royal Economic Society by Frank Cass and Co., LTD., London. 1959.
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Part III, Chapter III
Further explanations of the nature of the Exchanges
We have seen that the exchanges are regulated by the intrinsic value of specie, that is at par, and their variation arises from the costs and risks of transport from one place to another when the balance of trade has to be sent in specie. Argument is unnecessary in a matter which we see in fact and practice. Bankers sometimes introduce refinements into this practice.
If England owes France 100,000 ounces of silver for the balance of trade, if France owes 100,000 ounces to Holland, and Holland 100,000 to England, all these three amounts may be set off by bills of exchange between the respective Bankers of these three States without any need of sending silver on either side.
If Holland sends to England in January merchandise of the value of 100,000 ounces of silver and England only sends to Holland in the same month merchandise to the value of 50,000 ounces (I suppose the sale and payment made in January on both sides) there will be due to Holland in this month a balance of trade of 50,000 ounces, and the exchange on Amsterdam will be in London in January 2 or 3 per cent. above par, or in the language of exchange, the exchange on Holland which was in December at par or at 35 escalins to the pound sterling in London will rise there in January to about 36 escalins. But when the Bankers have sent this balance of 50,000 ounces to Holland the exchange on Amsterdam will naturally fall back to par or 35 escalins in London.
But if an English Banker foresees in January, owing to the sending into Holland of an unusual quantity of merchandise, that at the time of payments and sales in March Holland will be indebted considerably to England, he may instead of sending the 50,000 écus or ounces due in January to Holland, furnish in that month bills of exchange on his Amsterdam correspondent payable at double usance or two months, the amount of the value to be paid on maturity, and by this method profit on the exchange which in January was above par and in March will be below par, and so gain doubly without sending a sol to Holland.
This is what Bankers call speculation, which often causes variations in the exchanges for a short period independently of the balance of trade; but in the long run we must get back to this balance which fixes the constant and uniform rule of exchange. And though the speculations and credits of Bankers may sometimes delay the transport of the sums which one City or State owes to another, in the end it is always necessary to pay the debt and send the balance of trade in specie to the place where it is due.
If England gains regularly a balance of trade with Portugal and always loses a balance with Holland the rates of exchange with Holland and Portugal will make this evident: it will be seen that at London the exchange on Lisbon is below par and that Portugal is indebted to England. It will be seen also that the exchange on Amsterdam is above par and that England is indebted to Holland. But the quantity of the debt cannot be seen from the exchanges. It will not be seen whether the balance of silver drawn from Portugal will be greater or less than what has to be sent to Holland.
There is however one thing which will always shew at London whether England gains or loses the general balance of her trade (by general balance is understood the difference of the individual balances with all the foreign states which trade with England), and that is the price of gold and silver metal but especially of gold (now that the proportion between gold and silver in coined money differs from the market rate, as will be explained in the next Chapter). If the price of gold metal in the London market, which is the centre of English trade, is lower than the price at the Tower where guineas or gold coins are minted, or at the same price as these coins intrinsically, and if gold metal is taken to the Tower in exchange for their value in guineas or minted coins, it is a certain proof that England is a gainer in the general balance of her trade. It proves that the gold taken from Portugal suffices not only to pay the balance which England sends into Holland, Sweden, Muscovy, and the other States where she is indebted, but that there remains some of the gold to be sent to the Mint, and the quantity or sum of this general balance of trade is known from that of the specie coined at the Tower of London.
But if the gold metal is sold in the London market above the Tower price, which is usually £3.18.0 an ounce, the metal will no longer be taken to the Mint, and this is a certain sign that so much gold is not drawn from abroad (from Portugal for instance) as must be sent into the other countries where England is indebted. It is a proof that the general balance of trade is against England. This would not be known but for the prohibition in England to send gold coin out of the country. But this prohibition is the reason why the timid London bankers prefer to buy gold metal (which they are allowed to send abroad) at £3.18.0 up to £4 an ounce for export rather than send out guineas or gold coins at £3.18.0 against the law and at the risk of confiscation. Some of them take this risk, others melt the gold coins to send them out as bullion, and it is impossible to judge how much gold England loses when the general balance of trade is against her.
In France the cost of minting is deducted, usually 1½ per cent., i.e. the price for coin is always higher than for uncoined metal. To know whether France loses in the general balance of her trade, it will suffice to know whether the Bankers send French coins abroad. If they do so it is a proof that they do not find bullion to buy for export, since the bullion though at a lower price than coined money in France, is of greater value than these coins in foreign countries by at least 1½ per cent.
Though the exchanges rarely vary apart from the balance of trade between one country and others, and though this balance is naturally the mere difference in value of the goods and merchandise which the State sends to other countries and receives from them, yet there are often circumstances and accidental causes which cause considerable sums to be conveyed from one State to another without any question of merchandise or trade, and these causes affect the exchanges just as the balance of trade would do.
Such are the sums of money which one State sends into another for its secret services and political aims, for subsidies to allies, for the upkeep of troops, Ambassadors, noblemen who travel, etc., Capital which the inhabitants of one State send to another to invest in public or private funds, the interest which these inhabitants receive annually from such investments, etc. The exchanges vary with all these accidental causes and follow the rule of the transport of silver required. In considering the balance of trade matters of this kind are not separated, and indeed it would be very difficult to separate them. They have very certainly an influence on the increase and decrease of circulating money in a State and on its comparative strength and power.
My subject does not allow me to enlarge on the effects of these accidental causes: I confine myself always to the simple views of commerce lest I should complicate my subject, which is too much encumbered by the multiplicity of the facts which relate to it.
Exchanges rise more or less above par in proportion to the great or small costs and risks of the transport of money and this being granted they naturally rise much more above par in the cities or States where it is forbidden to export money than in those where its export is free.
Suppose that Portugal consumes regularly every year considerable quantities of woollen and other Manufactures of England, as well for its own people as for those of Brazil, that it pays for them partly in wine, oils, etc., but for the surplus payment there is a regular balance of trade remitted from Lisbon to London. If the King of Portugal rigorously prohibits under penalty not only of confiscation but of life the transport of any gold or silver metal out of his States, the terror of this prohibition will in the first place stop the Bankers from meddling about sending the balance. The price of the English manufactures will be kept in hand at Lisbon. The English merchants unable to receive their funds from Lisbon will send no more cloth thither. The result will be that cloth will become extraordinarily dear. Though their price has not gone up in England they cease to be sent to Lisbon because their value cannot be recovered. To have these cloths the Portuguese nobility and others who cannot do without them will offer twice the usual price, but as they cannot get enough of them without sending money out of Portugal, the increased price of cloth will become the profit of any one who in spite of the prohibition will export gold or silver. This will encourage various Jews and others to take gold and silver to English vessels in the port of Lisbon, even at the risk of their lives. They will gain at first 100 or 50 per cent. in this traffic and this profit is paid by the Portuguese in the high price they give for the cloth. They will gradually familiarise themselves with this manœuvre after having often practised it successfully, and at length money will be seen to be put on board English ships for a payment of 2 or 1 per cent.
The King of Portugal lays down the law or prohibition. His subjects, even his courtiers, pay the cost of the risk run to circumvent and elude it. No advantage then is gained by such a law, on the contrary it causes a real loss to Portugal since it causes more money of the State to go abroad than if there were no such law.
For those who gain by this manœuvre, whether Jews or others, send their profits abroad, and when they have enough of them or when they take fright they often themselves follow their money.
If some of these lawbreakers were taken in the act, their goods confiscated and their lives forfeited, this circumstance and execution instead of stopping the export of money would only increase it, because those who formerly were satisfied with 1 or 2 per cent. for exporting money will ask 20 or 50 per cent., and so the export must always go on to pay the balance.
I do not know whether I have succeeded in making these reasons clear to those who have no idea of trade. I know that for those who have practical knowledge of it nothing is easier to understand, and that they are rightly astonished that those who govern States and administer the Finances of great kingdoms have so little knowledge of the nature of exchanges as to forbid the export of bullion and specie of gold and silver.
The only way to keep them in a State is so to conduct foreign trade that the balance is not adverse to the State.