When a depreciated coinage is said to produce a FALL in the Foreign Exchanges, it means that a given amount of home coinage will purchase a LESS amount of foreign coin.

When a depreciated coinage is said to produce a RISE in the Foreign Exchanges, it means that a GREATER quantity of home coinage is required to purchase a given amount of foreign coin.

A clear understanding of these expressions will prevent any confusion arising when they are used indiscriminately, as they often are, in discussions on the Exchanges. We shall give a little further on a striking example of the derangement of the foreign exchanges of England owing to the depreciation of the coinage, and their rectification in consequence of the restoration of the English coinage.

3. It is also evident that there can be no true par of exchange between two countries which do not employ the same metal as their legal standard. We have seen, in the preceding chapter, the insuperable objections to employing two metals as legal standards in the same country. Up to a comparatively recent period gold and silver were equally used, and their relative values were fixed by law. This was their legal par of exchange, but we also saw that their market values were constantly varying, and from causes quite beyond the reach of any law; and that it was no more possible to have a fixed price of one in terms of the other, than to have a fixed legal price for corn or other commodity. The very same rule must clearly apply to two countries, one of which uses gold, and the other silver, as the measure of value. Hence, in speaking of the par of exchange between England and France as 25.20, which it usually is, or that £100-2,520 francs, it is only on the assumption that the relative values of gold and silver are fixed, which we know can never occur between any two countries, any more than between the same metals in the same country. The only correct mode of expressing it is, therefore, to say that such is the usual Rate of Exchange between the two countries.

In the year 1797, when the Bank of England stopped payment, the House of Lords appointed a Committee to investigate the whole subject. The Committee, among other things, wished to ascertain the par of exchange between London and Hamburg, and they examined several merchants upon the subject, but they

were quite unable to agree among themselves what was the par of exchange between these two places; and the Committee reported that they were unable to come to any satisfactory conclusion on the subject, and in this they were correct. And the very same reasons apply to any other two countries which use different metals as measures of value, as there is not in the nature of things any permanently fixed relation between them. Hence, there cannot be in the nature of things, any fixed par of exchange between England and any country that uses exclusively a silver standard. The most that can be said is, that there is a usual rate of exchange between them; hence, between such countries, it is often totally impossible to decide certainly which way the exchange is, unless the difference exceeds a certain limit. At the time of the foundation of the Bank of England, in 1694, the coinage of England was in such a disgraceful state from the wear and tear of many years, and extensive clipping, that the rate of exchange between London and Hamburg, owing to this circumstance alone, was 25 per cent. against England.

Although, when the currency is in a depreciated state, the exchange will be apparently adverse with those countries which maintain their currency in its standard state, it is quite clear that the exchange, founded upon the commercial operations of the two countries, may be above, below, or at par; and it is a very simple matter to discover its true state, that is, whether it is favorable or the contrary, and the amount of its difference either way. The rate of exchange, which arises out of the state of the currency, is called the NOMINAL EXCHANGE; the rate which arises out of the commercial relations of the country, is called the REAL EXCHANGE. Thus, if we suppose that the exchange on Paris is 2,521 francs for £100 in gold at the Mint price, or when the currency is at its full legal weight, then, if we suppose that, in consequence of the depreciation of the currency, the market price of gold bullion rises to £4 3s. per oz., then the market price of £100 is £106 11s. 74d. Now, suppose that the exchange on Paris is 23.80, or £100 will purchase 2,380 francs in Paris, then £106 11s. 74d would be able to purchase 2,536 63 francs. But, as the real par at the Mint price is assumed to be 2,521, it is evident that the difference between these two sums is the extent to which the real exchange is in favour of

London. We can also see the extent to which the exchange is depressed, because £100 at the above exchange will purchase 2,380 francs, whereas they ought to purchase 2,536 63, if they were of full weight; and the difference between these two sums shews the extent by which the nominal exchange is depressed. Hence, we have the following rule

Find the market price of the sum in London compared to the Mint or money price; multiply the market price so found by the rate of exchange; then, if the result is equal to the par of exchange, the exchange is at par; and if there be a difference, the exchange is favourable, or adverse, according as the difference is above or below the par.

And the depression of the exchange, caused by the depreciation of the currency, is the difference between the sum so expressed in the mint and market prices multiplied by the rate of exchange. In the excellent state in which our currency now is, the question of the nominal exchange is of little importance, but it is impossible to understand the history of the currency in former times without it and it is essential now with regard to several foreign countries at present which use an inconvertible and depreciated paper currency.

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On the Nature of an Exchange.

4. We will now explain the nature of an exchange. Suppose two cities, say London and Edinburgh. Suppose a trader A in London is debtor to a trader B in Edinburgh for a certain sum: suppose also that a trader B1 in Edinburgh is debtor to A1 in London for an equal sum. Then, in order to pay their debts, A would have to send the money to B, and B1 would have to send an equal sum to A', thus causing two separate transmissions of bullion between London and Edinburgh, at some expense for freight and insurance.

Now, this settlement of debts may be greatly facilitated, if A in London goes and pays his debt to A1, and buys from A1 the debt due to him from B1, and sends this debt by post to B in Edinburgh. B then goes to B1 and demands payment from him of his debt due to A. Thus, it is clear that the whole business has been settled by the transmission of the debt, instead of by the

transmission of twice the amount in bullion, and each debtor has paid the debt to the creditor in the same town.

The whole transaction is called an exchange, and it is clear that there must be a debtor and a creditor in each city. In the case given there are four parties; but an Exchange is possible with three parties. Thus, suppose that A in London owes B in Edinburgh a debt, and B1 in Edinburgh owes A in London an equal debt. Then it is clear that A may pay B by transferring to him the debt due to himself from B1. From this, it is seen that three parties are indispensable to an "Exchange."

In fact, an Exchange in commerce means simply a transaction in which a debtor pays his creditor by transferring to him a debt due to himself from some one else. Every time a person pays a debt by means of a cheque or bank note, that is an Exchange. It is an example of what is called Novatio in Roman Law, because the former debtor is exchanged for a new one.

Two passengers are travelling in an omnibus. The fare is sixpence. One passenger pays the conductor a shilling. The conductor is then indebted to him in sixpence. The other passenger has a sixpence in his hand ready to pay his fare. The conductor, by a nod, tells him to give the sixpence to the first passenger. By this means the conductor's debt is paid, and the whole transaction is an exchange.

We may observe that a consideration of this transaction is sufficient to disprove the popular account that Bills of Exchange and exchange operations were invented by the Jews. A crowd of writers have said that the Jews, having undergone a terrible persecution in France towards the end of the 12th century, invented Bills of Exchange in order to transmit their effects from France to foreign countries. This account, however widely received, is impossible, because it is clear that exchange operations can only arise out of reciprocal debts being due between two places, as they cannot take place unless debtors and creditors of the one reside in the other. To suppose that people could simply remit their money by means of Bills of Exchange, is as absurd as to suppose that a man could send his luggage by the electric telegraph. All that he could do in either case would be to send an order to deliver his money, or his luggage, to some one else.

The first thing James II. did after he came to the throne, was to solicit alms from Louis XIV. Louis collected Bills on London to

the amount of five hundred thousand livres, or about £37,500, and sent them to London. That is, he went to the merchants in Paris who had debts due to them by merchants in London, paid them their debts, and so bought their rights against the London merchants. He then sent over these Bills to London, to the French Ambassador, and the London merchants paid the money to him. But Louis could not have done this unless there were already sums due by the merchants of London to the merchants of Paris.

Now, when the debts between London and Edinburgh are equal, it is evident that they may all be discharged by means of such an exchange, without remitting any specie. The exchanges are then said to be at PAR.

Supposing, however, that the debts are unequal, and Edinburgh wishes to send more money to London than it has to receive, it is clear that the demand for bills is greater than the supply; and, as every one would rather send a bill than cash, as it is cheaper to do so, those who had money to send would bid against each other for the bills in the market as for any other merchandise, and the price of them would rise, or a premium would have to be paid for a bill on London.

Now, London is the great centre of commerce. It supplies the rest of the country with foreign merchandise: it is the seat of Government, to which the revenue is remitted from all parts of the country: the great families from all parts of the country go to reside there, and their incomes must be remitted to them there: hence there is almost always a much greater quantity of money seeking to flow from the country to London than the contrary: consequently, the demand for bills on London in the country is greater than the supply, and, therefore, inland bills upon London are always at a premium.

This premium is computed by time. Thus, if a person paid a sum of money into a bank in Edinburgh, in former times, he got a bill payable at 60 days' date in London; or, if he wanted it payable at sight, he had to pay 60 days' interest. This was afterwards reduced to 40 days, and was estimated at about per cent. As communications improved, this was reduced to 20 days, or 5s. per cent. But, in consequence of the still further facilities afforded by railways, the premium is now reduced to 1s. per

cent.