IN the science of Political Economy, the term ExCHANGE is commonly understood to designate exclusively that species of mercantile transactions, whereby the debts of individuals, residing at a distance from each other, may be either partially or wholly liquidated, without the intervention of money. The object of this article is to explain the nature of these transactions, and the principles on which they are founded.

This will be best effected, by treating, first, of the exchange between different parts of the same country; and, secondly, of that between different and independent countries.

INLAND EXCHANGE.

Suppose a merchant, residing in London, orders his agent in Glasgow to purchase a thousand pounds worth of cottons on his account; then, although it should not suit the Glasgow merchant to commission goods of equal value from his London correspondent, the latter may nevertheless be under no necessity of remitting cash to Glasgow to discharge his debt. Among cities, or countries, having a considerable intercourse together, the debts mutually due by each other are found, in ordinary cases, to be nearly equal. And, therefore, the Glasgow merchant, who has shipped the cottons for London, does not transmit the bill, drawn by him on his correspondent for their price, directly to London to be cashed, for that would subject him to the expence of conveying the money home from London to Glasgow, but he gets its value from some other merchant in Glasgow, who has payments to make in London, on account of teas, wines, &c. imported from that city, and who, unless he could procure such a bill, would be obliged to remit their price in money. The bill on account of the cottons is, therefore, either drawn in favour of the person to whom the money for the tea and wine is owing in London, or it is drawn in favour of the tea merchant in Glasgow, and indorsed to him; and this last person, by presenting the bill to the purchaser of the cottons, receives its value, and consequently the price of the cottons, and the price, or part of the price, of his tea and wine at the same moment. By this simple contrivance, therefore, the expence and risk attending the double transmission, first, of money from London to Glasgow to pay the cottons, and, second, of money from Glasgow to London to pay the teas and wines, is entirely avoided. The debtor in one place is changed for the debtor in the other; and both accounts are settled without the intervention of a single farthing.

The bill drawn and negotiated in such a transac- Inland tion as this, is termed an inland bill of exchange. If Exchange, the transaction had taken place between London or Glasgow, and a foreign city, it would have been termed a foreign bill of exchange.

A bill of exchange may, therefore, be defined to be, "An order addressed to some person residing at a distance, directing him to pay a certain specified sum to the person in whose favour the bill is drawn, or his order."*

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The price of bills of exchange fluctuates accord- Circuming to the abundance or scarcity of them in the mar- stances ket, compared with the demand. Thus, to revert termine the to our former example, if we suppose the debts Price of Inreciprocally due by London and Glasgow to be land Bills of equal, whether they amount to L.10,000, L.100,000, Exchange. or any other sum, they may all be discharged without the agency of money, and the price of bills of exchange will be at PAR; that is, a sum of L.100 or L.1000 in Glasgow will purchase a bill for L.100 or L.1000 payable in London, and vice versa. if these two cities are not mutually indebted in equal sums, then the price of bills of exchange will be increased in the city which has the greatest number of payments to make, and will be proportionably reduced in that which has the fewest. If Glasgow owes London L.100,000, while the debts due by London to Glasgow only amount to L.90,000, it is clear, inasmuch as the merchants of Glasgow have a larger sum to remit to London, than the merchants of London have to remit to Glasgow, that the price of bills on London would rise in Glasgow, because of the increased competition; and that the price of bills on Glasgow would fall in London, because of the proportionably diminished competition. And hence a larger sum would be required to discharge any given amount of debt due by Glasgow, and a less sum would be required to discharge a corresponding amount of debt due by London; or, which is the same thing, the exchange would be in favour of London, and against Glasgow. Bills on London would sell in Glasgow for a premium, and bills on Glasgow would sell in London at a discount, the amount of the premium in the one case, and of the discount in the other, being obviously equal.

On the supposition, that the balance of L.10,000, due by Glasgow, depressed the exchange of that city on London one per cent., it would at first sight appear as if it would cost Glasgow L.101,000 to discharge its debt of L.100,000 due to London; and that, on the other hand, L.89,108 would be sufficient to discharge the debt of London to Glas

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Inland gow. But a very little consideration will serve to Exchange. show that this could not really be the case. change transactions can take place between different cities, until there be both debtors and creditors of the one residing in the other. And hence, when the exchange became unfavourable to Glasgow, the premium paid by the Glasgow merchants for bills drawn on London would not go into the pockets of their creditors in that city, but into the pockets of their neighbours in Glasgow, to whom London was indebted, and from whom the bills had been purchased. The loss to Glasgow would, therefore, be limited to the premium paid on the balance of L.10,000. Thus supposing that A of Glasgow owes D of London L.100,000, and that C of London owes B of Glasgow L.90,000, A will pay to B L.91,000 for a bill, or order on C to pay D L.90,000. In this way, the L.90,000 London debt at Glasgow would be quite cleared off; the premium, which is lost by the debtor to London in Glasgow, being gained by its creditor in the same place. If the business had been transacted in London, C, with L.89,108, would have purchased of D a bill for L.90,000 payable by A, so that, in this case, the gain would have fallen to the share of the debtor C, and the loss to that of the creditor D, both of London. The complexity of real transactions does not affect the principles on which they are founded; and to whatever extent Glasgow might be indebted to London, or London to Glasgow, the only disadvantage under which either of them would in consequence be placed, would be the unavoidable one of paying the expence of remitting the balance of debt.

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change.

Natural li- The expence of transmitting money from one place mit to fluc- to another forms the natural limit to fluctuations in tuations in the exchange. If 20s. sufficed to cover the expence and risk attending the transmission of L.100 from Glasgow to London, it would be indifferent to a Glasgow merchant, whether he paid one per cent. premium for a bill of exchange on London, or whether he remitted money direct to that city. If the premium was less than one per cent., it would be clearly his interest rather to make his payments by means of bills of exchange than by remittances; and that it could not exceed one per cent. is obvious, for every individual would rather directly remit money, than incur an unnecessary expence, by purchasing a bill on London at a greater premium than would be sufficient to cover the expence attending a money remittance. If, owing to the badness of the roads, to disturbances in the country, or to any other cause, the expence of remitting money from Glasgow to London should be increased, the difference in the rate of exchange between these two cities might also be proportionably increased. But in every case, the extent to which this difference could attain, would necessarily be limited by, and could not, for any considerable period, exceed the cost of making remittances in cash.

Exchange transactions become more complex, when one place, as is very often the case, discharges its debts to another by means of bills drawn on a third place, Thus, although London should owe nothing to Glasgow, if Glasgow is indebted to London, London to Manchester, and Manchester to

Glasgow; Glasgow would either wholly or partially Inland discharge its debt to London by a bill drawn on Exchange. Manchester. It would wholly discharge it, provided the debt due to Glasgow in Manchester was equivalent to the debt due by Glasgow to London. But if this be not the case, Glasgow must either remit money to London to discharge the balance of debt, or bills drawn on some other place indebted to her.

Transactions in inland bills of exchange are almost entirely conducted by bankers, who charge a certain rate per cent. for their trouble, and who, by having a credit in those places to which they are in the habit of remitting bills, are enabled, on all occasions, to supply the demands of their customers. In Great Britain, London, because of its intimate connection with other parts of the country, occasioned partly by its immense commerce, partly by its being the seat of government, and the place to which the revenue is remitted, and partly by its currency consisting of Bank of England paper, for which the paper currency of the country banks is rendered exchangeable, has become the great focus in which all the money transactions of the empire centre, and in which they are ultimately adjusted. quence of these various circumstances, but chiefly of the demand for bills on London to remit revenue, and of the superior value of Bank of England currency, the exchange between London and the other parts of the country is invariably in its favour. Bills on London drawn in Edinburgh and Glasgow were formerly made payable at 40 days' date, which is equivalent to a premium of about per cent.; but, owing to the greater facility of communication, this premium is now reduced to 20 days' interest, or to about per cent. Bills for remitting the revenue from Scotland are now drawn at 30 days; previously to summer 1819 they were drawn at 60 days.

In conse

What has been already stated is sufficient to show, that, however well fitted bills of exchange may be for facilitating the operations of commerce, and saving the trouble and expence attending the transportation of money, it is impossible to adjust mercantile transactions by their means, except in so far as the accounts mutually balance each other. A real bill of exchange is merely an order entitling the holder to receive payment of a debt previously contracted by the person on whom it is drawn. It is essential to the existence of such a bill that an equivalent amount of debt should first have been due. And hence, as the amount of the real bills of exchange drawn on any one merchant, or body of merchants, cannot exceed the amount of the debts due by them, if a greater sum is owing them than what they owe to others, the balance, it is obvious, must either be paid in money, or by the delivery of some sort of commodities possessed of real value. If, as in the example just given, Glasgow owes London L.100,000, while London only owes Glasgow L.90,000, a reciprocal transfer of debts may be made to the extent of L.90,000. But the Glasgow merchants cannot discharge the additional L.10,000 by means of bills drawn on London; for, by the supposition, London only owed them L.90,000, and they have already drawn for its amount. The balance, therefore, must either be discharged by an actual money payment,

Inland or by the delivery of some species of commodities, Exchange. or by bills drawn on some third party who may be indebted to Glasgow.

Fictitious Bills of Exchange.

We do not mean by this to insinuate that, there are no fictitious bills of exchange, or bills drawn on persons who are not really indebted to the drawer in the market. In every commercial country bills of this description are always to be met with; but they are only a device for obtaining loans, and do not and cannot transfer real debts. A merchant in London may form a connection with a merchant in Glasgow, and draw bills of exchange upon him payable a certain number of days after date, which the latter may retire by selling in Glasgow an equal amount of bills drawn upon his correspondent in London. The merchants who purchase, or the bankers who discount these bills, really advance their value to the drawers, who, as long as they continue, by means of this system of drawing and redrawing, to provide funds for their payment, continue in fact to command a borrowed capital equal to the amount of the fictitious paper in circulation. It is clear, how ever, that the negociation of such bills can have no effect in the way of transferring and settling the real bona fide debts reciprocally due between any two or more places. Fictitious bills mutually balance each other. Those drawn by London on Glasgow are exactly equal to those drawn by Glasgow on London, for the one set are drawn to pay the other the second destroys the first, and the result is nothing.

The method of raising money by the discount, or, which is the same thing, by the sale of fictitious bills, has been severely censured by Dr Smith, as entailing a ruinous expence on those engaged in it, and as being resorted to only by projectors, or persons of suspicious credit. When fictitious bills are drawn at two months' date, there is, in addition to the ordinary interest of 5 per cent. a commission of about per cent., which must be paid every time the bill is discounted, or, at least, six times in the year. The total expence of money raised in this way could not, therefore, supposing the transaction to be always on account of the same individual, be estimated at less than 8 per cent. per annum; and the payment of so high a rate of interest on borrowed capital, in a country where the ordinary rate of mercantile profit is only supposed to average from six to ten per cent., could not fail to be generally productive of ruin to the borrower. It seldom happens, however, that in transactions carried on by means of fictitious bills, the whole charge for commission falls on one individual. Loans obtained in this way are almost always on account of two or more persons. Thus, at one time a fictitious bill may be drawn by A of London on B of Glasgow; and, in this case, the Glasgow merchant will, before the bill becomes due, draw upon his London correspondent for the proceeds of the bill, including interest and commission. At another time, however, the transaction will be on account of B of Glasgow, who will then have to pay commission to his friend in London; so that each party may, on the whole, as Mr Thornton has observed, gain about as much as he pays in the shape of commission.

It is often extremely difficult to distinguish be- Inland tween a fictitious bill and one which has arisen out of Exchange. a real mercantile transaction. Neither does it seem to be of any very material importance. The credit of the persons whose names are attached to the bills offered for discount, is the only real criterion by which either a private merchant or a banker can judge whether he ought to negotiate them. The circumstance of a merchant offering considerable quantities of accommodation paper for discount, ought, unquestionably, if discovered, to excite a suspicion of his credit. But unless in so far as the drawing of fictitious bills may be held to be indicative of overtrading, or of a deficiency of capital to carry on the business in which the party is engaged, there does not appear to be any good reason for refusing to discount them.

These few observations will, perhaps, suffice to explain the manner in which transactions between different parts of the same country are settled by means of bills of exchange. They are, in general, extremely simple. The uniform value of the currency of a particular country renders all comparison between the value of money at the place where the bill is drawn and negociated with its value where it is to be paid unnecessary; while the constant intercourse maintained between the different commercial cities of the same kingdom, by preventing those derangements to which the intercourse between distant and independent countries must always be subject, also prevents those sudden fluctuations which so frequently occur in the market price of foreign bills of exchange. We shall, therefore, leave this part of our subject, and proceed to investigate the circumstances which influence the course of exchange between different and independent countries.

FOREIGN EXCHANGE.

The price of Foreign bills of exchange depends en-Foreign Extirely on two circumstances; first, on the value of change. the currency at the place where they are made payable, compared with the value of the currency at the place where they are drawn; and, secondly, on the relation which the supply of bills in the market bears to the demand.

If the real and nominal value of the currencies of the different nations having an intercourse together remained invariable, such fluctuations in the price of bills of exchange as arise from the first of these circumstances would be altogether unknown. But, as the comparative value of the pound Sterling, dollar, franc, guilder, florin, &c. is subject to perpetual variation, the price of bills of exchange must vary ac cordingly. Such variations, however, as proceed from this cause, affect merely their nominal, or rather numerical value. It is those only which arise from variations in the supply and demand for bills, or, which is the same thing, in the payments a country has to make compared with those it has to receive, that can be considered as real; and hence the distinctions of nominal, real, and computed exchange. The first depends on alterations in the relative value of the currencies to be compared together; the se cond depends on the supply of bills in the market