Chapter XIX: Part III: Of Exchange (1)

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CHAP. I.
_Of the first Principles of Exchange._

Having ended what I had to say of banks, in which most of the principles of private credit have been sufficiently deduced, I now proceed to the doctrine of exchange, which is the principal operation of mercantile credit.

The security which merchants commonly take from one another when they circulate their business, is a bill of exchange, or a note of hand: these are looked upon as payment. When they give credit to one another in account, or otherwise, the cause of confidence is of a mixed nature; established partly upon the security of their effects, partly on the capacity, integrity, and good fortune, of the person to whom the credit is given.

No man but a merchant has any idea of the extent and nature of this kind of credit. It is a thing to be felt, but cannot be reduced to principles; and merchants themselves can lay down no certain rules concerning it. It is an operation which totally depends upon their own sagacity.

But when they deal by bills of exchange, the case is very different. The punctuality of acquitting those obligations is essential to commerce; and no sooner is a merchant’s accepted bill protested, than he is considered as a bankrupt. For this reason, the laws of most nations have given very extraordinary privileges to bills of exchange. The security of trade is essential to every society; and were the claims of merchants to linger under the formalities of courts of law, when liquidated by bills of exchange, faith, confidence, and punctuality, would quickly disappear; and the great engine of commerce would be totally destroyed.

A regular bill of exchange is a mercantile contract, in which four persons are concerned, viz. 1. The drawer, who receives the value: 2. His debtor in a distant place, upon whom the bill is drawn, and who must accept and pay it: 3. The person who gives value for the bill, to whose order it is to be paid: and 4. The person to whom it is ordered to be paid, creditor to the third.

By this operation, reciprocal debts, due in two distant parts, are paid by a sort of transfer, or permutation of debtors and creditors.

(A) in London, is creditor to (B) in Paris, value 100_l._ (C) again in London, is debtor to (D) in Paris for a like sum. By the operation of the bill of exchange, the London creditor is paid by the London debtor, and the Paris creditor is paid by the Paris debtor; consequently, the two debts are paid, and no money is sent from London to Paris, nor from Paris to London.

In this example, (A) is the drawer, (B) is the accepter, (C) is the purchaser of the bill, and (D) receives the money. Two persons here receive the money, (A) and (D), and two pay the money, (B) and (C); which is just what must be done when two debtors and two creditors clear accounts.

This is the plain principle of a bill of exchange. From which it appears, that reciprocal and equal debts only can be acquitted by them.

When it therefore happens, that the reciprocal debts of London and Paris (to use the same example) are not equal, there arises a balance on one side. Suppose London to owe Paris a balance, value 100_l._ How can this be paid? I answer, that it may either be done with or without the intervention of a bill.

With a bill, if an exchanger, finding a demand for a bill upon Paris, for the value of 100_l._ when Paris owes no more to London, sends 100_l._ to his correspondent at Paris in coin, at the expence, I suppose, of 1_l._ and then, having become creditor on Paris, he can give a bill for the value of 100_l._ upon his being repaid his expence, and paid for his risk and trouble.

Or it may be paid without a bill, if the London debtor sends the coin himself to his Paris creditor, without employing an exchanger.

This last example shews of what little use bills are in the payment of balances. As far as the debts are equal, nothing can be more useful than bills of exchange; but the more they are useful in this easy way of business, the less profit there is to any person to make a trade of exchange, when he is not himself concerned, either as debtor or creditor.

When merchants have occasion to draw and remit bills for the liquidation of their own debts, active and passive, in distant parts, they meet upon change; where, to pursue the former example, the creditors upon Paris, when they want money for bills, look out for those who are debtors to it. The debtors to Paris again, when they want bills for money, seek for those who are creditors upon it. This is a representation of what we have frequently called the money market, in which the _demand_ is for _money_, or for _bills_.

This market is constantly attended by brokers, who relieve the merchant of the trouble of searching for those he wants. To the broker every one communicates his wants, so far as he finds it prudent; and by going about among all the merchants, the broker discovers the side upon which the greater demand lies, for money, or for bills.

We have often observed, that he who is the demander in any bargain, has constantly the disadvantage in dealing with him of whom he demands. This is no where so much the case as in exchange, and renders secrecy very essential to individuals among the merchants. If the London merchants want to pay their debts to Paris, when there is a balance against London, it is their interest to conceal their debts, and especially the necessity they may be under to pay them; from the fear that those who are creditors upon Paris would demand too high a price for the exchange over and above par.

On the other hand, those who are creditors upon Paris, when Paris owes a balance to London, are as careful in concealing what is owing to them by Paris, from the fear that those who are debtors to Paris would avail themselves of the competition among the Paris creditors, in order to obtain bills for their money, below the value of them, when at par. A creditor upon Paris, who is greatly pressed for money at London, will willingly abate something of his debt, in order to get one who will give him money for it.

It is not my intention to dip into the intricacies of exchange: all intricacies must here be banished; and instead of technical terms, which are very well adapted for expressing them, recourse must be had to plain language, for pointing out the simple operations of this trade. It is by this method that principles must be deduced, and from principles we shall draw the consequences which may be derived from them.

From the operation carried on among merchants upon Change, which we have been describing, we may discover the consequence of their separate and jarring interests. They are constantly interested in the state of the balance. Those who are creditors on Paris, fear a balance due to London; those who are debtors to Paris, dread a balance due to Paris. The interest of the first is to dissemble what they fear; that of the last, to exaggerate what they wish. The brokers are those who determine the course of the day: and the most intelligent merchants are those who dispatch their business before the fact is known.

Now I ask, how trade, in general, is interested in the question, who shall outwit, and who shall be outwitted, in this complicated operation of exchange among merchants?

The interest of trade and of the nation is principally concerned in the proper method of paying and receiving the balances. It is also concerned in preserving a just equality of profit and loss among all the merchants, relative to the real state of the balance. Unequal competition among men engaged in the same pursuit, constantly draws along with it bad consequences to the general undertaking, as has often been observed; and secrecy in trade will be found, upon examination, to be much more useful to merchants in their private capacity, than to the trade they are carrying on.

Merchants, we have said, in speaking of the bank of England, endeavour to simplify their business as much as possible; and commit to brokers many operations which require no peculiar talents to execute. This of exchange is of such a nature that it is hardly possible for a merchant to carry on the business of his bills, without their assistance, upon many occasions. When merchants come upon Change, they are so full of fears and jealousies, that they will not open themselves to one another, lest they should discover what they want to conceal. The broker is a confidential man, in some degree, between parties, and brings them together.

Besides the merchants, who circulate among themselves their reciprocal debts and credits, arising from their importation and exportation of goods, there is another set of merchants who deal in exchange; which is the importation and exportation of money and bills.

Were there never any balance on the trade of nations, exchangers and brokers would find little employment: reciprocal and equal debts would easily be transacted openly between the parties themselves. No man feigns and dissembles, except when he thinks he has an interest in so doing.

But when balances come to be paid, exchange becomes intricate; and merchants are so much employed in particular branches of business, that they are obliged to leave the liquidation of their debts to a particular set of men, who make it turn out to the best advantage to themselves.

Whenever a balance is to be paid, that payment costs, as we have seen, an additional expence to those of the place who owe it, over and above the value of the debt.

If, therefore, this expence be a loss to the trading man, he must either be repaid this loss by those whom he serves, that is, by the nation; or the trade he carries on will become less profitable.

Every one will agree, I believe, that the expence of high exchange upon paying a balance, is a loss to a people, no way to be compensated by the advantages they reap from enriching the few individuals among them, who gain by contriving methods to pay it off: and if an argument is necessary to prove this proposition, it may be drawn from this principle, to wit, whatever renders the profit upon trade precarious or uncertain, is a loss to trade in general: this loss is a consequence of high exchange; and although a profit does result from it upon one branch of trade, the exchange business, yet that cannot compensate the loss upon every other.

We may, therefore, here repeat what we have said above, that the more difficulty is found in paying a balance, the greater is the loss to the nation.

This being admitted, I shall here enumerate all the difficulties which occur in paying of balances. Most of them have been already mentioned from their relation to subjects already discussed; and could it be supposed, that every reader has retained the whole chain of reasoning already gone through, a repetition in this place would be superfluous: but as that cannot be expected, I shall, in as short and distinct a manner as possible, recapitulate, under four articles, what I hope will be sufficient to refresh the memory upon each of them.

1_mo_, The first difficulty which occurs in paying a balance, is to determine exactly the true and intrinsic value of the metals or coin in which it is to be paid; that is to say, the real par.

2_do_, How to remove the domestic inconveniences which occur in paying with the metals or coin.

3_tio_, How to prevent the price of exchange from operating upon the whole mass of reciprocal payments, instead of affecting only the balance.

The remedies and palliatives for these three inconveniencies once discovered, comes the last question, viz. How, when other expedients prove ineffectual for the payment of a balance, the same may be paid by the means of credit, without the intervention of coin; and who are those who should conduct that operation.

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CHAP. II. _How to determine exactly the true and intrinsic value of the Metals, Coin, or Money, in which a Balance to foreign Nations is to be paid._

This first question regards the whole mass of reciprocal payments, as well as that of the balance.

Every payment to be made of a determinate and fixed value; that is to say, of a liquidated debt, must be paid in a value equally determinate in its nature.

This I suppose to be the case, whether payment be made in the precious metals unmanufactured, bullion, or in a nation’s coin, or in denominations of money of account. All payment in merchandize, except bullion, must suffer conversions of value before the debts can be liquidated.

Money of accompt, which is what we understand by denominations, we have defined to be a scale of equal parts, calculated to determine the value of things, relatively to one another. It must, therefore, be by the money of accompt of different nations, that the value of bullion and of coin can be determined.

When coin is introduced, the denominations of money are realized in a determinate quantity of the precious metals, and the fabrication of the bullion into coin, raises the value of that commodity, bullion, like the manufacturing of every other natural production.

When coin, therefore, is employed in paying sums according to the legal denomination which it carries, it is money, not merchandize; but when it is given at any other rate than its denomination, it is merchandize, not money.

In the third book, we have shewn how utterly impossible it is to realize with exactness, the denominations of money of accompt, in the metals which are constantly varying in their value, and exposed to waste in circulation.

We have shewn, by many examples, how, in fact, the value of the pound sterling has been subject to great vicissitudes of late, from the great disorder of the coin.

The coin of France is, indeed, upon a better footing in point of uniformity of weight, than ours; and the proportion of the metals in it comes nearer their present value in the market: but then as oft as the balance turns against France, the high imposition upon her coinage, exposes the coin to great fluctuations of value, when compared with bullion in the Paris market. This is also to be ascribed to the imperfection of the metals when used as money, while they are merchandize at the same time.

This being the case, the way to calculate the real par of exchange between nations, who have in common no determinate and invariable money, exclusive of coin, is to consider fine gold and silver as the next best standard.

This is a merchandize which never varies in its quality. Fine gold is always the same in every mass; and weight for weight, there is no difference in its value or quality any where.

This standard being once adopted, the calculation of the real par becomes an easy operation to those who know the course of the bullion market in the two places exchanging.

If, by the exportation of all the heavy coin of London, bills must be paid in a worn out currency, the rise in the price of gold in their market, above mint price, will mark pretty nearly how far it is light.

If, on the other hand, the wars of France, or an unfavourable balance upon her trade, shall oblige her to export her coin, that operation will _sink_ the value of it, or _raise_ the price of bullion, which ever way you choose to express it.

It is not here a proper place to resume the question, which of the two expressions is the most proper: we are here considering the value of the bullion as what is fixed, because it answers the purpose. But whether we say that bullion _rises_ in the markets of Paris and London; or that the value of their currencies _sink_, though from very different causes, the calculation of the real par will proceed with equal accuracy. An example will illustrate this.

When _fine_ gold is at the lowest price to which it can ever fall at Paris, that is to say, at the mint price, it is worth 740 livres 9 sols, or 740.45 livres _per_ mark, in decimals, for the ease of calculation. The mark contains eight ounces Paris weight.

Were the ounces of Paris equal to those of troy weight, ⅛ of this sum, or 92.5562 livres, would be the value of that ounce by which gold is sold at London.

But the Paris ounce is about 1½ _per cent._ lighter than the troy ounce; and the exact proportion between them is unknown, from the confusion of weights, and the want of a fixed standard in England.

By the best calculation I have been able to make, a Paris ounce should contain 473 grains troy, which makes the proportion between the two ounces to be as 473 is to 480, which is the number of grains in the troy ounce.

Gold bullion at Paris is regulated by the mark _fine_, at London by the ounce _standard_.

When standard gold bullion is at the lowest price it can be at London, it is worth the mint price, or 3_l._ 17_s._ 10½_d._ _per_ troy ounce, which, expressed in decimals, is 3.8937_l._ sterling. Standard is to fine, as 11 is to 12; consequently, the ounce fine is 4.2476_l._ sterling: and if the Paris ounce of _fine_ bullion be worth, as has been said, 92.5562 livres, the ounce troy, according to the above proportion, will be worth 93.926 livres. Divide then the livres by the sterling money, and the quotient will give you the real par of exchange of the pound sterling, while bullion remains at that value in Paris and in London, viz. 4.2476⁄93.926 = 22.112 livres for the pound, or 32.56_d._ sterling for the French crown of 3 livres.

Gold bullion never can rise in the Paris market, at least all the last war it never _did_ rise, above the value of the coin; that is, to 801.6 livres the mark fine, or 100.2 livres _per_ ounce Paris, and 101.7 livres the troy ounce.

How high the price of gold bullion may rise at London no man can say; but the highest it rose to, during the last war, was, I believe, 4_l._ 0_s._ 8_d._ _per_ ounce standard, or to 4.3999_l._ sterling _per_ ounce fine. By this divide the value of the ounce troy fine in French livres, the real par at this rate of the metals in both cities will be 4.3999⁄101.7 = 23.11 livres for the pound sterling, or 31.155 pence sterling for the French crown of 3 livres. But suppose two cases which may happen, viz. 1. That gold bullion at Paris should be at the price of coin, while at London it may be at mint price: or, 2. That at Paris it may be at mint price, when at London it is at 4_l._ 0_s._ 8_d._ what will then the real par of exchange be?

I answer, that on the first supposition, it will be one pound sterling, equal to 23.939 livres, and the crown of 3 livres equal to 30.076 pence sterling. In the other, equal to 21.34 livres for the pound sterling, and for the crown of 3 livres 33.728. A difference of no less than 8.9 _per cent._

Is it not evident that these variations _must_ occur in the exchange between London and Paris? And is it not also plain, that they proceed from the fluctuation of the price of bullion, not from exchange?

We have, I think, demonstrated, in the third book, that a wrong balance upon the French trade raises bullion to the price of coin; and that a right balance brings it down to mint price. The price of coinage is above 8 _per cent._ So that 8 _per cent._ of fluctuation in the price of bullion is easily accounted for in the Paris market, without combining the variations in the English market.

In London, where no coinage is paid, were all the coin of full weight, and exportation free, coin and standard bullion would constantly stand at the same price: but when the heavy coin is exported, and the currency becomes light by the old remaining in circulation, the price of bullion rises in proportion.

Is it surprizing that, at London, gold in bullion should be worth as much as gold of the same standard in guineas, weight for weight? It is worth as much at the mint, why should it not be worth as much at market? Any man may offer to pay _for the ounce_ of all the guineas coined by Charles II. James II. and William III. now in circulation, the highest market price that ever was given for standard gold bullion in London, and gain by the bargain.

This, I hope, will be sufficient to satisfy any body that there is a mistake in ascribing the high price paid for the French crown in the London exchange, to a wrong balance upon the trade of England with France.

From this new light in which I have placed the question, I hope the arguments used in the 16th chapter of the first part of the third book, will acquire an additional force; and that thereby the eyes of this nation may be opened with regard to the interests of the French trade; a point, I should think, of the highest concern.

To calculate, as every body does, the par of the French crown, either by the gold or the silver in the English _standard_ coin, when no such _standard_ coin exists; and to state all that is given for the crown above 29½_d._ if you reckon by the silver, or 30¼_d._ if you reckon by the gold, for the price of a wrong balance, is an error which may lead to the most fatal consequences.

If government should think fit to impose, in their own mint, a coinage, equal to that of France, and make all their coin of equal weight, and at the due proportion, it will take off all the loss we suffer by paying coinage to France, which we at present impute to the exchange, while she pays none to us. But then it will occasion nearly the same fluctuations upon the real par of exchange as at present; only from another cause on the side of Great Britain. At present our exchange becomes favourable from the weight of our own currency, and the balance against France upon her trade; which, in Paris, raises the price of the bullion with which we pay our French debts. On the other hand, our exchange becomes unfavourable from the lightness of our own currency, from the coinage we pay to France, and balance against us; which last carries off all our new guineas; and in the Paris market, sinks the value of that bullion in which we pay our French debts.

Were matters put upon a right footing, we should gain from France the price of our coinage, when our balance is favourable, and pay coinage to France when their balance is favourable; instead of seeing our exchange turn more in our favour, only from the additional weight of the coin in which we pay.

If French coinage should appear too high a price for the interest of other branches of British trade, a question I shall not here determine, let us impose at least as much as to keep our guineas out of the melting pot, and banish all the old coin which throws us into such confusion.

What has been said is undoubtedly too much upon this subject for the generality of readers. The number of those who can go through a chapter like this with pleasure is very small. But if the idea I have been endeavouring to communicate, be found just by one man of capacity, whose opinion shall have weight in the deliberations of Great Britain, the consequences may be great to this nation; and this consideration will, I hope, plead my excuse.

I shall now set this question in another point of view, from which the stress of my arguments will be felt, and all intricate combinations will be laid aside.

Does not the price of exchange, or what is given above the par, proceed from the expence of sending the metals from one place to the other, the insurance of them, and the exchanger’s profit? If this be true, which I believe no body will deny, must not what is paid for the bill, over and above these three articles, be considered as the real par, relative to exchange? Now does the price of the bullion which the exchanger pays in his own market, or the price he gets for that bullion in the market to which he sends it, at all enter into the account of the transportation, risk, and profit, which the exchanger has on the operation? Certainly not. May there not be a very great difference between the buying and selling the very same bullion in different markets at one time and another? Ought we not to charge that to some other accompt than to the price of exchange, which is confined to the expence of transporting _the balance only_, and when two objects totally different are included under the same term, does it not tend to perplex our notions concerning them?

The great variation in the price of bullion in France, for example, and the expence of procuring it, proceeds from three causes. The first is, the coinage imposed in France, while none is imposed in England. What, therefore, is paid upon this account, is profit to France, and loss to England.

The second cause of variation, is the debasement of the value of the pound sterling, when the heavy gold has been sent abroad. That loss affects the nation, and every man in England, in the quality of creditor for sums specified in pounds sterling, to the profit of all debtors.

The third cause of variation, is from the great expence exchangers are put to, in procuring the metals from other countries, when they cannot be got at home: the consequence of this shall be explained in a succeeding chapter.

As all these causes are combined in the exchange upon bills when they come to market, I think it is proper to analize them, before the doctrine we are upon can be distinctly understood.

I shall therefore conclude my chapter with this proposition:

That the best method of determining exactly the true and intrinsic value of the metals, coin, or money, in which the balance due to or from a foreign nation is to be paid, is to compare the respective value of fine bullion with the respective denominations of the coin in the one and the other; and to state the difference as the price paid for the exchange[20].

Footnote 20:

There occurs another considerable difficulty to be removed, before the
real par of exchange can be exactly determined from the price of
bullion, to wit, the uncertainty of weights, and the multiplicity of
them.

Every nation in Europe has a different weight, I might almost say
every city. This has proceeded, in a great measure, from the
inaccuracy with which they have been made formerly. I think it is
highly probable, that many, at least, of the principal weights in
Europe, have derived their origin from the same standard; although
they are now considerably different. Those I am best acquainted with
are the following, of which I shall here set down a short table,
reduced to troy grains, according to the best calculation I have been
able to make.

One ounce troy contains 480 troy grains. One ounce Paris, or _poids de marc_, 473 One ounce Holland troes 473.27 One ounce Colonia 449.33

These are the weights used in the mints of England, France, Holland,
and Germany.

If therefore we should call the troy ounce 100, the proportion of the
rest will be as follows:

Troy 100 Paris 98.541 Holland 98.597 Colonia 93.61

I have chosen to reduce to ounces; because it is the denomination in
which the proportion of weights is best preserved.

These ounces I apprehend to have been originally taken from the old
Roman pound, which was the weight adopted by the Emperor Charles the
Great, who applied himself much to the establishing a general standard
of weights in his dominions.

In the examples I have given, we see how the Colonia ounce deviates
more than any other from the average on the whole.

This ounce is very near equal to the old Saxon ounce, established in
the English mint at the Norman conquest, and there preserved, until
Henry VIII. substituted in its place, the troy weight. This
circumstance makes it probable that the Saxon ounce came originally
from Charles the Great, who first conquered the Saxon nation, and drew
them from a state of absolute barbarity. The rude manners of the
Saxons may have occasioned this great deviation.

The difference, therefore, in those ounces, I ascribe to the
progressive error of those who have made weights, and from the neglect
of preserving a proper standard.

The best remedy for this inconvenience, would be, for any one mint to
form a weight, _ad libitum_, and to send a most accurate copy of it to
every mint in Europe: to mention, at the same time, the exact
proportion between the weight sent, and that observed at their own
mint: to beg of the other mints an equal communication of the
proportion between the weight sent, and their several standards: and
last of all, to publish in the news-papers of all commercial towns,
every market day, as is done at Amsterdam, the price of _fine_ gold
and silver, according to this new weight made for the purpose. This
weight may be called the mint-weight of Europe; and from the universal
utility which would follow upon such a regulation, it probably might
be followed: were this to happen, it might be a step towards
establishing an universal conformity of weights every where.

While matters stand on the present footing, it is necessary to be
informed of three particulars. First, Of the proportion of the
different mint weights. Secondly, Of the regulations by which the coin
is made. And lastly, Of the exactness of the mints in following the
regulation. Every mistake in any one of these three articles, is an
impediment to the just determination of the real par.

I acknowledge that, in fact, exchange business goes on smoothly,
notwithstanding all the difficulties we have been enumerating. It may
therefore be asked, in what would consist the great advantage of so
scrupulous a nicety?

My answer is, that exchange business will always go smoothly on, as
long as exchangers gain, and that trade is not interrupted.

But trading men consider their own interest only; and I am configuring
the interest of an intelligent state, which wants to promote the good
of the whole community, without occasioning any hurt to the interest
of individuals.

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CHAP. III.
_How to remove the inconveniences which occur in paying Balances with
the Metals or Coin of a Nation._

The inconveniences which occur when balances are to be paid in bullion or coin are these:

First, The want of secure and ready transportation, from the obstructions government throws in the way to prevent it.

Secondly, The difficulty of procuring the metals abroad when they are not to be found at home.

When we speak here of balances to be paid from one country to another, we understand, that the general amount of the whole payments to be made to the world, exceeds the sum of all that is reciprocally due from it. So far as a balance due to one country is compensated with a balance due by another, they may be mutually discharged by bills of exchange, according to the principles already laid down. All compensations being made by bills drawn for reciprocal debts, we must here suppose a balance due by the country whose interest we are considering. This, like debts between private people, must either be paid in intrinsic value, or by security for it; that is, by contracting a permanent debt bearing interest. The first is the question here before us; the second will be examined in the succeeding chapter.

The first difficulty mentioned, to wit, the want of secure and ready transportation of the metals, proceeds in a great measure from the obstruction government throws in the way, to prevent the exportation of them. To remove which difficulty, it is proper to shew how far it is the interest of government to obstruct, how far to accelerate the transportation of the metals.

We have said that it is the advantage of every state, in point of trade, to have balances paid with the least expence. If then we suppose that it is either necessary or expedient that this balance should be paid in the metals, government, in that case, should facilitate by every method the sending them off in the cheapest and securest way.

But since governments do not follow that rule, we must examine the reasons which engage them to prefer a contrary conduct.

The principal, the most general, and most rational objection against the exportation of the metals, is, that when it is permitted, without restriction, it engages the people, when they go to foreign markets for articles of importation, to run to the coin, instead of carrying thither the product and manufactures of the country. From which a consequence is drawn, that as long as coin and bullion are fairly allowed to be exported, the rich inhabitants will employ them for the purchase of foreign commodities, to the hurt of domestic industry.

This is an objection of great weight, relative to the situation of many nations. The Spaniards and Portuguese feel it severely. Many individuals there are very rich; the numerous classes of the people are either lazy or not properly bred to industry. In that situation the alternative to government is very disagreeable. Either the rich must be deprived of every enjoyment with which their industrious neighbours alone can supply them, until, by very slow degrees, the lowest classes of their countrymen can be engaged to change their way of living, and be inspired with a spirit of industry; or they must be allowed to gratify the desires which riches create, at the expence of the nation’s treasure, and the improvement of their country.

From this alternative we discover the principle which directs the conduct of a statesman under such circumstances, viz.

To forbid the importation of every foreign manufacture whatsoever; to submit to the hardships necessarily implied in the circumstances of the nation; and to pay freely what balance may be owing upon natural produce imported for the uses of subsistence, or manufacture.

This is a plan more rational and more easily executed, than a general prohibition to export the metals; because with good regulations, properly executed, you may prevent the importation of manufactures; but it is hardly possible to prevent the exportation of the metals necessary to pay for what you have bought from strangers, by the permission of government: and on the other hand, suppose you do effectually prevent the exportation of the metals, the consequence will be, to put an end to all foreign trade even in natural produce. What nation will trade with another who can pay only by barter? All credit will then be cut off; for who will exchange by bills, with a place which cannot pay, either in their own currency, or with the metals, the debts which they reciprocally owe?

The maxim therefore, here, is to prevent the contracting of debts with strangers; but when you allow them to be contracted, to facilitate the payment of them.

This reasoning is only calculated to direct a statesman who finds himself at the head of a rich luxurious nobility, and an idle or ill instructed common people, surrounded by industrious neighbours, whose assistance may be necessary upon many occasions, to provide subsistence, or the materials of manufacture, to his people; and this while he is forming a scheme of introducing industry at home, as a basis for afterwards establishing a proper foreign commerce.

But in this subject combinations are infinite, and the smallest change of circumstances throws the decision of a question on a different principle.

I will not therefore say, that in every case which can be supposed, certain restrictions upon the exportation of bullion or coin are contrary to good policy. This proposition I confine to the flourishing trading nations of our own time.

To set this matter in a fair light, and as an exercise upon principles, I shall borrow two combinations, one from history, and another from a recent example in France, in which a clog upon the exportation of the metals and coin were very politically laid on.

We learn from the history of Henry VII. of England, a sagacious Prince, that he established very severe laws against the exportation of bullion; and obliged the merchants who imported foreign commodities into his dominions, to invest their returns in the natural produce of England, which at that time consisted principally in wool and in grain.

The circumstances of the times in which that Prince lived, must therefore be examined, before we can justly find fault with this step of his political oeconomy.

In Henry the VIIth’s time, the foreign trade of England was entirely in the hands of foreigners, and almost every elegant manufacture came from abroad.

Under such circumstances, is it not plain, that the prohibition of the exportation of bullion and coin was only a compulsion, concomitant with other regulations, to oblige foreign merchants, residing in his kingdom, to buy up the superfluity of the English natural produce of wool and grain? Had not the King taken those measures, the whole money of the nation would have been exported; the superfluous natural produce of England would have lain upon hand; the abundance of these would have brought their price below the value of the subsistence of those who produced them; agriculture would have been abandoned; and the nation would have been undone.

I allow that nothing is so absurd as a desire to consume foreign productions, and to forbid the exportation of the price of them. I also allow, that every restraint laid upon exporting silver and gold, falls upon the consumer of foreign goods, and obliges him to pay the dearer for them; but this additional expence to the consumer, does not augment the mass of foreign debts. The debt due abroad will constantly be paid with the same quantity of coin, whether the exportation of it be allowed or forbidden; because the loss of those who pay the balance arises from the risk of confiscation of the money they want to export against law; or from the high exchange they are obliged to pay to those who take that risk upon themselves. In both cases, the additional expence they are put to remains in the country, and is repaid them by the consumers; consequently, can never occasion one farthing more to be exported. Prohibitions, therefore, upon the exportation of specie, are not in every case so absurd as they appear at first sight. It is very certain that no body gives money for nothing; consequently, a state may rest assured that the proprietors of the specie, their subjects, will take sufficient care not to make a present of it to foreigners. The intention, therefore, of such prohibitions, is not to prevent the payment of what people owe; but to prevent that payment from being made in coin or bullion; and also to discourage the buying of such foreign commodities as must be paid in specie, preferably to others which may be paid for with the returns of home produce.

When a statesman, therefore, finds the balance of trade, upon the main, favourable to the country he governs, he need give himself no trouble about the exportation of the specie, from this single principle, to wit, that he is sure it is not given for nothing. But when the balance turns against them, in the regular course of business, not from a temporary cause, then he may lay restraints upon the exportation of specie, as a concomitant restriction, together with others, in order to diminish the general mass of importations, and thereby to set the balance even.

In a trading nation, I allow, that no restriction of that kind ought to be general; because it then affects the useful and the hurtful branches of importation equally: but in Henry’s days, the sale of corn and wool was sufficient to procure for England all it wanted from abroad; and the interests of trade were not sufficiently combined, to enable the state to act by any other than the most general rules. Forbidding the exportation of coin was found to promote the exportation of English productions, and this was a sufficient reason for making the prohibition peremptory. In this view of the matter, did not Henry judge well, when he obliged the merchants who imported foreign goods, to invest the price they received for them in English commodities? Once more I must say it, he was not so much afraid of the consequences of the money going out, as of the corn and wool remaining at home; had he been sure of the exportation of these articles to as good purpose another way, the prohibition would have been absurd; but I am persuaded that was not the case.

The example taken from France is this.

After the fatal bankruptcy in 1720, by the blowing up of the Missisippi, the trade of France languished from the effects of the instability of their coin, until the year 1726, when it was set upon that footing on which it has remained ever since.

Upon that last general coinage, the same principles of enriching the King by the operation, directed the conduct of the minister.

The old specie was cried down, and proscribed in circulation: but it was thought, that as it was the King’s coin, he had a liberty to set a price upon it, at a different rate from any other bullion of the same fineness; and that he had also a right to command the proprietors of it to bring it to the mint at his own price.

The consequence was, that those who could were very desirous to send it to Holland, in order to draw back the value they had sent in bills upon Paris.

Under such circumstances, were not prohibitions upon the exportation of this coin most consistent with the plan laid down? We shall, in the next chapter, examine the consequences of this operation upon the exchange of France.

What has been said, will, I hope, suffice to explain some of the principal motives which statesmen may have, when they lay restrictions on the exportation of the metals, with a view to favour the trade of their nation.

But besides the interests of trade, there are other reasons for laying prohibitions on the exportation of the national coin, although that of bullion be left free under certain restrictions.

As often as it happens, from whatever cause it may proceed, that the value of a nation’s coin falls to par with bullion of the same fineness, that coin, if exported, may be melted down. This is a loss; because it puts the nation to the expence of coining more for the use of circulation.

When nations give coinage gratis, or when they allow the coin of other nations the privilege of passing current under denominations exactly proportioned to its intrinsic value, then coin never can be worth more than any other bullion of the same standard; consequently, will be exported or smuggled out upon every occasion.

If, therefore, a nation does really desire to avoid an expence to the mint, they must make it the interest of merchants to export every other thing preferably to their own coin. This is done by imposing a duty upon the coinage; and this will either prevent its going out unnecessarily, or if it be necessary to export it, the coin will return in the payments made to the nation, in consequence of its advanced value above any other bullion which can be sent.

The forbidding the exportation of coin, implies a restriction upon the exportation of bullion; because, unless the bullion be examined at the custom house, and the stamps upon it looked at, it may happen to be nothing but the nation’s coin melted down, with an intention to avoid the law. For this reason, whoever brings bullion to be stamped, whether it be for exportation or not, must declare that it is not made of the nation’s coin. How slender a check are all such declarations! The only one effectual is private interest; and as no man will take his wig to stuff his chair, when he can get cheaper materials equally good, so no man will melt down coin which bears an advanced value, when he can procure any other bullion.

On the whole, we may determine, that a flourishing commercial state, which has, on the average of their trade, a balance coming in from other countries, should lay it down as a general rule, to facilitate the exportation of their coin, as well as bullion: and if a very particular circumstance should occur, which may continue for a short time, they may then put a temporary stop to it, and facilitate the payment of the balance in the way of credit.

I have enlarged so much upon the methods of removing the first difficulty of paying a balance, with the coin or bullion found in a nation, that what remains to be said upon the second difficulty, to wit, the procuring them from other nations, need not be long.

Were the mint weights of all countries sufficiently determinate; were the regulations concerning the standard of bullion exactly complied with; and were the current market prices of that important commodity, considered as a valuable piece of intelligence every where, the bullion trade would be much easier than it is.

We have said, that when the reciprocal debts of two nations are equal, there is no occasion for bullion to discharge them. But trading nations are many; and from this it may happen, that one who, upon the whole, is creditor to the world, may be debtor to a place which is also creditor to the world; and in this case bullion is necessary to pay the debt.

If a man owes money to a person who has many creditors, the person owing, may buy up a claim against him, and pay what he owes in that way: but if the person to whom he owes money be indebted to no body, then the debt must be paid with ready money. Just so of nations. For instance, when bullion is demanded to be exported to Holland, the English merchants, who are creditors on Spain and Portugal, take from thence their returns in bullion, for the sake of paying a balance to Holland, which is, upon the whole, creditor to the world.

But as it seldom happens, that he who deals with Holland is the person who has credit in Spain or Portugal, he is obliged to apply to Portugal merchants to procure bullion. They again who trade thither, having profit on the returns of the commodities they bring from thence, will expect the same profits upon the bills they give to the man who wants to take his return in bullion. This plainly raises the price of bullion in the English market; because it is brought home in consequence of a demand from England. On the other hand, when the demands of England for Portuguese commodities is less than the value of what Portugal owes her, the Portugal merchants in London are obliged to take the balance in the metals. These come to the London market, and are offered to sale to those who want them: then the price of bullion falls; because the demand comes from the other side.

To go through all the operations which merchants employ to abbreviate the process I have been describing, would, indeed, better explain the practical part of exchange, than what I have said; but I write, not to instruct merchants, but to extract from their complicated operations, the principles upon which they are founded.

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CHAP. IV.
_How the Price of Exchange_, in a prosperous trading Nation, _may be
prevented from operating upon the whole Mass of reciprocal Payments, in
place of affecting the Balance only_.

We have taken it for granted, that the price of exchange is a hurt to trade in general.

In this chapter, we shall inquire more particularly than we have done, in what that hurt consists. The point of view of every man, whether he be a merchant or not, is first honestly, and as far as law and fair dealing permit, to consult his own private interest; and in the second place, to promote that interest with which his own is most closely connected.

According to this rule, every merchant will endeavour to manage his exchange business to the best advantage to himself. If the balance be against his country, he will sell his bills on the country creditor as dear as he can; that is, he will endeavour to raise the price of exchange as high as he can against his country, whatever hurt may thereby result to the general trade of it; and in so doing, he only does what duty to himself requires; because it is by minding his business only, that he can trade upon equal terms with his neighbours, every one of which avail themselves of the like fluctuations, when they happen to be in their favour.

From this I conclude, that since the loss upon high exchange against a country, affects principally the cumulative interest of the whole, relative to other trading nations; it is the business of the statesman, not of the merchants, to provide a remedy against it.

The whole class of merchants, no doubt, exchangers excepted, would be very glad to find the course of exchange constantly at par. This is also greatly the interest of the state; because it is from the _balance_ in its favour, not from _the profit made in drawing that balance_ from the debtor, that the state is a gainer. This must be explained.

I am to shew how it happens, that a nation is only benefited or hurt by the net balance which it receives from, or pays to her neighbours: and that the whole expence of paying or receiving that balance, is not national, but particular to individuals at home; consequently, it would be the interest of all states, that balances, both favourable and unfavourable, were paid by the nation debtor, at the least expence possible.

The great difficulty in communicating one’s thoughts upon this subject with distinctness, proceeds from the ambiguity of the terms necessary to express them. This may be avoided by adopting the technical terms of merchants; but these are still more difficult to be comprehended by any one not conversant in commerce. I shall acquit myself of this difficult talk the best way I can.

When we speak of a balance between two nations, we shall call the nation who owes the balance the _nation-debtor_; the other to whom it is owing, the _nation-creditor_.

Balances imply reciprocal debts; consequently, reciprocal debtors and creditors. To avoid, therefore, confusion in this particular, we shall use four expressions, viz. the debtors to the nation-creditor; the debtors to the nation-debtor; the creditors to the nation-creditor; the creditors to the nation-debtor.

Let me suppose that Paris owes a balance to London, no matter for what sum. The reciprocal debts between Paris and London are all affected by the consequence of this balance: that is to say, some pay or receive more than the real par; some pay or receive less. To discover where the profit centers, we are now to inquire who are those who receive more, who are those who receive less. And as profit and loss are here only relative, that is to say, the profit of the one is compensated by the loss of the other; we must see whether or not, upon the whole, the price of the exchange in this case be favourable to London, to which, by the supposition, the balance is due, and unfavourable to Paris, which is the debtor.

The question thus stated, let us examine the operations of exchange at London and Paris, and the state of demand in both, for money or bills.

In the London market, the demand will be for money in London for bills on Paris; and he who demands, must pay the exchange; consequently, the London merchants, creditors to the _nation-debtor_, will pay the exchange; that is to say, they will sell their bills on Paris below par; and the London merchants, debtors to the nation-debtor, will buy them, and gain the exchange; that is, they will buy bills upon Paris below par.