Chapter XX: Part III: Of Exchange (2)

Now as this negotiation is carried on at London, I must suppose it to take place amongst Englishmen; one part of whom will gain exactly what the other loses; consequently England, in this respect, neither gains or loses by the exchange paid in London.

Let us next examine the interest of the merchants, and the interest of the nation’s trade.

The creditors to the nation-debtor, who have lost by the exchange, are those who have exported English commodities to France. Upon this profitable branch of commerce the exchange occasions a loss, the consequence of which is, to discourage exportation.

The debtors to the nation-debtor, who have gained by the exchange, are those who have imported French commodities to England. Upon this hurtful branch of commerce, the exchange occasions a profit; the consequence of which is, to encourage importation.

This is not all. The merchants exporters, who have lost, cannot draw back their loss upon the return of their trade; because the return of their trade is the _money_ due by France, the balance included. Whereas the merchants importers may draw back their loss upon the return of their trade; because that return is _merchandize_, which they can sell so much the dearer to their own countrymen.

If the balance be in favour of London, importers gain, as we have seen; when it is otherwise, and when they are obliged to pay the exchange, they indemnify themselves, by the sale of their goods so much the dearer. High exchange, therefore, _may_ hurt exporters, but never _can_ hurt importers.

Let us next examine the operation of exchange at Paris.

In the Paris market, the demand will be for bills upon London for money in Paris; and he who demands must pay the exchange. The debtors, therefore, to the nation-creditor, must pay the exchange, and the creditors to the nation-creditor will receive it; and as both are Frenchmen, the profit and loss to Paris exactly balance one another.

But the debtors to the nation-creditor are here the importers of English goods; consequently, this trade, hurtful to France, would be hurtful to the importer, could he not indemnify himself by selling them so much the dearer to his countrymen.

The creditors, again, to the nation-creditor, who gain the exchange, are the exporters of French goods to England; so that here the exportation meets with an encouragement from a balance against the country.

From the advantage found upon exchange in favour of exporters, and the loss upon it to the prejudice of importers, in the case of a wrong balance, it has been believed, that a wrong balance produced upon importations and exportations are effects equal and contrary, which destroy one another, and thereby bring the balance even.

In answer to this, I have two short arguments to offer.

The first is, that were the argument conclusive, it would hold good in reversing the proposition; to wit, that the consequence of a favourable balance would be to destroy the difference also, and bring the balance even. This I never heard alleged.

My second argument is the strongest: that the enhancing of the prices of importations will not so effectually discourage the sale of them at home, as the enhancing the prices of exportations will discourage the sale of them abroad; for the reasons I shall give presently. But in the mean time,

If the compensation be considered only in relation to the merchants importers and exporters, there, indeed, I agree, that _their_ profit and loss upon the exchange is most exactly balanced; because what the one party gains the other loses; and the country loses the balance only, as has been said.

The reciprocal debts thus transacted by bills of exchange, we see that no profit can be made, nor loss incurred, either to London, or Paris, by that operation.

The profit to Frenchmen is compensated by the loss to Frenchmen; the same may be said of the English merchants: but the balance due after those operations are over, and the more remote consequences of high exchange, affect the relative interest of the two nations.

This balance is generally sent by the country-debtor, either to the country-creditor, or to their order in a third country, to which they are indebted.

The transportation and insurance of this balance is an expence to those who owe it, and the profit, if any there be on that operation, naturally falls to exchangers of the same nation, who conduct it. So whether exchange be paid upon bills drawn, or expence be incurred in the transportation of balances, no profit can accrue upon that to the nation-creditor, to the detriment of the debtor: it must, therefore, do hurt to both, relatively to nations where, upon the average of trade, exchange is lower.

I come now to the method of transporting balances in the metals.

We have seen how the creditors of the nation-debtor pay exchange upon the sale of their bills on Paris, which owes the balance. If by the operations of exchangers, this exchange should rise, to their detriment, higher than the expence, trouble, and insurance, of bringing the balance from Paris, then they will appoint some factor at Paris, to whose order they will draw bills upon their debtors in that city; and as what the Paris-debtors owe to London is stated in pounds sterling, the London-creditors will value the pound sterling, according to the rate of exchange, in their favour; and in their bills upon their Paris-debtor, they will convert the sum into livres, including the exchange.

By this operation, we see how the transportation of the balance may become the business of the creditors to the nation-debtor: which is a combination we have not as yet attended to: a few words will explain it.

When the creditors of the nation-debtor sell their bills, they must pay the exchange, as has been said. When they draw bills to the order of a friend in the place where the balance is owing, they superadd the exchange. This their debtors pay: but then they themselves must be at the trouble and expence of bringing home the money.

It is from this alternative which both parties have of either sending what they owe to their creditors in bullion, or of allowing them to draw for it at the additional expence of paying the exchange, that a check upon the extravagant profit of exchangers arises: and from this combination arises all the delicate operations of drawing and remitting.

Into these we shall not inquire: the principle on which they depend appears sufficiently plain, and this is the principal object of our attention.

I proceed now to consider how far those reciprocal profits and losses, between merchants in the same country, affect the trade of it in general.

When the balance is favourable, we have said that the exporters lose the exchange, and the importers gain it; and both being citizens, the country would not be concerned in their relative interests, were it not that these interests are connected with that of the country, which reaps great benefit from the trade of those who deal in exportations, and loss from the other.

If, therefore, exchange is found to hurt exportation, when the balance is favourable, in this respect the country has an interest in bringing it as low as possible. But as it may be said that since the return of an unfavourable balance hurts in its turn the interests of importation, and favours the other, exchange thereby operates a national compensation; it will not be improper, in this place, to throw out one reflection more, in order to destroy the strength of that argument.

Were this proposition admitted, as I am afraid it cannot, from what we have already said, it affords no argument against doing what can be done, to render exchange as little hurtful as possible to exportation, during the favourable balance. But as to the question itself, of national compensation, I cannot allow that even _exporters_ and _importers_ are thereby brought on a level in point of trade: for this reason, that the exchange affecting the exporters, in proportion as it augments, discourages manufacturers, who must have regular, and even growing profits, according to the increase of demand. These the merchant exporter cannot afford; because he _cannot_ draw back from his foreign correspondents, any advance upon manufactures at home, arising from domestic circumstances. But when the merchant importer is affected by the exchange against him; this additional expence he _can_ draw back; because he sells to those who are affected by all domestic circumstances.

Let us therefore determine, that it is the interest of a state to disregard that compensation which is given to exportation by a wrong balance, which does so much harm; and to avoid the discouragement given to it by a right balance, which does so much good. The only way to compass those ends, is to keep exchange as near to par as possible.

Could reciprocal debts be always exchanged at par, and could the expence of bringing home, and sending a balance abroad, be defrayed by the state, I think it would prove a great advantage to the trade of a nation. I do not pretend to say that, as matters stand, the thing is practicable; but as it is a question which relates to my subject, and seems both curious and interesting, I shall here examine it.

At first sight, this idea will appear chimerical; and some readers may despise it too much, to be at the trouble to read what may be said for it. I shall therefore set out by informing them that the scheme has been tried, in a great kingdom in Europe, under a great minister; I say it was attempted in France, in the year 1726, under the administration of Cardinal Fleuri, and produced its effect; although it was soon given up, from a circumstance which, I think, never can occur in Great Britain.

After the last general coinage in France, 1726, exchange became so unfavourable to that kingdom, that there was a general outcry. The Cardinal, to put a stop to the clamour, and set trade to rights, as he thought, ordered Samuel Bernard, at that time a man of great credit, to give bills on Holland at par, to all the merchants. To enable him to place funds in Amsterdam, for the payment of his bills, the Cardinal supplied this exchanger with sufficient quantities of the old coin, then cried down, and paid for the exportation of it to Holland.

Upon this exchange on Holland came to par; and all exchangers at Paris looked on the operation with amazement. The minister, however, in a short time discovered, that by this he was undoing with one hand, what he wanted to establish with the other. He therefore stopped in his career, after having paid, perhaps, ten times the balance due to Holland.

By unfolding the combination of this operation, I shall be better able to cast light on the question before us, than in any other way.

When the general coinage was made in France, by the arret of the month of January 1726, all the old coin was cried down, and ordered to be recoined. The mint price of fine gold _per_ marc was fixed at 536 livres 14 sols 6 deniers; and the silver at 37 livres 1 sol 9 deniers. These were the prices at which the mint paid for bullion, when offered to be coined. But the King, as if he had a right upon the metal in the old coin, commanded it to be delivered at the mint at no higher rate than 492 livres for the marc of fine gold, and at 34 livres for the marc of fine silver: and to compel the possessors of it to bring it in, all exportation and melting down was made highly penal; the avenues from France were beset with guards to prevent the going out; and the melting pots were strictly watched. Upon this, the possessors of the old coin, rather than sell it to the mint at so great an undervalue, had recourse to exchangers for bills upon Holland for it: and these being obliged to send it thither at a great expence and risk, exacted a very high exchange, which, consequently, affected the whole trade of France.

Politicians persuaded the Cardinal, that exchange had got up so high, not from the discredit cast on the old coin, but because of the wrong balance, and the alteration which had been made at that time upon the denomination of the new: and that so soon as the balance against France was paid, exchange would return to par. Upon this the Cardinal set Bernard to work, but he soon discovered his mistake; and by arret of the 15th of June the same year, raised the mint price of the old coin, and then exchange became favourable.

These are all facts mentioned by Dutot, and yet he never will ascribe the rise of exchange in France to any other cause than to the tampering with the denominations of their coin: an operation which may rob one set of people in favour of another; but which has very little effect upon exchange, when other circumstances do not concur, as in the case before us.

Now had the high exchange against France been owing to a wrong balance upon her trade, is it not evident that the Cardinal’s operation would have succeeded, that all demands for bills at Samuel Bernard’s office would have been confined to the exact extent of that balance; that the reciprocal debts would have been negotiated between the merchants at par; and, consequently, that all expence upon exchange would have been saved to individuals, at the small charge to government of transporting the balance paid for the bills by the merchants at Paris?

Were prosperous trading states, therefore, conducted by statesmen, intelligent, capable, and uninfluenced by motives of private interest, they would make it a rule to be at the expence of sending off, and bringing home all balances, without the charge of exchange to traders: but the consequence of either neglect, or incapacity in the man at the helm, would then become so fatal that it might be dangerous to attempt, at once, so great a change in the present method of paying balances: but I never make allowances for the defects of a statesman, while I am deducing the principles which ought to direct his conduct.

I shall next slightly point out the bad consequences which, _upon an unfavourable state of commerce_, might result from such a plan; and without recommending any thing to practice, leave the reader to judge of the expediency.

We see, that by a statesman’s giving bills at par, _on all occasions_, and being himself at the expence of transportation and insurance, in bringing home and sending off all balances, exchange would of itself come to par.

The first consequence of this would be, the total annihilation of the exchange business; and if, after that, any interruption should happen by neglect in the statesman, trade might suffer considerably.

Another consequence is, that the most destructive trade would go forward without a check, as long as merchants could pay the par of the bills they demanded upon foreign parts: and this they would constantly be enabled to do, while there was either coin or paper in circulation, as has been explained in treating of banks of circulation upon mortgage.

The consequence of this would be, to oblige the state to pledge the revenue of the country to strangers, in proportion to the balance owing, over and above the extent of the metals to discharge it.

Now the question is, and this I shall leave to the sagacity of my reader to determine, whether, as matters stand, there be any check proceeding from high exchange which can prevent the bad consequences here set forth. I suspect there is not. We see the most enormous sums lent by nations to nations; raising the exchange against the lenders; turning it in favour of the borrowers, but never preventing the loan from going forward. Does not Great Britain, as well as France, owe amazing sums to other nations, at the expence of paying the interest out of their revenue? And have not all those sums been transacted by exchangers, who have made great fortunes by it? Are not the most unfavourable balances paid in the ordinary method? Are there not, therefore, already, instruments in the hands of all nations, sufficient for their undoing? How could their ruin be accelerated by this alteration in the mode of performing the same thing?

But let it be observed, that our business, in this chapter, is to search for methods to advance the prosperity of flourishing nations, who have a balance owing to them; and here we have been setting forth the bad consequences which result from _these_, to others who are in decay. Every argument, therefore, drawn against this scheme, in favour of the idle or prodigal, is an argument in favour of it, with respect to the industrious and frugal. As all nations are liable to alternate vicissitudes of prosperity and adversity, the principles here laid down require to be carefully combined with domestic circumstances, before they be applied to practice.

It was with a view to this distinction, that, in the title of this chapter, I pointed out the question there proposed, as relative to the state of it in a _prosperous trading nation_; and I am not quite clear how far it might not be advantageous in every case: but this question I shall not here enlarge upon. What has been said, will, I hope, be sufficient to point out the principles upon which the decision depends; and if any statesman inclines to try the consequences of it by an experiment now and then, nothing is so easy as to do it, without any detriment. This is proved from the operation performed by the French cardinal, on the occasion of a very unfavourable and high exchange.

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CHAP. V.
_How, when other expedients prove ineffectual for discharging of
Balances, the same may be paid by the Means of Credit, without the
Intervention of Coin or Bullion; and who are those who ought to conduct
that Operation._

We have now applied the principles formerly laid down, towards discovering the most proper expedients for removing or palliating the three inconveniences to be struggled with in regulating exchange. 1. How to estimate the value of a balance due: 2. How to pay it with the coin or bullion of the country: and lastly, How to prevent the price of exchange from affecting any thing more than the balance to be paid, after all reciprocal debts have been compensated.

It remains to inquire, what are the most proper methods to acquit what a nation may owe, after it has done all it can to pay the value of their balance in the other way.

At first sight, it must appear evident that the only method here is to give security, and pay interest for what cannot be paid in any other value. This is constantly done by every nation; but as the ordinary methods are very perplexed, and are attended with expences which raise exchange to a great height, and thereby prove a prodigious discouragement to trade in general: it would be no small advantage, could all this loss on exchange be equally thrown upon every class within the state, instead of being thrown entirely upon its commerce.

As this is the expedient to be proposed, it will not be amiss to observe, that foreign balances arise chiefly upon four articles. 1. The great importation and consumption of foreign productions. 2. The payment of debts and interest due to foreigners. 3. The lending money to other nations. And 4. the great expence of the state, or of individuals, abroad.

Could all the bad consequences arising from these four causes, and the high exchange occasioned by them, be cast upon that interest alone which occasions them, I would not propose to lay the whole body of the nation under contribution for repairing the loss.

But if from the nature of the thing, as matters stand, the whole be found to fall upon trade, without a possibility of preventing it, in this case, I think, it is better for the nation, _in cumulo_, to lend its assistance, and share the burdens, than to allow it to fall upon that part of the body politic from which the whole draws its vigour and prosperity.

It cannot be denied, that when a heavy balance is due by a nation, it has the effect of raising exchange upon every draught or remittance. When bills are demanded to pay a foreign claim, it cannot be determined from what cause the claim has arisen. Whether for national purposes or not, the exchange is the same, and equally affects the whole interest of trade.

If this be a fair state of the case, I think we may determine, that such balances are to be paid by the assistance and intervention of a statesman’s administration.

The object is not so great as at first sight it may appear. We do not propose that the value of this balance should be advanced by the state: by no means. They who owe the balance must, as at present, find a value for the bills they demand. Neither would I propose such a plan for any nation who had, upon the average of their trade, a balance against them; but if, on the whole, the balance be favourable, I would not, for the sake of saving a little trouble and expence, suffer the alternate vibrations of exchange to disturb the uniformity of profits which tends so much to encourage every branch of commerce.

We have abundantly explained the fatal effects of a wrong balance to banks which circulate paper; and we have shewn how necessary it is that they should perform what we here recommend. There is therefore nothing new in this proposal: it is only carrying the consequences of the same principle one step farther, by pointing out, as a branch of policy, how government should be assisting to trade in the payment of balances, where credit abroad is required; and this assistance should be given out of the public money.

The greatest, and indeed, I think, the only objection to this scheme, is, that by it the condition of our foreign creditors will be bettered, for no value received from them. This I allow will be the case when the balance is against England: but it will be compensated to the creditors by the loss they will sustain when the balance is in her favour. But supposing there should be a benefit to foreign creditors, will not this circumstance raise the confidence of all the world in the English funds? If there was a proposal made for lowering the rate of money, by refunding the debts which bear a higher interest than what money can be procured for, were the continent to pour her wealth into our subscription, might we not then more readily expect a supply from that quarter? Besides, is not all the interest due to foreign creditors paid in bank paper? Is not this demandable in coin, and will not this coin be exported, if credit be not found? Were the bank of England to keep a subscription open, at all times, in Amsterdam, for money to be borrowed there, on the payment of the interest in that city, who doubts but loans might be procured at much less expence than at present, when we beat about for credit every where, until by the return of a favourable balance upon the trade of England, she shall be enabled to fill up the void.

I feel my own insufficiency to unfold the many combinations which such an operation must imply. I therefore shall not attempt what, at any rate, I must leave imperfect. What has been said, combined with what has been thrown out on the same subject, in treating of other matters, is sufficient to give a hint, as to the expediency of the plan in general. And as to the objection which arises from the payments to the public creditors abroad, I shall reserve the more ample discussion of it till I come to consider the doctrine of public credit.

END OF THE THIRD PART.

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AN

INQUIRY

INTO THE

PRINCIPLES OF POLITICAL OECONOMY.

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