Chapter XXXIV: Part III: Of Exchange

CHAP. I. Foreign circulation is carried on by bills of exchange.

When reciprocal debts are contracted by different countries, the creditors in both take payment at home for the bills they draw to the order of those who pay; and they again indorse the bills to their creditors abroad.

In this contract four parties concur: the domestic and foreign creditors; the domestic and foreign debtors. This operation can extend no farther than to the amount of reciprocal and equal debts; if there be a balance owing upon one side, this balance must be paid in value, either in money or merchandize. Now as a debt is much easier discharged by compensation than by payment, merchants endeavour to profit of this compensation; but as every one endeavours alike when there is a balance on one side, it operates upon the whole of the exchange, and every one must bear his share of the expence of paying it.

If London should owe a balance to the world, after compensating all that the world owes to her, every London-debtor to the world will wish to compensate; consequently, he will look out for one who is creditor to the world: but this search betrays the secret, and shews that he is the demander; upon which the other avails himself of his situation, and refuses to compensate without profit. Hence the secrecy said to be requisite in this branch of trade. It is requisite to the trader only, whose interest is concerned; because whatever one set of merchants in a place wish to conceal, another set have constantly an interest to divulge. The interest of the state consists in preserving an equality of profit and loss among them all; and in facilitating to them the paying and receiving the balances due upon the total of all their transactions. The loss of the nation is upon the balance due by the country; the expence of paying the balance, which is the price of exchange, is only a relative loss to some of her subjects, and a relative gain to others.

The attention, therefore, of a statesman in what regards exchange, is, 1_mo_, To take care that the true par between the value of the national money and the money of other nations, shall be as much as possible proportional to the quantity of metal contained in each.

2_do_, To remove domestic inconveniences in paying with the metals, or national coin, every unavoidable balance.

3_tio_, To hinder the expence of acquitting a small balance from occasioning a loss on the compensation of reciprocal debts.

And, 4_to_, When he finds an inconvenience in allowing the metals or coin to go out of the country, he must assist in having the balance paid in the way of credit.

CHAP. II. The best method for 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 two places exchanging; and to state the difference only, as the price paid for the exchange. To render this more practicable, a proposal for rendring all mint-weights more determinate is set forth in a note.

CHAP. III. When upon the whole of a nation’s trade with the rest of the world, a balance is due, it must be paid, either in intrinsic value, which totally discharges it, or by giving security for it, and paying interest until the charge can be obtained. We consider in this chapter the methods of discharging it.

A statesman is the best judge when his people ought to pay with bullion, and when with credit. If he approves of their paying with bullion, that is, with gold and silver, he should render the exportation of the metals as easy as possible. If a duty be laid upon coinage, he need not be afraid that any one will send off the coin, as long as bullion can be found; and when this runs short, if he does not choose that his coin should go out, he must lend his assistance in paying with credit. If he finds it against his interest either to pay in one way or in the other, he must put a stop to the trade which creates the balance: for while such trade is permitted, he will find it beyond his power to prevent the payment of that balance in the most hurtful way possible to his country.

I here observe, that in countries unacquainted with trade, and in others where the whole external commerce is carried on by strangers, a good expedient for cutting off such hurtful branches of traffic is to lay all the restraints possible on the exportation of the metals, in order to promote the exportation of what the country can offer in return. But when trade and industry are established, these restrictions cease to be useful; because merchants then find a profit upon exporting domestic productions, which they never can have upon exporting an intrinsic value.

A statesman, therefore, should conduct his operations according to the situation of his country. If foreign trade be unprofitable, cut it off as much as possible, and lay every restraint upon the exportation of coin. If it be profitable, lay no restrictions on payments; because you are sure you will gain upon the whole. And if, in any particular case, you incline to keep your coin at home, mortgage your country, and pay with your credit.

If, when you are obliged to check foreign trade, and lay prohibitions on the exportation of coin, exchange is found to rise to a great height against you, yet will this exchange produce no national loss: it will be paid within the country by those who consume foreign commodities, to those who are at the trouble and expence of transacting the balance.

CHAP. IV. Here I demonstrate what before I had in a manner taken for granted, viz. that the price of exchange is neither a national loss, or a national gain; but whether it be favourable or unfavourable, it produces an instability in the profits upon trade, and should therefore be kept at par by all possible methods. I also shew how exchange is favourable to exportation, when the balance is against a country, and how the exchange is unfavourable in that respect in proportion as the balance is for that country: and as whatever exchange is gained by exporters is lost by importers, and _vice versa_, some have concluded, that an unfavourable balance does of itself destroy its own pernicious effects, and sets the balance even. I endeavour to disprove this proposition, by shewing how the importers are indemnified, as to their loss by the exchange, from the additional price they get for their foreign commodities at home; whereas the exporters cannot raise their prices abroad; because foreign competition will not permit them. So that in one case the wrong balance hurts the rich consumer at home, who can bear the loss; and in the other, the right balance hurts the poor manufacturer, who cannot. Hence I conclude, that it is greatly for the interest of a trading state to keep exchange, at all times, as nearly at par as possible.

That this is a practicable scheme, I prove by a matter of fact, and by an experiment made in France by a late minister; where, upon a certain occasion, the exchange having risen to a great height against France, he immediately brought it to par, by ordering bills upon Holland to be furnished at that rate, to those who should demand them; and by taking upon himself the expence of sending the money paid for such bills, to the place upon which they were drawn.

I observe, however, that such operations can only be recommended to statesmen who preside over the interests of flourishing trading nations; because in proportion as they are benefited by facilitating the payment of the casual balances due by them from time to time, in so far is a prodigal nation hurt, by facilitating the dissipation of their property, and by contriving a ready method of transferring it to foreigners.

CHAP. V. When a nation owes a balance, after all the payments they have been able to make, either in coin, bullion, bills, or merchandize, it is evident, that what remains can only be satisfied by obtaining credit for it, at the expence of mortgaging the country and paying interest for the remaining balance. When this, however, happens to be the case, it involves the nation-debtor in a multitude of expensive operations conducted by exchangers, who constantly find a profit in carrying them on, though at a very great loss to individuals within the country. To prevent this inconvenience, I propose, that the statesman should take upon himself the obtaining of credit abroad, for the balance due by the country he governs; and that the expence incurred by this operation should be defrayed by the public, whereby every individual within the state will contribute his share towards maintaining an uniformity in the profits upon trade, and supporting the stability of commerce, from the regularity of the course of exchange at all times. This operation resembles very much another of which we have already spoken in treating of banks of circulation upon mortgage. There we recommended the payment of foreign balances as a proper branch of bank administration: here we recommend it to a statesman to interpose voluntarily between his subjects and their foreign creditors. This is the best method of supporting commerce, when it happens accidentally to fall under the discouragement of an unfavourable balance.

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