University of Virginia Library

22.10. 10. Of Exchange.

The relative abundance and scarcity of specie in different countries forms what is called the course of exchange.

Exchange is a fixing of the actual and momentary value of money.

Silver as a metal has value like all other merchandise, and an additional value as it is capable of becoming the sign of other merchandise. If it were no more than mere merchandise, it would lose much of its value.

Silver, as money, has a value, which the prince in some respects can fix, and in others cannot.

1. The prince establishes a proportion between a quantity of silver as metal, and the same quantity as money, 2. He fixes the proportion between the several metals made use of as money. 3. He establishes the weight and standard of every piece of money. In fine, 4, he gives to every piece that ideal value of which I have spoken. I shall call the value of money in these four respects its positive value, because it may be fixed by law.

The coin of every state has, besides this, a relative value, as it is compared with the money of other countries. This relative value is established by the exchange, and greatly depends on its positive value. It is fixed by the general opinion of the merchants, never by the decrees of the prince; because it is subject to incessant variations, and depends on a thousand accidents.

The several nations, in fixing this relative value, are chiefly guided by that which has the greatest quantity of specie. If she has as much specie as all the others together, it is then most proper for the others to regulate theirs by her standard: and the regulation between all the others will pretty nearly agree with the regulation made with this principal nation.

In the actual state of the globe, Holland is the nation we are speaking of. Let us examine the course of exchange with relation to her.

They have in Holland a piece of money called a florin, worth twenty sous, or forty half-sous or gros. But, to render our ideas as simple as possible, let us imagine that they have not any such piece of money in Holland as a florin, and that they have no other but the gros: a man who should have a thousand florins should have forty thousand gros; and so of the rest. Now the exchange with Holland is determined by our knowing how many gros every piece of money in other countries is worth; and as the French commonly reckon by a crown of three livres, the exchange makes it necessary for them to know how many gros are contained in a crown of three livres. If the course of exchange is at fifty-four, a crown of three livres will be worth fifty-four gros; if it is at sixty, it will be worth sixty gros. If silver is scarce in France, a crown of three livres will be worth more gros; if plentiful, it will be worth less.

This scarcity or plenty, whence results the mutability of the course of exchange, is not the real, but a relative, scarcity or plenty. For example, when France has greater occasion for funds in Holland than the Dutch of having funds in France, specie is said to be common in France and scarce in Holland: and vice versa.

Let us suppose that the course of exchange with Holland is at fifty-four. If France and Holland composed only one city, they would act as we do when we give change for a crown: the Frenchman would take three livres out of his pocket, and the Dutchman fifty-four gros from his. But as there is some distance between Paris and Amsterdam, it is necessary that he who for a crown of three livres gives me fifty-four gros, which he has in Holland, should give me a bill of exchange for fifty-four gros payable in Holland. The fifty-four gros is not the thing in question, but a bill for that sum. Thus, in order to judge of the scarcity or plenty of specie, [12] we must know if there are in France more bills of fifty-four gros drawn upon Holland than there are crowns drawn upon France. If there are more bills from Holland than there are from France, specie is scarce in France, and common in Holland; it then becomes necessary that the exchange should rise, and that they give for my crown more than fifty-four gros; otherwise I will not part with it; and vice versa.

Thus the various turns in the course of exchange form an account of debtor and creditor, which must be frequently settled, and which the state in debt can no more discharge by exchange than an individual can pay a debt by giving change for a piece of silver.

We will suppose that there are but three states in the world, France, Spain, and Holland; that several individuals in Spain are indebted to France, to the value of one hundred thousand marks of silver; and that several individuals of France owe in Spain one hundred and ten thousand marks: now, if some circumstance both in Spain and France should cause each to withdraw his specie, what will then be the course of exchange? These two nations will reciprocally acquit each other of a hundred thousand marks; but France will still owe ten thousand marks in Spain, and the Spaniards will still have bills upon France, to the value of ten thousand marks; while France will have none at all upon Spain.

But if Holland was in a contrary situation with respect to France, and in order to balance the account must pay her ten thousand marks, the French would have two ways of paying the Spaniards: either by giving their creditors in Spain bills for ten thousand marks upon their debtors in Holland, or else by sending specie to the value of ten thousand marks to Spain.

Hence it follows that when a state has occasion to remit a sum of money to another country, it is indifferent, in the nature of the thing, whether specie be conveyed thither or they take bills of exchange. The advantage or disadvantage of these two methods solely depends on actual circumstances. We must inquire which will yield most gros in Holland-money carried thither in specie, or a bill upon Holland for the like sum. [13]

When money of the same standard and weight in France yields money of the same standard and weight in Holland, we say that the exchange is at par. In the actual state of specie [14] the par is nearly at fifty-fourgros to the crown. When the exchange is above fifty-four gros, we say it is high; when beneath, we say it is low.

In order to know the loss and gain of a state in a particular situation of exchange, it must be considered as debtor and creditor, as buyer and seller. When the exchange is below par, it loses as a debtor, and gains as a creditor; it loses as a buyer and gains as a seller. It is obvious it loses as debtor; suppose, for example, France owes Holland a certain number of gros, the fewer gros there are in a crown the more crowns she has to pay. On the contrary, if France is creditor for a certain number of gros, the less number of gros there are in a crown the more crowns she will receive. The state loses also as buyer, for there must be the same number of gros to purchase the same quantity of merchandise; and while the exchange is low, every French crown is worth fewer gros. For the same reason the state gains as a seller. I sell my merchandise in Holland for a certain number of gros; I receive then more crowns in France, when for every fifty gros I receive a crown, than I should do if I received only the same crown for every fifty-four. The contrary to this takes place in the other state. If the Dutch are indebted a certain number of crowns to France, they will gain; if this money is owing to them, they will lose; if they sell, they lose; and if they buy, they gain.

It is proper to pursue this somewhat further. When the exchange is below par; for example, if it be at fifty instead of fifty-four, it should follow that France, on sending bills of exchange to Holland for fifty-four thousand crowns, could buy merchandise only to the value of fifty thousand; and that on the other hand, the Dutch sending the value of fifty thousands crowns to France might buy fifty-four thousand, which makes a difference of 8/54, that is, a loss to France of more than one-seventh; so that France would be obliged to send to Holland one-seventh more in specie or merchandise than she would do were the exchange at par. And as the mischief must constantly increase, because a debt of this kind would bring the exchange still lower, France would in the end be ruined. It seems, I say, as if this should certainly follow; and yet it does not, because of the principle which I have elsewhere established; [15] which is that states constantly lean towards a balance, in order to preserve their independency. Thus they borrow only in proportion to their ability to pay, and measure their buying by what they sell; and taking the example from above, if the exchange falls in France from fifty-four to fifty, the Dutch who buy merchandise in France to the value of a thousand crowns, for which they used to pay fifty-four thousand gros, would now pay only fifty thousand, if the French would consent to it. But the merchandise of France will rise insensibly, and the profit will be shared between the French and the Dutch; for when a merchant can gain, he easily shares his profit; there arises then a communication of profit between the French and the Dutch. In the same manner the French, who bought merchandise of Holland for fifty-four thousand gros, and who, when the exchange was at fifty-four, paid for them a thousand crowns, will be obliged to add one-seventh more in French crowns to buy the same merchandise. But the French merchant, being sensible of the loss he suffers, will take up less of the merchandise of Holland. The French and the Dutch merchant will then both be losers, the state will insensibly fall into a balance, and the lowering of the exchange will not be attended with all those inconveniences which we had reason to fear.

A merchant may send his stock into a foreign country when the exchange is below par without injuring his fortune, because, when it returns, he recovers what he had lost; but a prince who sends only specie into a foreign country which never can return, is always a loser.

When the merchants have great dealings in any country, the exchange there infallibly rises. This proceeds from their entering into many engagements, buying great quantities of merchandise, and drawing upon foreign countries to pay for them.

A prince may amass great wealth in his dominions, and yet specie may be really scarce, and relatively common; for instance, if the state is indebted for much merchandise to a foreign country, the exchange will be low, though specie be scarce.

The exchange of all places constantly tends to a certain proportion, and that in the very nature of things. If the course of exchange from Ireland to England is below par, and that of England to Holland is also under par, that of Ireland to Holland will be still lower; that is, in the compound ratio of that of Ireland to England, and that of England to Holland; for a Dutch merchant who can have his specie indirectly from Ireland, by way of England, will not choose to pay dearer by having it in the direct way. This, I say, ought naturally to be the case; but, however, it is not exactly so. There are always circumstances which vary these things; and the different profit of drawing by one place, or of drawing by another, constitutes the particular art and dexterity of the bankers, which does not belong to the present subject.

When a state raises its specie, for instance, when it gives the name of six livres, or two crowns, to what was before called three livres, or one crown, this new denomination, which adds nothing real to the crown, ought not to procure a single gros more by the exchange. We ought only to have for the two new crowns the same number of gros which we before received for the old one. If this does not happen, it must not be imputed as an effect of the regulation itself, but to the novelty and suddenness of the affair. The exchange adheres to what is already established, and is not altered till after a certain time.

When a state, instead of only raising the specie by a law, calls it in, in order to diminish its size, it frequently happens that during the time taken up in passing again through the mint there are two kinds of money — the large, which is the old, and the small, which is the new; and as the large is cried down as not to be received as money, and bills of exchange must consequently be paid in the new, one would imagine then that the exchange should be regulated by the new. If, for example, in France, the ancient crown of three livres, being worth in Holland sixty gros, was reduced one-half, the new crown ought to be valued only at thirty. On the other hand, it seems as if the exchange ought to be regulated by the old coin; because the banker who has specie, and receives bills, is obliged to carry the old coin to the mint in order to change it for the new, by which he must be a loser. The exchange then ought to be fixed between the value of the old coin and that of the new. The value of the old is decreased, if we may call it so, both because there is already some of the new in trade, and because the bankers cannot keep up to the rigour of the law, having an interest in letting loose the old coin from their chests, and being sometimes obliged to make payments with it. Again, the value of the new specie must rise, because the banker having this finds himself in a situation in which, as we shall immediately prove, he will reap great advantage by procuring the old. The exchange should then be fixed, as I have already said, between the new and the old coin. For then the bankers find it to their interest to send the old out of the kingdom, because by this method they procure the same advantage as they could receive from a regular exchange of the old specie, that is, a great many gros in Holland; and in return, a regular exchange a little lower, between the old and the new specie, which would bring many crowns to France.

Suppose that three livres of the old coin yield by the actual exchange forty-five gros, and that by sending this same crown to Holland they receive sixty, but with a bill of forty-five gros, they procure a crown of three livres in France, which being sent in the old specie to Holland, still yields sixty gros; thus all the old specie would be sent out of the kingdom, and the bankers would run away with the whole profit.

To remedy this, new measures must be taken. The state which coined the new specie would itself be obliged to send great quantities of the old to the nation which regulates the exchange, and, by thus gaining credit there, raise the exchange pretty nearly to as many gros for a crown of three livres out of the country. I say to nearly the same, for while the profits are small the bankers will not be tempted to send it abroad, because of the expense of carriage and the danger of confiscation.

It is fit that we should give a very clear idea of this. Mr. Bernard, or any other banker employed by the state, proposes bills upon Holland, and gives them at one, two, or three gros higher than the actual exchange; he has made a provision in a foreign country, by means of the old specie, which he has continually been sending thither; and thus he has raised the exchange to the point we have just mentioned. In the meantime, by disposing of his bills, he seizes on all the new specie, and obliges the other bankers, who have payments to make, to carry their old specie to the mint; and, as he insensibly obtains all the specie, he obliges the other bankers to give him bills of exchange at a very high price. By this means his profit in the end compensates in a great measure for the loss he suffered at the beginning.

It is evident that during these transactions, the state must be in a dangerous crisis. Specie must become extremely scarce — 1, because much the greatest part is cried down; 2, because a part will be sent into foreign countries; 3, because every one will lay it up, as not being willing to give that profit to the prince which he hopes to receive himself. It is dangerous to do it slowly; and dangerous also to do it in too much haste. If the supposed gain be immoderate, the inconveniences increase in proportion.

We see, from what has been already said, that when the exchange is lower than the specie, a profit may be made by sending it abroad; for the same reason, when it is higher than the specie, there is profit in causing it to return.

But there is a case in which profit may be made by sending the specie out of the kingdom, when the exchange is at par; that is, by sending it into a foreign country to be coined over again. When it returns, an advantage may be made of it, whether it be circulated in the country or paid for foreign bills.

If a company has been erected in a state with an immense number of shares, and these shares have in a few months risen twenty or twenty-five times above the original purchase value; if, again, the same state established a bank, whose bills were to perform the office of money, while the legal value of these bills was prodigious, in order to answer to the legal value of the shares (this is Mr. Law's System), it would follow, from the nature of things, that these shares and these bills would vanish in the same manner as they arose. Stocks cannot suddenly be raised twenty or twenty-five times above their original value without giving a number of people the means of procuring immense riches in paper: every one would endeavour to make his fortune; and as the exchange offers the most easy way of removing it from home, or conveying it whither one pleases, people would incessantly remit a part of their effects to the nation that regulates the exchange. A continual process of remittances into a foreign country must lower the exchange. Let us suppose that at the time of the System, in proportion to the standard and weight of the silver coin, the exchange was fixed at forty gros to the crown; when a vast quantity of paper became money, they were unwilling to give more than thirty-nine gros for a crown, and afterwards thirty-eight, thirty-seven, &c. This proceeded so far, that after a while they would give but eight gros, and at last there was no exchange at all.

The exchange ought in this case to have regulated the proportion between the specie and the paper of France. I suppose that, by the weight and standard of the silver, the crown of three livres in silver was worth forty gros, and that the exchange being made in paper, the crown of three livres in paper was worth only eight gros, the difference was four-fifths. The crown of three livres in paper was then worth four-fifths less than the crown of three livres in silver.

Footnotes