[59] EXCHANGE. 128. EXCHANGE is a term employed to designate those mercantile transactions by which the debts of individuals residing at a distance from each other are either partially or wholly liquidated without the intervention of money, by means of bills of exchange. A bill of exchange is an "order addressed to some person residing at a distance, directing him to pay a certain specified sum to the person in whose favour the bill is drawn." In mercantile phraseology, the person who draws a bill is termed the drawer; the person on whom it is drawn, and to whom it is addressed, is called the drawee, who is also called the acceptor when he engages to pay it, by writing the word accepted, together with his name, across the face of the bill; the person to whom it is made payable is called the payee; and those persons into whose hands the bill may pass previously to its being paid are, from their writing their names on the back, termed indorsers. The person in whose possession the bill is at any given period is termed the holder or possessor. Suppose that A in London sells goods to B at Edinburgh, amounting to £500, and B at Edinburgh sells goods to C in London amounting to £300, and to D in London amounting to £200; these several debts may be mutually discharged in this manner:-B, instead of remitting the amount he is indebted to A, draws on C at a specified time, in favour of A, for £300, and on D, in favour of A, for £200. These bills are transmitted to A, who, on their receipt, or as soon after as convenient, presents them to C and D respectively for their acceptance. If C and D accept these bills, each becomes liable to A for the amount named in his bill, and when these bills become due, they are presented by A to C and D for payment. If they are regularly taken up, A writes a receipt on the back, and the several transactions are thus settled in the most simple and convenient manner. The price of bills of exchange fluctuates according to the abundance or scarcity of them compared with the demand. Thus if the debts reciprocally due by London and Edinburgh were equal, they may all be discharged without the agency of money, and the price of bills of exchange would be at par; that is, a sum of £100 or £500 in Edinburgh will purchase a bill for £100 or £500 payable in London, and vice versâ. But if these two cities are not mutually indebted in equal sums, then the price of bills of exchange will be increased in the city which has the greater amount of payments to make, and reduced in the other. If Edinburgh owe London £250,000, whilst the debts due by London to Edinburgh amount only to £200,000, it is evident that the price of bills on London would rise in Edinburgh, because of the increased competition, and that the price of bills on Edinburgh would fall in London, on account of the proportionally diminished competition. The exchange would be in favour of London and against Edinburgh, and bills on London would sell in Edinburgh at a premium, whilst bills on Edinburgh would sell in London at a discount. An increased demand for bills must always enhance their price, as it would that of any other saleable article. This is the plain principle of exchange being constantly exemplified in the premium paid for bills on London, which has generally a large balance of trade in its favour. The premium on bills can never exceed the expense of transmitting money or bullion from one place to another, which forms the natural limit to fluctuations in exchange. 129. The object of exchange calculations is to ascertain what a sum of money payable in one place is worth in another, either by the ratio of the two sums, considered as equivalent in the coin of those places, or by two or more ratios, formed of equivalent sums, expressed in the coin of three or more places communicating with each other, as in the example in Art. 137. 130. The par of exchange between two countries is that sum of the currency of either of the two countries, which, with respect to intrinsic worth, is precisely equal to a given sum of the other. In this definition of the phrase," par of exchange," it is assumed that a given quantity of gold or silver always possesses the same intrinsic value; or that, bullion being everywhere recognized as the standard currency of the commercial world, the comparative value of the currencies of particular countries depends on the quantity of bullion contained in their coins, or for which their paper money, or other circulating medium, may be exchanged. In estimating the quantity of bullion contained in the currencies of different countries, a particular coin of one country is taken as the standard of comparison, and the proportion between it and the coins of other countries of mint standard weight and fineness, is ascertained. A par of exchange is thus established, by ascertaining the amount of the standard currency of any particular country which contains precisely as much gold or silver as is contained in the coin or integer with which it has been compared. Thus, for instance, the franc, which is the principal unit of value in the currency of France, weighs, when of full weight, 77 troy grains, and is of a fineness of ths, that is, ths of the pieces are pure silver; and the dollar, which is the principal unit of value in the currency of the United States of America, weighs 412 troy grains, and is also of a fineness of ths; 5 346 francs is evidently, then, the par of exchange for the dollar of the United States, when no loss of time, nor, consequently, of interest, takes place in effecting such exchange; but in the sum quoted by merchants as the par of exchange between two places, an allowance for interest is usually made, depending on the period allowed for the payment of the bills of exchange passing between those places. 131. The par of exchange between different countries is, then, determined by the relative proportion of fine gold or silver which the coins compared respectively contain; but the sums which at any particular time are considered as equivalent in the money of those places are continually varying according to the momentary preponderance of their mercantile transactions. The nominal value thus acquired is termed the rate of exchange, and is dependent on the relation between the supply of the bills of exchange of those places and the demand for them. 132. Between two places employing the same description of money as London and Edinburgh, the rate of exchange is easily expressed by saying that the bills are at a certain premium or discount, as the case may be; between foreign countries employing different descriptions of money, the relative value of their respective coins requires to be considered; and for countries whose standards of value are of different metals, as England and France, the relative value of the metals adopted as their respective standards is a necessary element in a calculation of their par of exchange; and consequently, in determining whether the rate of exchange is either favourable or unfavourable to one of those countries. The principal unit of value in England is the pound sterling, and this may be defined to be 123 274 troy grains of gold of the fineness of+ths, while, as already stated, the principal unit of value in France is the franc, containing 774 troy grains of silver, of a fineness of ths; the silver coins of England represent sums somewhat greater than their intrinsic value, being coined only for circulation within the country as convenient subdivisions of the pound sterling, and being only a legal tender in payment of a debt to a small amount; and the gold employed in France is subject to a premium or discount, almost invariably a premium, calculated upon its nominal value, and varying from day to day. To determine the par of exchange at any time between England and France, it is then necessary either to know the market-price of silver at that time in England, or the premium on gold in France. Let it be supposed that the price of fine silver in London is 5s. 5d. per ounce troy, and consequently, that of an ounce troy, or 480 grains of silver, equivalent in fineness to the franc, 4s. 10 d., then the intrinsic value of the franc in English money will be 9.4d.; and the par of exchange for the pound sterling, 25.53 francs. Or, if it be assumed that the premium on gold in Paris be 15 per mille (1 per cent.), the ten-franc gold piece would be worth 10.15 francs; and, as its weight is 49 783 troy grains, and its finenessths, 44 805 grains of pure gold would be worth 10 15 francs; but 123 274 grains of gold of ths fine, or 113.001 grains of pure pound sterling, 113.001 × 10 15 gold being equivalent to the =25.59 francs would be the par of exchange for the pound sterling. If, when the circumstances are in accordance with the above assumptions, the rate of exchange at short, or for bills payable at sight, were 25.75, the exchange would be said to be favourable to England and unfavourable to France. 134. The foregoing calculation is founded on the assumption made in Article 130, that a given quantity of gold or silver has the same intrinsic value in all places and in all forms; but as the transmission of bullion from one country to another is regulated by the same principles as the export and import of other commodities, it is evident that a difference in the value.of bullion in two countries may exist equal to the expense of its transmission, and that the difference in value of bullion in two countries, like the rate of exchange between those countries, as stated at the end of Article 128, is limited by the cost of transmission. The regulations, also, under which the mints of different countries execute the coinage, establish generally a certain difference between the value of coin and the value of bullion. 135. Under the laws by which the currency of this country is regulated the price of gold may be considered invariable. Since the Bank of England has been by law obliged to purchase all bullion tendered to them at 31. 17s. 9d. per oz., of ths fineness, gold bullion has = been almost invariably quoted at that price in this country, and English gold coin is always worth 37. 17s. 10 d. per oz., that value being assumed as the basis of our currency. In France a kilogramme 15,432 English grains, of gold ofths fineness, is coined into 3100 francs, of which six are retained to cover the expense of fabrication, and the price of gold bullion of the fineness of ths may therefore be considered, when there is no premium, 3094 francs per kilogramme, or 3437 8 francs per kilogramme of fine gold, or the price of a kilogramme of gold bullion of English standard or ths fineness, 3151 3 francs; or of one ounce, of which the value in England would be 31. 178. 9d., 98 019 francs: the par of exchange between the two countries deduced from the relative prices for gold bullion would therefore be 25 21 francs to the pound sterling; and if at that time the rate of exchange was 25.24, gold must be dearer in London than at Paris, for ⚫03 in 25 21 francs, or 12 per cent. more gold would be given for a bill on London than that bill would exchange for in London, or the same proportion less would be given in London for a bill on Paris than it would afterwards command in that city. If, as is generally the case, gold in Paris be at a premium, say of 12 per mille, the par of exchange calculated by the price of gold bullion would be 25 51; and if at that time the rate of exchange were 25 61, gold would be about per cent. dearer in London than in Paris. In a similar manner, if the par of exchange between Hamburgh * and London be 13 marks banco, 114 schillings, but if the rate of exchange at Hamburgh on London at short be 13 121, then it follows that gold is dearer in London than in Hamburgh. To find the per centage we have only to make the following proportion : Mks. Sch. Mks. Sch. As 13 11 13 12 :: 100: 100.51; hence gold is 51 per cent. dearer in London than in Hamburgh. 136. In foreign exchange, one place always gives another a fixed sum of money for a variable price, which fluctuates according to the balance of debt; the former is called the certain price, and the latter the uncertain price. Thus London is said to give to Paris the certain for the uncertain; that is, the pound sterling for a variable number of francs; and to give to Spain the uncertain for the certain; that is, a variable number of pence sterling for the dollar of exchange. As examples in direct exchange are only applications of the Rule of Three, it will be unnecessary to occupy more space with it, and we shall now advert shortly to the subject of indirect exchanges. ARBITRATION OF EXCHANGE. 137. Indirect exchanges are those produced through the medium of some other country or countries, and the proportional or mean rate deduced is termed the arbitrated rate of exchange, and the object of In France, accounts are kept in francs and centimes, and 100 centimes make 1 franc. In Hamburgh, there are two kinds of money-banco and currency. Accounts are kept in banco, which is a nominal valuation of the Cologue mark. A mark bauco is worth about 17 d. sterling, and 16 schillings make 1 mark. In Frankfort, accounts are kept in florins and kreutzers, and 60 kreutzers make 1 florin. A rix dollar is equal to 90 kreutzers. the arbitration of exchanges is to ascertain whether, in remitting or drawing bills, it will be most advantageous to do so directly or indirectly. Simple arbitration comprehends the exchanges of three places only, and compound arbitration of more than three places. A single example will be sufficient to explain the method of calculation in all cases. Suppose a merchant of London has to receive 4500 marks banco at Hamburgh, whether will it be more advantageous for him to draw on Hamburgh directly at 13 marks 8 schillings per pound sterling, or to direct his agent to remit the sum to Frankfort, at 148 rix dollars per 300 marks banco, with directions to invest the value in a bill on London, which can be effected at 10 florins per pound sterling, allowing 1 per cent. for the charge of commission? By the direct mode of exchange, Now let x represent the value by the indirect course of exchange, then we have the following equalities: Hence the continued product of the numbers in the first column must be equal to the continued product in the second, that is The direct is preferable to the indirect exchange, the difference being £3. 13s. 34d. in favour of the direct exchange. STANDARDS OF ENGLISH WEIGHTS AND MEASURES. 138. For a standard measure of time we must look to the daily and yearly revolutions of the earth, which, by the immutable laws of Nature, has performed its revolutions round the sun with unerring regularity for ages past, and will continue to do so for ages to come, unless some great and unknown change should occur in the solar system of which it is a part. The sun, which regulates the operations of man, and determines the periods of labour and rest, is pointed out by nature to fix the standard of time; but as the length of a solar day is not always the same, it is an unfit measure of time, and therefore the solar day is superseded by a duration called a mean solar day, that is, the mean interval of time which elapses between two passages of the sun across the meridian of any place. This interval of time is supposed to be divided into 24 equal portions, each of which is called an hour. Astronomers have determined that a solar year, or the time of one tropical revolution of the earth |
