On the supposition, that the balance of L.10,000, due by Glasgow, depressed the exchange of that ci ty on London one per cent., it would at first sight appear as if it would cost Glasgow .L.101,000 to discharge its debt of L.100,000 due to London; and that, on the other hand, L.89,108 would be sufficient to discharge the debt of London to Glas gow. But a very little consideration will serve to show that this could not really be the case. No ex change transactions can take place between differ ent cities, until there be both debtors and creditors of the one residing in the other. And hence, when the exchange became unfavourable to Glasgow, the premium paid by the Glasgow merchants for bills drawn on London would not go into the pockets of their creditors in that city, but into the pockets of their neighbours in Glasgow, to whom London was in debted, and from whom the bills had been purcha sed. The loss to Glasgow would, therefore, be limit ed to the premium paid on the balance of L.10,000. Thus supposing that A of Glasgow owes D of Lon don L.100,000, and that C of London owes B of Glasgow L.90,000, A will pay to B L.91,000 for a bill, or order on C to pay D L.90,000. In this way, the L.90,000 London debt at Glasgow would be quite cleared off; the premium, which is lost by the debtor to London in Glasgow, being gained by its creditor in the same place. If the business had been transacted in London, C, with L.89,108, would have purchased of D a bill for L.90,000 payable by A, so that, in this case, the gain would have fallen to the share of the debtor C, and the loss to that of the creditor D, both of London. The complexity of real transactions does not affect the principles on which they are founded; and to whatever extent Glasgow might be indebted to London, or London to Glasgow, the only disadvantage under which ei ther of them would in consequence be placed, would be the unavoidable one of paying the expence of re mitting the balance of debt.
The expence of transmitting money from one place to another forms the natural limit to fluctuations in the exchange. If 208. sufficed to cover the expence and risk attending the transmission of L.100 from Glasgow to London, it would be indifferent to a Glasgow merchant, whether he paid one per cent. premium for a bill of exchange on London, or whe ther he remitted money direct to that city. If the premium was less than one per cent., it would be clearly his interest rather to make his payments by means of bills of exchange than by remittances; and that it could not exceed one per cent. is obvious, for every individual would rather directly remit mo ney, than incur an unnecessary expence, by pur chasing a bill on London at a greater premium than would be sufficient to cover the expence attending a money remittance. If, owing to the badness of the roads, to disturbances in the country, or to any other cause, the expence of remitting money from Glasgow to London should be increased, the differ ence in the rate of exchange between these two ci ties might also be proportionably increased. But in every case, the extent to which this difference could attain, would necessarily be limited by, and could not, for any considerable period, exceed the cost of snaking remittances in cash.
Exchange transactions become more complex, when one place, as is very often the case, discharges its debts to another by means of bills drawn on a third place, Thus, although London should owe nothing to Glasgow, if Glasgow is indebted to Lon don, London to Manchester, and Manchester to Glasgow; Glasgow would either wholly or partially discharge its debt to London by a bill drawn on Manchester. It would wholly discharge it, provided
the debt due to Glasgow in Manchester was equiva lent to the debt due by Glasgow to London. But if this be not the case, Glasgow must either remit money to London to discharge the balance of debt, or bills drawn on some other place indebted to her.
Transactions in inland bills of exchange are al most entirely conducted by bankers, who charge a certain rate per cent. for their trouble, and who, by having a credit in those places to which they are in the habit of remitting bills, are enabled, on all oc casions, to supply the demands of their customers. In Great Britain, London, because of its intimate connection with other parts of the country, occa sioned partly by its immense commerce, partly by its being the seat of government, and the place to which the revenue is remitted, and partly by its cur rency consisting of Bank of England paper, for which the paper currency of the country banks is rendered exchangeable, has become the great focus in which all the money transactions of the empire centre, and in which they are ultimately adjusted. In conse quence of these various circumstances, but chiefly of the demand for bills on London to remit revenue, and of the superior value of Bank of England cur exchange between London and the other parts of the country is invariably in its favour. Bills on London drawn in Edinburgh and Glasgow were formerly made payable at 40 days' date, which is equivalent to a premium of about Q per cent.; but, owing to the greater facility of communication, this um is now reduced to 20 days' interest, or to about • per cent. Bills for remitting the revenue from Scotland are now drawn at 30 days; previously to summer 1819 they were drawn at 60 days.
What has been already stated is sufficient to show, that, however well fitted bills of exchange may be for facilitating the operations of commerce, and sav ing the trouble and expence attending the transporta tion of money, it is impossible to adjust mercantile transactions by their means, except in so far as the accounts mutually balance each other. A real bill of exchange is merely an order entitling the holder to receive payment of a debt previously contracted by the person on whom it is drawn. It is essential to the existence of such a bill that an equivalent amount of' debt should first have been due. And hence, as the amount of the real bills of exchange drawn on any one merchant, or body of merchants, cannot exceed the amount of the debts due by them, if a greater sum is owing them than what they owe to others, the balance, it is obvious, must either be paid in money, or by the delivery of some sort of commodities possessed of real value. lf, as in the example just given, Glasgow owes London L.100,000, while London only owes Glasgow L.90,000, a reci procal transfer of debts may be made to the extent of L.90,000. But the Glasgow merchants cannot discharge the additional L.10,000 by means of bills drawn on London; for, by the supposition, London only owed them L.90,000, and they have already drawn for its amount. The balance, therefore, must either be discharged by an actual money payment, or by the delivery of some species of commodities, or by bills drawn on some third party who may be indebted to Glasgow.