EXCHANGE, in political economy. The reciprocal payments of merchants are made in bills of exchange, the amount of which is expressed in the money of the country upon which they are drawn. In calculating the par of lexchange, the coin of different countries is supposed to contain that quantity of gold or silver, of a determinate purity, which, agreeablyto the regulations of their respective mints, it ought to contain. Thus, an English guinea is supposed to contain 5 dwt. 6 gr. troy of gold, and a Spanish dollar 17 dwt. 6 gr. of silver each, of a certain de gree of fineness.
When a bill of exchange upon Lisbon can be procured in London for the same weight of gold or silver which the sum of Portuguese money for which it is drawn is supposed to contain, exchange between London and Lisbon is said to be at par ; when it can be procured for less, exchange is said to be below par, or in favour of London ; when more must be given, exchange is said to be above par, or against London.
The value of all the bills of exchange, which the merchants of London can draw upon the merchants of any other place, must in general be regulated by the value of the consignments and re mittances, direct or indirect, through other countries, which they have made to that place, and consequently the course of exchange affords an indication of the State of the trade between different coun tries. When bills upon Lisbon, for in stance, are scarce in London, and ex change consequently above par, it is a sign that London owes more to Lisbon, than Lisbon to London : and the reverse is a sign of the contrary.
But there are other circumstances by which the course of exchange is very materially affected. Should the circu lating coin of any country, v. g. be consi derably debased, and its real value, the quantity of gold or silver which it really contains, be much less than its nominal value, exchange may appear to be against a country, while actually it is in;favour of it. Before the reformation of our silver coinage in the reign of William III. we are informed by Dr. Smith, the exchange between England and Holland, comput ed by the standard of their respective mints, was 25 per cent. against England; but the current coin of England was at that time rather more than 25 per cent. below its standard value, and consequent ly exchange was really in favour of Eng land. The issue of assignats, during the
revolution, depreciated the currency of France in a greater degree than was ever known in any other instance ; and ac cordingly the exchange between London and Paris became between 60 and 70 per cent. against the latter place An unfavourable state of the exchange with any country furnishes a motive for exporting commodities to it. The mer chant, under these circumstances, can af ford to sell his commodities as much cheaper as the premium which he is obliged to pay for a bill of exchange amounts to. Hence ,the course of ex change always tends to an equilibrium. Indeed it can never really exceed the expense of sending gold or silver bullion to The place upon which the bill is drawn : since this is the money of the commercial world, and will every where be accepted in payment. Its apparent rise above this expense is to be ascribed to a depreciation of the currency, or some similar cause. We shall now en ter more into the practical part of ex change.
In treating this subject, we shall first give an idea of the nature of exchanges; and in the second place, we propose ex plaining the peculiar terms in use among merchants relative to bills.
In transactions between a buyer and seller, both residing in the same place, it is obvious that the mode of payment is extremely simple. It takes place either in cash or by bill, and is attended with no intricacy of computation. Transac tions between two towns in the same country are almost equally easy. Pay ment in cash is out of the question, but the seller either draws on the buyer a bill payable at the residence of the buy er, or, if this residence is not a town of extensive trade, the buyer domiciles his acceptance at a place of thi4 description; that is, he makes it payable there. The simplicity of this process arises from the money being of the same denomination in both places, and nearly of the same va lue. But in dealing with foreign coun tries, the calculation becomes less simple from the difference of denomination ; and although this causes no real difference in the value of money, yet obstacles exist to the conveyance of specie, which almost always prevent money from being of equal value in two different countries at the same time.