EXCHANGE, in political economy, is sometimes applied to the conversion of the money of one country into its equivalent in the money of another—as by stating the relation which French napoleons and francs bear to British pounds. The technical meaning of the word has now, however, come to be the difference between the actual value of money, taken by the standard of bullion, in any two places with relation to each other. If, in London, it costs more than £100 to pay £100 in St. Petersburg, the rate of exchange is against the former town, and in favor of the latter; an inhabitant of which will be able to pay a debt of £100 in London with less than £100 worth of bullion in St. Petersburg. The process will be best explained by analyzing it through means of simple examples. If Thomson & Co. of London buy £100 worth of wine from De la Rue of Paris, and De la Rue, on the other hand, buy £100 worth of cotton goods from Thomson Co. of London, the two debts, were there no others between the merchants of the same towns, would extinguish each other, and there would be no neces sity either for transmitting money or drawing bills of exchange. Suppose, however, that it is not De la. Rue, but his neighbor Bonchamp, who has bought the £100 worth of cotton goods fronl Thomson & Co., then the debts of all will be settled by Bon champ paying £100 to De la Rue on Thomson & Co.'s account. Suppose, next, the case of De In Rue being due nothing to Thomson & Co,. and Bonchamp being due them only £50, a like sum has to be otherwise found. Van Pradt of Amsterdam is due precisely this sum to Thomson & Co., while either De la Rue or Bonchamp is due the same amount to Van Pradt for a purchase of Gouda cheeses; then it is clear that the several debts can be adjusted among them without the transmission of bullion. It will cost some trouble to adjust the payments, however, and this trouble will have to be paid for. As in paying Thomson & Co. their debt of £100, De la Rue will have to pay for this trouble, the rate of exchange will be against him. If the debt, or any part of it, cannot be met by such an adjustment out of cross debts and credits, it will be necessary for the debtor to send bullion to his creditor; and this being an expensive process, it throws the rate of exchange against the debtor who so pays. For instance, if the sum due by the Frenchmen to Van Pradt was only £25 instead of £50, then De la Rue would have had to be at the expense of sending £25 to London in bullion. No such actual transactions take place in the existing mercantile world, because the accounts in debtor and creditor connected with the three towns above referred to are to be counted in thousands, and ramify into other towns; but the above examples may be held to represent the groups of debtors and creditors, as algebraic signs represent quan tities. The individual merchants in one trading town have no idea how the surplus of
debit or credit may lie between them, far less can they tell how it may be adjusted by debits and credits in other towns; hut through the agency bankers, bill-discounters, and other persons who deal in money, the relations of all trading-places towards each other are in a constant state of shifting and adjustment; and any one who has to pay a debt in any trading-place can find out how much he has to give to get that debt paid, and can pay it accordingly. When, through the operation of these complicated trans actions, you require to give more than £100 in London to get that amount paid in Paris, then the rate of exchange is against London, and is in favor of Paris, where less than £100 in cash will pay a debt of £100 in London. The difference will generally depend on the difficulty of adjusting questions of debt and credit throughout the field of Euro pean commerce, in such a manner as to get the debt paid. If it cannot be paid by adjustment, then bullion must be sent; and thus it is generally said that the rate of exchange against any place is limited by the charge of transmitting bullion to it. The rate of exchange is liable to be brought to a level also by commercial exportation and importation, since, whenever it is expensive to get money sent to a country, there is a temptation to send goods to that country, to compensate the debt. In the general circle of transactions of this kind, the state or town which has the largest amount of transactions will have the largest number of debtors and of creditors, and will thus afford the chief facility for each compensating the other. It is thus that London is the center of the money market, where all the debts and credits in the world may be said to meet and extinguish each other. While the old notions about the balance of trade (q.v.) existed, it was supposed that the nation which the exchange was against was going to min; while that which it was in favor of was prospering through the other's loss. At present, it is inconvenient and expensive to a country to have the exchange against it. An adverse exchange generally- indicates a sort of break in the circle of trade, which it would be advantageous to fill up, and may he caused by the commerce of a country decreasing; on the other hand, however, the imports for which a country pays in cash or in expensive bills, may be the same as a highly advantageous traffic. Gold-producing countries find bullion their most advantageous export, the same is the case with countries into which gold has flowed in excess.