EXCHANGE. The conversion of the money of one country into its equivalent in the money of another. The technical meaning of the word has now, however, come to be the difference be tween the actual value of money taken by the standard of bullion, in any two places, with re lation to each other. If in New York it requires more than $500 to pay a debt of that amount in London, the rate of exchange is against the former town and in favor of the latter, an in habitant of which can pay a debt of $500 in New York with less than that amount of bullion in London.
The operations of exchange are based on the prineiple of the cancellation of indebtedness, and can be best explained by simple example. If a New York merchant, A. buys goods from a Lon don merchant, B, it would seem that the simplest way of discharging his indebtedness would be by the shipment of gold to London. But this primitive method is not the simplest. Such a shipment involves costs of transportation and insurance, which materially enhance the price paid. A simpler plan would be to have another London merchant, C, who owes money in New York, make the payment in London to A's creditor, while A in New York makes the pay ment to C's creditor at that point. This is in effect what actually takes place in the settlement of such debts, though neither A in New York nor C in London is under the necessity of ascertain ing to whom payment must be made to cancel the two debts. This is done through the agency of the banks and bankers. A in New York goes to his banker and buys a draft upmc London; (' in his turn buys a draft upon New York. These two drafts cancel one another, and London pays New York, and New York London, without the shipment of specie.
In circler to correspond to the facts of the actual world. these simple transaetions must be multiplied by the 'thousandfold. The aggregate of the payments to be made by New York to Lon don must be balanced off against those of Lon don to New York. But can it be supposed that the balanee is ever exact ? As between two points only, this is probably never the case. How then can a balance be reached? In the first place, by associating with New York other places which do their banking through that centre. In this manner practical equality of demand between points is attained and exchange is at par. Costs of shipment are eliminated, and to pay a debt of £500 in London, the New York merchant pays the exact equivalent in American money of the fine gold contained in /500. But such equality of demand is rare. There is usually an excess of payments to be made by one point or the other. In such cases exchange rises above or falls below par. If New York has more payments to make upon London than London on New York, sterling exchange will be in demand. To secure the means of payment in London the New York merchant will pay more than the par, and ex change is at a premium. If the contrary case prevails, New York bankers in their desire to secure payments for London will offer them at less than par. The alternative of buying ex
change is always the shipment of bullion, and when the premium upon exchange grows as large as the cost of shipping bullion, gold exports will begin. The cost of shipping bullion fixes, there fore, the maximum of exchange. In the last resort, therefore, the discrepancy in the relative demand of two points is liquidated by shipments of specie, but it is to be observed that it is only the balance which is shipped, and large amounts are settled by the principle of compensation. Be fore the specie movement begins, adjustment is frequently sought by the shipment of securities, and even of commodities. The rate of exchange is liable to be brought to a level 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 afford the chief facility for each compensating the other. It is thus that London is the centre of the money market, where all the debits and credits of 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 ruin, while that which it was in favor of was prosper ing 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 be 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-produeing countries find bullion their most advantageous export, and the same is the ease with countries into which gold has flowed in excess.
Some confusion as to rates of exchange often occurs because of the failure to note the diver gent practice of the London and other markets. In London they reckon bow much foreign money can be purchased by a definite sum of the home currency. Thus the par of exchange between London and New York being £1 — Lon don may reckon exchange at $4.84, in which ease American money is dear and exchange at a premium. On the other hand, New York reckons the cost in Anwricae money of a definite quan tity of foreign money. Thus, when sterling exchange is quoted at $4.S-1, English money is cheap and exchange below par. Consequently, in England, exchange 'falls' as the conditions be come more unfavorable, while in the ruited States exchange 'rises' when time conditions be come unfavorable. A failure to note this differ ence has been a fruitful cause of misunderstand ing.