1902 Encyclopedia > Exchange


EXCHANGE. The system by which commercial nations discharge their debts to each other has been termed " Ex-change, " or " the Exchanges." It has been subject of much study both by merchants and bankers who have to deal with its phenomena in the course of business, and by economists desirous to discover the causes of the phenomena, and to ex-plain the laws or method of their operation. In rude times the people of neighbouring countries brought their staple or surplus produce to common fairs, where one kind of goods was valued and bartered for another; and the dealers brought a little gold and silver with them to settle the small balances. But this, though a rough type of international trade still, is a wholly different affair from modern com-merce, with its transactors multiplied a millionf old, and con-ducting their transactions far apart in widely distant coun-tries. Money itself does little to obviate the difficulties arising from this multiplicity of crossing and recrossing currents; and whoever, therefore, was the first introducer of the idea of '" Exchange" is entitled to a high place in the commercial annals of the world—whether it was the stranger mentioned by Isocrates, who came to Athens with some cargoes of corn, and gave an order on a town on the Euxine where money was owing to him, with recourse on an Athenian merchant in the event of the order being dis-honoured; or Cicero, in paying for the studies of his son at Athens by an assignment from a creditor in Borne on his debtor in the Greek city ; or the pope, whose lending merchants of Siena and Florence drew upon Henry III., or rather on the prelates and abbots of England, with some English merchants as remitters, for the expenses of depos-ing Manfred, king of Sicily, in which act of deposition Henry was an interested and obligant party,—thus avoid-ing in these various cases the difficulty and risk of trans-porting coin. The idea, wherever first exemplified, was too good to be lost. It was early developed into a system in Venice, later in Amsterdam, and is now of world-wide application.

It is well to observe, first, what is exchanged—values of commodities exported and sold from one place or country to another, debts thereby owing, interest, profits of capital invested abroad, foreign loans and subsidies, freights, bank-ing and other commissions, expenses of foreign residence or travel, and, in short, claims of payment of every kind on one part, having their relative obligations of remittance on the other, and originally denominated, as the contract or the occasion may have been, in the money either of the places from which the claims proceed or of those where they are payable. Secondly, the means must be noticed by which the exchange is effected—pieces of paper, bearing express calculation to secure what is exactly due between debtor and creditor. A bill of exchange is an order drawn for a specified and definite sum, in favour of a person who is the buyer and becomes the " remitter" of the order, upon a third person, the " drawee," who is indebted for this sum to the drawer, and on presentation of the order becomes the "acceptor." The person or company in whose favour the order is drawn may pass it into other hands, and these, by writing their names on the back, become " indorsers." On much the same model there are " inland " and " foreign " bills of exchange. The whole system of exchange has its foundation in the drawing of the creditor on the debtor; for, as in every country there are both creditors and debtors of other countries, the debtors find it to their advantage to take up the drafts of the creditors in order to avoid direct remittances in cash.

Inland exchange is simpler in character and more easily Inland comprehended than foreign exchange, but in reality presents ex-the same phenomena and the same sequence of cause and cnanS° effect as the other, so far as the circumstances of any country allow these to come into operation.

Mr M'Culloch, in the article on "Exchange" in former editions of the present work, gave a familiar exposition of inland exchange, which it would be difficult to improve:—

"If the debts reciprocally due by London and Glasgow he equal, whether they amount to £100,000, £500,000, or any other sum, they may be discharged without the intervention of money, and the price of bills of exchange will be ' at Par;' that is, a sum of £100 or £1000 in Glasgow will purchase a bill for £100 or £1000 payable in London, and vice versa. But if these cities be not mutually indebted in equal sums, then the price of bills will be increased in the city which has the greatest number of payments to make, and reduced in that which has the fewest. If Glasgow owe London £100,000, whilst the latter only owes the former £90,000, it is clear, inasmuch as Glasgow has a larger sum to remit to London than London has to remit to Glasgow, that the price of bills on London will rise in Glasgow because of the increased demand, and that the price of bills on Glasgow will fall in London because of the diminished demand. A larger sum would consequently be required to discharge a debt due by Glasgow to London, and a less sum to discharge an equal debt due by the latter to the former ; or, which is the same thing, the exchange would be in favour of London, and against Glasgow. Bills on London would sell in Glasgow at a premium, and bills on Glasgow would sell in London at a dis-count ; the premium in the one case being equal to the discount in the other.

" On the supposition that the balance of £10,000, due by Glasgow, depresses the exchange on London one per cent., it appears, at first sight, that it will cost Glasgow £101,000 to discharge her debt of £100,000 due to London ; and that, on the other hand, £89,100 would, be sufficient to discharge the debt of London to Glasgow. But a very little consideration will serve to show that this would not be the case. Exchange transactions cannot take place between different cities until debtors and creditors of the one reside in the other. And hence, when the exchange became unfavourable to Glasgow, the premium paid by its merchants for bills on London would not go into the pockets of their creditors in the latter, but into those of their neighbours in Glasgow to whom London was in-debted, and from whom the bills were purchased. The loss to Glasgow would, therefore, be limited to the premium paid on the balance of £10,000. Thus, supposing that A of Glasgow owes D of London £100,000, and that C of London owes B of Glasgow £90,000, A will pay to B £91,000 for a bill or order on C to pay D £90,000. In this way the £90,000 of London debt at Glasgow would be 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 £89,100, would have purchased of D a bill for £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 whatever may be the amount of the debts reciprocally due by different places, the only disadvantage under which any of them could be placed by a fall of the exchange would be the unavoidable one of paying the expense of remitting the balance of debt.

" The expense of transmitting money from one place to another limits the fluctuations in the exchange between them. If 20s. sufficed to cover the expense and risk attending the transmission of £100 from Glasgow to London, it would be indifferent to a mer-chant, in the event of the exchange becoming unfavourable to the former, whether he paid one per cent, premium for a bill on London, or remitted money direct to the latter. If the premium were less than one per cent., it would be clearly his interest to make his payments by means of bills rather than by remittances ; and that it could not exceed one per cent, is obvious, for every individual would rather directly remit money than incur an unnecessary expense by purchasing bills on London at a greater premium than would suffice to cover the expense of a money remittance. If, owing to the badness of roads, disturbances in the country, or any other cause, the expense of remitting money from Glasgow to London were increased, the difference in the rate of exchange between them might also be proportionally increased. But in every case the extent to which this difference could attain would be limited by, and could not for any considerable period exceed, the cost of remitting cash.

'' Exchange transactions become more complex when one place, as is often the case, discharges its debts to another by means of bills drawn on a third place. Thus, though London should owe nothing to Glasgow, yet if Glasgow be indebted to London, London to Manchester, and Manchester to Glasgow, the latter may wholly or partially discharge her debt to London by remitting bills on Man-chester. She may wholly discharge it, provided the debt due to her by Manchester exceed or is equal to the debt due by her to London. If, however, it be not equal to the latter, Glasgow will either have to remit money to London to pay the balance of debt, or bills on some other place indebted to her.

" Transactions in inland bills of exchange are almost entirely con-ducted by bankers, who charge a certain rate per cent, for their trouble, and who, by means of their credit and connexions, are able, on all occasions, to supply the demands of their customers. Bills on London drawn in Edinburgh and Glasgow were formerly made payable at forty days' date, which was equivalent to & premium of about J per cent.; but, owing to the greater facility of com-munication, this premium is now reduced to twenty days' interest, or to about \ per cent. Bills for remitting the revenue from Scot-land are now drawn at thirty days ; previously to 1819 they were drawn at sixty days."

The cost of remittance from Scotland to London has con-tinued to fall during the last thirty years. Bills on revenue account are now drawn at eleven days, free of stamp, and bankers' drafts at seven days, or at a charge of 2s. per ¿100 up to £300, 6s. for all sums between £300 and £600, and Is. additional for every £100 above £600. On the other hand, the London bankers remit money, paid over their counters to-day, to Scotland and other parts of the kingdom, payable at par to-morrow. To this extent the rate of ex-change is still adverse to Edinburgh and Glasgow, and in favour of London. In like manner the holder of a bill of exchange in Edinburgh or Glasgow upon London finds himself in a somewhat better position than the holder of a bill in London upon either of the two Scotch centres. Yet it would be an error to suppose that the balance of trade is against Scotland and in favour of England. The balance of value of commodities exchanged between the two countries is in favour of Scotland, and might be greatly in her favour, and yet the rate of exchange be adverse; so that we are thus early admonished that the imports and exports of goods, though an important, are not, as was long supposed, a decisive element in the rate of exchange. The transmission of the revenue of Scotland (seven or eight millions annually), the rental of owners of land having their chief domicile in the metropolis, and the amount of obligations of Scotch merchants made payable in London under the increasing concentration of monetary business, would be sufficient to counteract the effect of a large balance of trade on the rate of exchange. Hence London bankers, in taking money even in small sums payable at par next day in Edinburgh or Glasgow, are simply taking before-hand what is already under course of remittance, and re-ducing pro tanto the balances to be remitted from Scotland.

The relations of inland exchange just stated are those of a country where the money is uniform; where the bank-notes of Ireland and Scotland are payable on demand in the common imperial standard of value, as the country bank-notes of England are similarly exchangeable for gold or for Bank of England notes, which latter are orders for the deli-very of so much gold in the issue department; and where, consequently, all inland bills are drawn in precisely the same money. The circumstances are thus highly favourable to an even exchange; and it may be conclusively held that the nearer the monetary system, whether in separate countries within themselves, or in nations closely related by com-mercial and financial transactions one with another, approaches to these conditions, the difficulties and oscilla-tions of exchange, inland and foreign, will be reduced within narrower limits.

The history of inland exchange in the three kingdoms presents abundant proofs of the immediate effect of money of differing values in disordering the exchanges, or, in other words, the uniform payment of their debts one to another. In the early days of Scotch banking, when the natural limit of a free legal issue of notes was less understood than it soon became, and a structure of bills of exchange was reared upon this basis, it was found that bullion had to be raised by constant re-discounts in London, and that exchange, in short, became imprac-ticable. Even within the same town, given two kinds of money or currency, one of superior value to another, a premium will be immediately established in favour of the money of superior value, and will affect every transac-tion, however small, by calculations of rate of exchange, as was long illustrated by the banco of Hamburg, a strict metallic money of given weight and fineness, in its contact with the worn or degraded coins of various mints in pre-vailing circulation. In 1689, when, by a proclamation of James II., one penny was added to the nominal value of the Irish shilling, £108, 6s. 8d. Irish money became equal to only fAOO of British money in the nominal par of ex-change, between Great Britain and Ireland, or a difference of 8J- per cent, against the latter. In the course of another century the monetary system of Ireland and Great Britain had so far become uniform that the bank-notes of both countries were payable on demand in gold, but the dilution of standard proclaimed by James II. was still in force. In the eight years previous to 1797, the date of the Bank Restriction Act suspending specie payments, the rate of exchange between London and Dublin had ranged from 1\ to 9 per cent., being from f- below to § per cent, above the par of exchange, as determined by the actual value of the British and Irish money. The banks of England and Ireland were now alike free to issue notes without legal liability to pay them in gold on demand ; and in 1803 the Bank of Ire-land had increased its issues from ¿£621,917 to ¿£2,707,956, being in the proportion of 1 to 4 3; while the Bank of Eng-land had increased its issues in the same period from ¿£9,181,843 to ¿£16,505,272, or in the proportion only of 1 to 1"8. The rate of exchange was then 17 per cent, against Dublin, being 8§ per cent, more than the normal par. But in the seven subsequent years the issues of the Bank of Ireland increased at the rate of 2y per cent., and the issues of the Bank of England at the rate of 5 percent., while the country bank issues of Ireland were much dimin-ished in amount, and those of England were largely increased. During this period the current rates of ex-change became more favourable to Dublin. The inconver-tible paper currency of Ireland had increased, but it had not increased in nearly the same proportion as the same kind of money in England. The manufacturers of Ulster, at once disaffected against the Government and annoyed at the uncertain value of the bank notes, clung to a gold cur-rency ; and while Dublin was under a discount of 8 per cent, in its exchange with London, Belfast was commanding a premium of 3 per cent, against London, and 10 percent, against Dublin.1

Apart, however, from this element of the differing stand-ards and values of money, which comes more fully into view under the head of " foreign exchange," it is impossible to follow closely the description of inland exchange above quoted from Mr M'Culloch without apprehending many of the principal characteristics of the operation, which, as they are sure to arise in exchange transactions under all circum-stances, cannot be too soon brought into formal notice; such as (1) that the rate of exchange is ruled by the supply and demand of bills for the time being; (2) when in any market the demand for bills on a given centre is greater than the supply, the deficiency may be supplemented by bills on other centres having a favourable exchange with the given centre—a resource which, though indirect, receives much extension in the wide theatre of the commercial world under the watchful study of experts in bills; (3) the profit of a premium and the loss of a discount on bills fall within the market where the bill is drawn or sold, the drawee or acceptor having the definite sum on the bill to pay in either case ; (4) exchange between one country or one centre and another is never a completed or perfectly adjusted process, but a constant series of transactions, reflecting the varying phases of claims and debts as they mature; and (5) the fluctuation of rates of exchange is effectually limited by the expense of transmitting money, that is, coin or bullion,— a principle which, though subject to partial exceptions in foreign exchange, is an underlying and potential law of the whole system.

In the study of foreign exchange some embarrassment Foreign arises from the twofold character of the action and its re- ex" suits, and the necessity of realizing in one conception the 0 ange drawers and buyers of the bills, and the two countries to which their transactions apply. It tends to simplify the matter to remember that what is transacted either in London or Paris expends the whole effect, for purposes of comprehension at least, of the course of exchange between the two cities; and so in other cases. If the debts, the time of settlement of which has come, of London to Paris be greater than the debts of Paris to London, the supply of bills on Paris in London will be less, and the supply of bills on London in Paris will be greater than the demand, which are only different forms of expressing the same relation. There may be a momentary variation in the rate of exchange in the two cities, but as soon as the relation of supply is discovered the variation will disappear. On both fields the same two classes of people, drawers and remitters, are at work, only the party in stronger force on the one is in weaker force on the other, and at both ends there is the same though converse result. In any one market, there-fore, there is a complete representation of the action of exchange.

To a circle of exchange four persons, as is explained by Mr Mill, are always necessary : A, say of England, has ex-ported English goods to B, say in France; and in order that B may be saved the expense and risk of sending money to A, A draws a bill on B for the sum due, and sells it to his neighbour D in England, in order that he may send it instead of money to C in France, from whom D has imported French goods of exactly equivalent value, and who, on the expiry of days the bill has to run, takes it to his neighbour B, and gets his payment, while in possession of the bill B has his discharge from A. The debt on both sides is thus paid without the transmission of a single ounce of gold or silver.

This is a genuine circle of foreign exchange ; but in the great commerce and diversified creditorship and debtorship of the world the process is frequently of a very complex kind. Not only all the exports and imports, freights, and transit dues round the globe, but nearly all the public and private outlays which one country expends upon another, are paid by means of foreign bills of exchange. Mr Goschen, in a prac-tical treatise which may be said to bring up the science of exchange to the present time, examines the various classes of foreign bills, and specifies some movements of exchange which could hardly be dreamed of save by professional men. For instance, teas shipped from China to New York are generally paid for by a draft of the exporter on a London merchant for account of the American importer. The exporter in China is paid by the price which is given him for his bill on London ; and the London acceptor looks for payment to the importer in New York. In the East Indies those who ship produce to America draw on London and not on New York; and the New Orleans cotton exporter to Russia draws on London instead of on St Petersburg, The explanation of this may be partly that Great Britain exports more in manufactures and silver to China, for example, than she imports of Chinese tea and silk, and thus leaves a balance of trade due to her, which the Chinese pay by transferring their claims on New York to their London creditors, and partly from the greater reputation and custom of the London banking houses than those of New York or St Petersburg, though many of these may be no less wealthy than the others, or simply from the greater convenience of a bill on London. In propor-tion, however, as direct trade in mutual import and export of goods is established between two countries, direct ex-change follows. Formerly the New York houses drew, for their shipments of tobacco and other produce to Bremen, on England for German account. But now since German manufactures and products have been making progress in the New World, bills of exchange aie drawn between New York and Bremen, and Rio Janeiro and Hamburg. But the merchants of Bombay and other parts of India, finding few purchasers of bills on Bremen, still draw on London for German account. These indirect exchanges may be re-garded as examples of the common expedient of utilizing both debts and credits at various distant points in redressing the inequalities of direct exchange; and, also, of the advantage of London, from the greater extent of British commerce and the greater distribution of British exports than those of any other country, as the centre for ultimate adjustments and clearings of this kind. But Mr Goschen has adduced an extensive class of foreign bills still more remarkable. These are bills " technically said to be drawn in blank," which represent no actual indebtedness at the period of drawing, and by which the acceptor does not pay his debt to the drawer, but on the contrary, the drawer incurs a debt to the acceptor. Mr Goschen admits that they approach nearly to the character of accommodation bills in the home trade, might be even worse abused, and consequently require to be discriminated. In many cases such bills have a function of public utility,—as, for example, where the imports of a country do not fall into the same period of the year as its exports, and the bills in payment of them do not meet each other in the ordinary course. In that case, the importers in seeking to buy bills on foreign countries would not find them, and would have no recourse but to remit specie in payment of their purchases abroad. In like manner the exporters of grain, cotton, and other produce might draw bills for their value, but would find the bills were unsaleable, and would have to order the gold, remitted by the importers a few months before, to be sent back again. In this situation banking-houses draw " in blank " on bankers abroad, selling their drafts to importers at one period of the year and buying the bills of the exporters at another, therewith to refund the bankers abroad by whom their drafts have been honoured. The case implies a raising of capital in anticipation of the produce, but there need be nothing fictitious either in its manner or character, and it may well be believed to be the case of many large producing countries and colonies. In the deal-ings of foreign exchange the small as well as the large bills are embraced. With the piles of single bills for many thousands of pounds sterling, from such countries as China, India, or America, are commingled many bills of small amounts; while from all parts of Europe they are of a still more miscellaneous character—bills of retail as well as wholesale trade, bills of Swedish or Norwegian shipmasters for freights, of Dutch and Belgian farmers for parcels of eggs and butter, of Germans for toys, and French for odd articles de Paris, on minor agents, shopkeepers, milliners, and others, who may not have come in the course of their business within the range of inland exchange.

The developments of foreign exchange are always more or less modified in the course of a generation, and so much seems necessary as an introduction to the essential subject itself, and in particular to the explanation of the rate of exchange, how it is determined, and what in a general sense it imports.

Mr M'Culloch, in former editions of this w-ork, treated foreign exchange under three heads:—(1) nominal exchange, or the rate of exchange established between two countries on a strict estimate of the respective money, or coins, or currencies, in which the value of their goods are usually denominated and exchanged; (2) real exchange, or the effect of the supply and demand of bills in raising the current rate above, or depressing it below, the mean point or equilibrium—nominal, inasmuch as it is an equal value from which there is constant variation by other elements acting on the rate of exchange, but yet of radical fixity and importance; and (3) computed exchange, or, in reality, the actual course of exchange as determined day by clay from the combined consideration and effects of the other two. While this division was appropriate enough, it may be better here to consider still more in detail the various elements entering into the valuation of foreign bills or, in other words, the rate of foreign exchange. These may be conveniently embraced under the following heads:—(1) par of exchange; (2) supply and demand of bills ; (3) rate of interest ; (4) cost of specie remittance; to which may be added, what is always implied, (5) correct judgment of the force and duration of the cause or causes affecting the rate of exchange, or its opposite, panic.

1. Without some common medium of value in commercial Par of countries, bills of exchange could not be drawn between one ex-and another. The " cash" of China has played no more part cnatlge in the foreign exchanges than the cowries of Africa; but since a mint has been established in Japan, from which gold pieces are issued under public regulation as to weight and fineness, there may be no difficulty in ascertaining the mone-tary equivalency, at Yokohama, of any debt due by Japan to England, or vice versa. The nations have thus found a medium of exchange in bullion, in gold or silver, or in both. In countries of the double standard, it has been usual to modify the law by liberty of contract for payment in one of the metals, without which liberty, indeed, it would be as well to have only one standard, since it is certain that the debtor will always choose to pay in the metal that has become relatively cheaper. In countries where silver is the sole standard, the par of silver to gold may be 15 to 1, or 16 to 1, as law or custom may have established; but in foreign exchange the par of silver to gold cannot be fixed at any absolute point by the law of any one country, and in the case of a depreciation, say of silver, even though temporary, by which the market price of silver to gold became If to 1, a proportionate addition would be made to the figures of the mint or former customary par, and this new sum become practically the par of exchange between the gold currency of England or California and the silver dollars of Mexico or rupees of India. Thus, having gold and silver to deal with, it is always possible, whatever may be the variety and names of the coins of different countries, to estimate the equivalents of the one to the other This is a matter simply of weight and assay; and the ratio thus found is the par of exchange between one country and another.

Mr M'Culloch seems to have thought that the par of ex-change should properly include, not only equivalent weight and purity of the precious metals, but their relative cheap-ness or dearness in given places. " Thus," he says, " if, because of the expense of carriage, the value of bullion in Great Britain be 5 per cent, greater than in San Francisco, 100 ounces of pure gold in the latter would not be worth 100 ounces of pure gold in London, but 5 pet cent, less ; and the exchange would be at true par when bills for 105 ounces standard bullion, payable in San Fran-cisco, sold in London for 100 ounces." Since this has not been the practice in determining the par of exchange-—the 25-30 of Paris, and the old 109 of New York, &c, with London having been based more or less exactly on equal weights of pure gold for pure gold—a question is suggested which the following considerations may help to resolve.

The 5 per cent, claimed from San Francisco is for a relative dearness of gold in London, which can only be overcome by carrying the gold from the one place to the. other ; but it would be illogical to charge in a bill of exchange for a transport of specie which it is the express object and effect of the bill to supersede. The merchant in London would be entitled to sell a bill on San Francisco for a sum equal to 100 ounces of gold, and to include the costs of ex-change, if any; or his debtor in San Francisco might buy a bill on London for a sum sterling equal to 100 ounces of gold; and if the course of exchange were such that this bill cost him only 99 ounces, the merchant in London would yet have no reason to complain. If neither of these modes of settlement were available, the debtor in San Francisco would have to send 100 ounces of gold to London, in which case there would be no rate of exchange in question.

But, apart from the less value of bullion in some coun-tries than in others owing to nearness to the mines or other causes, there is a cheapness of the metallic money, as well as the general currency of a country, which operates directly on the rate of exchange, and requires in one form or other the recognition of a different par from that established under other conditions. The standard may be tampered with; the alloy may be increased; the weight of the coins may be diminished and diminished, till, like the Turkish piastre, they become scarce a shadow of themselves. It is obvious that innovations of this kind compel a rectification of the estimated par of exchange. In other cases coins are legitimately changed; and these variations, in so far as they supersede or modify coins which entered into the par esti-mate, are bound to have a new rating. A country which allows its coinage to be much worn, defaced, and generally light in weight, is in the same position as one which has deliberately lowered its standard of value ; for though its light coins, when sent abroad, which they are not apt to be, count for no more then they weigh, there is the other and more serious effect that they may have been already well weighed at home, and have so raised the prices of the goods of the country as to place all dealings in them under a de-lusion as to their real value. One may well believe, how-ever, that this is a form of monetary evil which has now passed away. There will always be some more or less worn and light coins in a metallic circulation, and as long as these are limited in number, and circulate in the country of their coinage at the mint price, they do little or no harm. There is a much more convenient process by which to cheapen the money of a country than any form of debasing the coinage, namely, to dispense wholly or almost wholly with metallic money in favour of an inconvertible paper currency.

Effect of When a country is impelled to issue paper money not Lncon- payable on demand in gold or silver, its monetary value vertible gjjpS away from all fixed reckoning. The first effects are money 80 aSreea^e as naturally to lead to a larger and a still larger issue, and the agreeable effects are prolonged until the real situation begins to be disclosed, and, finally, de-rangement has spread so widely on all sides that extrica-tion becomes a task of the gravest difficulty. The effects even on the foreign exchanges are for a time somewhat dlusive. There being no more need for gold and silver, nearly the whole stock of bullion passes out, and like a new found capital gives ample power of purchase abroad. The importer, finding that there are increasing prices for every commodity in the paper money, goes into his business with new heart and will. The premium, which has early begun to be established on foreign bills, soon becomes so large that the exporter imagines that he can make a fair profit out of the premium on his foreign bill alone, though there may not be a margin of a fraction of one per cent, of profit in the actual trade. Supposing such a result possible to the exporter, it is clear that he makes his profit entirely out of his neighbour the importer, who has to buy his bill, and consequently to pay the premium. Both cannot be right in their views, and in point of fact both are wrong until they begin to realize that the inconvertible paper dollar, rouble, or florin is not so valuable and has not the same purchasing power as the metallic money, or as the paper notes maintained in a constant practical convertibility. This fact is demonstrated within the country itself by the more or less gradual and uniform, but inevitable, rise of prices of all commodities, and of bullion among others, in this new currency. It is discovered very early in the foreign exchanges, not only since there is likely to be an excess of imports over exports when a country is in the act of denuding itself of specie, but because the foreigner has to be careful to get the value of his goods or produce as it is known to him in his own money; and any important change in the money of a country, therefore, obtains a sharp valuation abroad. Both at home and abroad it is soon dis-covered that the par of exchange, as formerly established, has passed away, and that a new par has come into operation under the pure force of the natural relations of the case. The importer finds no advantage from the advancing prices of what he imports in the domestic markets, since he has to pay more of the domestic money for the foreign bill of exchange by which he discharges the debt for his imports ; and the exporter finds no advantage in the premium on his foreign bill which he sells to the importer, since it only re-places what he has already paid in the increased cost of his commodities and other outlays.

This action of exchange is now so familiar as to require little illustration; but a commonplace example may be given, to render more obvious the result on both sides. A, a merchant in London, at a period when the rate of ex-change between London and Hamburg.is at exact par, can sell a hogshead of sugar worth £50 in London to B in Hamburg for £100, or weight for weight in gold of 100 sovereigns. He exports, draws his bill on B, which he sells for £100, and derives his profit of £50 on the sugar, less expenses of transit, At another period of equal scarcity and dearness of sugar in Hamburg as compared with London, but when the currency of England has been under suspension of specie payment, and has been so much in-creased in quantity that prices of sugar and other commo-dities have doubled in the meanwhile, the hogshead of sugar now sells in London for £100. A, however, again exports, draws on B for £100, and, the rate of exchange being now 100 per cent, in favour of Hamburg against the currency of England, sells the bill for £200 in London, and makes a profit in the English currency of £100, equal to £50 in undepreciated money—the same profit as he made before. The results to B, all things being equal as sup-posed save the depreciation of the English currency, are also the same in both transactions. The case of a British importer, in corresponding circumstances, would not differ from that of A, the exporter; because, however unfavourable the nominal exchange might be in the bills by which he paid for his imports from abroad, he would be repaid by the increased nominal prices obtained for them in the home market.

As long as a change in the par of the money of two countries is not recognized or clearly understood, there may be much miscalculation and irregular profit and loss among the merchants on both sides. On the other hand, as soon as noted and brought under generally acknowledged estimate, it does not interfere, per se, with the movement of produce or the fair profits of those engaged in foreign trade.

But how is the depreciation of an inconvertible paper currency to be measured ? As a convertible paper currency only maintains its par with gold by being always payable j on demand in the gold it promises to pay, so an ineon- | vertible paper currency falls just so much below the par j of gold as the difference between the amount of gold it professes to be and the amount of gold it exchanges for in its own market. The price of bullion in an inconvertible paper currency rises like that of other commodities—not, indeed, in its general market value, but in its market price within the sphere of the currency; and the amount of this rise marks what may be called either a discount on the paper money or a premium on the gold, and this dis-count or premium becomes a measure of the depreciation of the currency. It is by no means a satisfactory standard, for it may vary from day to day, and in this respect be as unlike as possible to a par of exchange between the gold and silver moneys alike of small and great states, which may hold good without variation for any number of years, where may also be restrictions on the sale of bullion, prohi-bition of the export of bullion, and speculative combinations of paper-holders and gold-holders to " corner " each other, and the fluctuations may be not only constant but sometimes extreme. But, with all its disadvantages, the relation of gold to the paper money, as it happens to be revealed in the markets, is the only measure of the depreciation to be had, and the premium on gold has consequently to be reckoned as a necessary component part of the rate of ex-change with other countries.

The history of the last twenty years, though years of abundant production of gold and silver and great material prosperity, has been marked by an extended resort to incon-vertible paper money in many parts of the world; and the ex-changes of Russia, Austria, Italy, and many other countries might be referred to for ample proofs of the effect of this monetary expedient on the nominal par, and the extraordinary fluctuations to which it gives rise. The "green-back " money of the United States, a result of the war between North and South, is probably the most familiar, while in some respects also the most instructive example. The par of the American dollar to the pound sterling was originally struck in the rough proportion of $40 equal to ¿£9, which made the quotation at New York $4'44 to the pound, or, as stated on the British side, 54d. to the dollar. But on strict inquiry this did not correspond with the gold, weight for weight, in the dollar and the sovereign, and was in fact 9 per cent, too favourable to the dollar. It thus appeared that to correct the scales $9 had to be thrown in with every hundred, and adhering to the old par with the tenacity which has been the general commercial practice in such cases, the exchanges were held to be in equilibrium when bills on London stood at $109 for every hundred of the purchase-money, or 9 per cent, nominal premium in favour of England. The par, as more definitely stated, was then in New York $4 '85 equal to the pound, or in London 49|d. equal to the dollar, and this remained the mean specie point from which all other influences acting on the exchange caused the rate either to rise or to fall, until the period of the civil war, and the issue of paper money, guaranteed by Federal security, but inconvertible. The effect of the new currency on the exchanges was neither immediate nor suddenly great in its proportions. The wide territory and large population of the Northern States were a powerful absorbent. Moreover, as the Government increased its issues the banks withdrew their notes, which had the effect pro tanto of staying the progress of deprecia-tion. But gold was still absolutely necessary in the ports, and a premium on gold, inevitable from the first, increased month by month with the increased issue and circulation of " greenbacks." What the nominal par of exchange now was became a sort of arithmetical puzzle ; for, taking the exchange of New York on London alone, without respect to other countries trading with the United States (the money of some of which was undergoing similar deprecia-tion at the same period), the established premium of 9 per cent, in favour of London was met and supplemented by this new premium on gold, and to add the one premium to the other would not be enough, because the dollar itself was now fallen away from its value when the $9 to the hundred had been strictly ascertained and arranged as a corrective of the original rough par of $40 equal to ¿£9. The Government, issuing the new currency that produced this disturbance in the foreign exchanges, had no theory on the subject, and only made some feeble attempts to regulate the sale of bullion. The adjustment was left in the main to the calculation of bankers and merchants on both sides, in presence of the natural causes in operation, and the solu-tion thus attained may be all the more significant. The premium on gold in its exchange at New York with the paper currency was added to the former premium of 9 per cent, in favour of London, and the 9 per cent, itself, marked of old in $9 of bullion value, was increased pro rata by the same premium. This rule has since regulated the nominal par of exchange between New York and London through wide ranges of fluctuation. The exchange was often as high as 180 during the war, so that the quo-tation must often have been—New York $8'0 = £1, London 30d. = $1'0. It is no less worthy of remark that, without the actual resumption of specie payment, the "greenback'' dollar has been quoted of late in New York and other American cities at the metallic par of 4'85—a rare though not unprecedented phenomenon, to be attributed to a severe financial and commercial crisis, followed by four years of lowered prices, steady excess of exports over imports, and accumulation of bullion.
The effect of issues of inconvertible paper money, or the suspension of cash payment of paper currency already in circulation on the par of exchange, is the same as that of a change of the standard of value, a debasement of the coinage, or, where in one of two countries the money is gold, and in the other silver, a depreciation of one metal as compared with the other. When two countries par their gold coins, the object is to arrive at a common term by which value for value will be paid, in equivalent weight and purity of metal, out of the money of each other. When one of them displaces its gold coins by inconvertible paper money, the same object has to be attained, and this is reached, though not so fixedly as in the par of metallic coins, by the premium which gold commands over the paper money in the sphere of its currency. The former par in such cases may be adhered to as a landmark, and this gold premium may be treated as nominal premium on one side and nominal discount on the other, but it is sub-stantially of the nature of par of exchange, and becomes a necessary integer of the rate of exchange. In the case of countries of one of which gold, and of the other silver, is the standard money, the nominal par is subject to variation from changes in the relative market value of the two metals. If, for example, the relation on which the par proceeded was 15 ounces of silver equal to 1 ounce of gold, and the depreciation of silver becomes such that 17 ounces will buy only 1 ounce of gold, the par of exchange between the two countries will follow the course of that depreciation.

The course of the exchanges of India has been much affected of late years by the depreciation of silver, and so also those of all silver-paying countries. The drawer of a bill sterling on London in Calcutta or Bombay is literally selling gold for silver, and, whatever the more ordinary par may have been, is bound to take into account the 7narket value of silver. In 1876, owing to the large quantity of demonetized German silver thrown upon the market, less directly to a pre-existing cause, namely, the large extent to which silver had been cast out even of the fractional currency of countries largely committed to incon-vertible paper, and also to exaggerated reports of abundant increase of production in the American mines, silver fell to 47d. an ounce—about the lowest point reached in its rela-tion to gold, and a great reduction from what had long been its par value of 5s. 2d. an ounce. The consequence was that the Indian rate of exchange declined to Is. 6|d. per rupee in six months' sight bills on London, or, in other words, that the rupee, having an accustomed par value of near 2s., was worth only Is. 6|d. sterling, minus say seven months' interest accruing between the date and the maturity of the bill. It is difficult, or rather impossible, as foreign bills are negotiated, to distinguish the respective force of the various causes operating on the rate of exchange. In the case of India nearly all the constituents of exchange are adverse to the value of the rupee, save that of rate of interest, which is higher in Calcutta or Bombay than in London. The Indian drawer of a six months' bill on London would lose more by holding the bill till its maturity than the buyer of the bill who remits it to London for acceptance and discount; and some middle term must be struck between them, according as the rates of interest in India and England vary. But, on the other hand, India is a country where the imports always exceed the exports, where foreign capital in many forms has been largely invested and has to render its annual tribute, and where the financial relations of the Government of India and the Government of England are such that the latter has to draw periodically a considerable amount of bills on the Indian treasuries; so that, whatever the par of gold and silver might be, the supply of bills on London would always be less than the demand, or, in other words, the Indian creditors have some advantage over the Indian debtors of London in the rate of exchange. Were gold the money of India, the range of the premium thus established on the bill on London would be limited by the cost of remitting gold; but silver being the money of India, the action of the premium itself, or rather of the relative indebtedness of which it is the result, is to extend the range of thespecielimit by lessening the demand for silver abroad. The rupee being less valuable than it formerly was, does less work in the Indian circulation and is all the more needed at home; to export it in payment of the adverse balance of trade would be to send it where it is less valuable still. It may thus be concluded that the depreciation of silver has been much the most potent and constant element in the adverse current of Indian exchange. The price of silver having since 1876 risen to 53id., the rate of six months' bills in London has risen to Is. 8fd. The rate of Indian exchange rises in the export seasons when the supply of foreign bills is increased; and it rises with the price of silver at all seasons.

In the silver exchange between Hamburg and London the same rule prevailed. In Hamburg silver was money, but in England and other countries which have a gold standard it is only merchandise, and a rise or fall in the price of Bilver affected the value of a bill on Hamburg or a bill drawn on Hamburg in English sovereigns. Where a double standard exists, as in France, bills between that country and another are drawn in the standard which is common to both. Thus in the direct exchange between Paris and London, the bills are usually or almost wholly gold bills.

2. Were there a common international money, the Supply supply and demand of bills would be the chief determining and ^ cause of a rise or fall in the rate of exchange. Hence, in biUg distinction from the nominal par, the relation of supply and demand of bills has been called " real exchange." Mr Goschen speaks of it as " the primary element in the value of bills," which, from so practical an authority, may be regarded as indicating that, notwithstanding all the varieties of money, this continues to hold the chief place in the negotiation of bills of exchange, or that, the nominal par being once determined, or a common principle formed for its rectification when the money of a country has de-preciated, it ceases to require the calculation which must always be given to the supply and demand of bills in the market. As the sum of the bills offered, and the sum ready to be bought, never express the whole of the claims upon, or the whole of the debts due to a country, but only such claims as have been drawn for, and debts the time of payment of which has come or is nearly approach-ing, there is always more or less change of the relation of supply and demand, as well as opportunity of judgment as to the probable course of the market, and means of apply-ing correctives if the balance be swaying too much on the one side or the other. If the price of foreign bills be depressed for want of buyers, drawers may hold back a little; on the other hand, if the demand has raised the price of bills, all who have sums to draw for will be induced to take advantage of the market, and so increase the supply. The buyers are moved in the same way, quickening or delaying their purchase within the limits of their period of remittance, according to their judgment of the probable course of the exchange. But the buyer cannot delay beyond the day when his remittance is due in the foreign country, nor the drawer beyond the ultimate date of drawing, or his own need of realizing the value of his bill; so that, amidst this oscillation, it is always the peremptory business to be done that determines the effect of supply and demand on the rate of exchange. The debtors of a foreign country, finding the supply of bills on that country less than the demand, will be ready to give an addition of price for them, in proportion to the scarcity, within the cost or up to the cost of remitting specie; and the creditors or drawers on a foreign country will submit in the other extremity to discount on their bills within the cost of sending them to their correspondent or banker's correspondent abroad, with orders to take payment and remit the proceeds in specie. When the course of exchange, as thus pursued from week to week, reveals that the claims immediate and maturing upon any country are greater than the debts due to it, and cannot be discharged through the mechanism of direct and indirect bills of exchange, its balance of debt can only be paid by remittances of bullion or an increased export of goods and produce, or other exportable value.

It is unnecessary to dwell further on the law of supply and demand of bills, which differs little from that of other com-modities, beyond remarking that an inadequate idea would be formed of the efficacy of bills of exchange in liquidating international debts without taking into account an immense banking organization, aided by bill-brokers and dealers in foreign exchange, who have all the main currents of indebtedness under their eyes, and know with the precision, of practice how the debts of one centre can be met by its claims upon others, and a stupendous mass of conflicting operations, ordinary and extraordinary, be most economi-cally effected. Fifty or a hundred millions sterling, as in the case of the French indemnity to Germany, can be trans-ferred from Paris to Berlin at a time without material dis-turbance of the more ordinary business of exchange. The British chancellor of the exchequer could transfer three millions and a quarter from London to Washington in pay-ment of the Alabama indemnity before the operation was well known in the principal marts of the two countries. When England is lending ten millions to India, fifteen millions to the Australian colonies, or twenty millions to innumerable enterprises in the United States and Canada, or so many millions to Russia, Turkey, or the River Plate republics—or making several of such loans at nearly about the same time, as has sometimes happened—the effect on the foreign exchanges, though considerable, is seldom thought of. A foreign loan is usually taken out—a large part in goods, another part in bills, and the balance most probably in specie. But the effect of a foreign loan on the exchanges is exactly the same as if the borrowing country had exported produce to the lending country equivalent to the amount of the loan, placing it in debt to that amount. The lender has become bound by contract to pay so much to the borrower. The whole weight of a foreign loan, therefore, falls at once to what may be called the adverse exchange of the lending country or the favourable or less unfavourable exchange of the borrowing country. The reverse action comes in half-yearly or yearly rills, when the interest and redemptions of the loan, spread over a series of years, are payable. A foreign loan, if prudently and honourably conceived, may thus, as regards even the rate of exchange, be advantageous on both sides, The lending country gives a great advantage at once to the borrowing country in its exchange, which may be no evil in itself, and which the borrowing country, if the terms of the loan be fulfilled, repays in a period of years*, during which its exporting and paying power may be reasonably expected to increase, which may be a common good. It may be added that foreign loans and investments of capital in foreign countries, badly as many may have been conducted, yet in their product of sound and marketable stocks and shares come to play a generally useful part in the rates of exchange. The value of commercial bills might not be so equable between such centres as London and Paris, or London and New York, without the intervention of stock-exchange securities. Bate of 3. It is obvious that the number of days or months a interest, bill has to run before payable imports the question of interest as an element of valuation in the rate of exchange. The usance of foreign bills is extremely various, from short to long, from payable at sight to payable at six months after sight; and days of grace are allowed by the law or custom of some few countries considerable enough to be taken into count. Where a bill is payable so many days or months after sight the time that must elapse, in the or-dinary course of communication, before it can be presented for acceptance, is a further prolongation of the currency of the bill. The buyer takes it with this weight of time upon it, and, whatever the period may be, is entitled to a conces-sion equivalent to the interest of the money which he pays, the converse happening in the case of stocks and shares on which dividend or interest has accrued at the period of sale, and must be accounted for to the seller in the price. But the important question in foreign bills of exchange is what rate of interest is to rule in the transaction Is it that of the country where the bill is drawn, or the country where it is payable, or a compromise between the two ? The drawer, in offering to transfer his bill to a buyer, is wholly in the domain of the rate of interest in his own market. If he sells, he gets the value of the bill in money worth so much interest; and if he holds the bill till its maturity, or to some period nearer its maturity, he deprives himself of money for that period worth the same interest. The buyer who, in the event of an exchange, pays down the value of the bill in money would seem to be under the same condition; but in reality, when closely examined, the relations of the buyer and the seller of a bill of exchange to the rate of in-terest are different. The buyer has a debt to pay in the country on which the bill is drawn, which debt he is bound to pay now; and for his purpose the bill is all the more valuable the less weight of interest it bears, or, in other words, the less discount it is subject to. Supposing, therefore, the bill is drawn in a country where the rate of interest is 7 per cent, on a country where the rate of interest is 3| per cent., possession of the bill will be more profitable, as regards rate of interest, to the buyer than to the seller. If t^he seller holds the bill, it bears 100 per cent, more weight of interest than it would bear in the hands of the buyer. If the rates of interest in the two countries be exactly reversed, the bill bears 100 per cent, more of this weight in the hands of the buyer than of the seller. Thus, after the par of the currencies has been established, which, as we have seen, is always practically established, even in the case of an inconvertible paper cur-rency, by the bullion test, and must be regarded as the first condition of all foreign exchange, this question of interest is sufficiently important to modify the action of supply and demand, and of other circumstances operating either to raise the rate of exchange above or depress it below the par of the currencies. It is one of those innumerable commercial relations in which there is an advantage to buyer or seller, but which cannot be realized without mutuality, and which consequently helps them to a transaction. If the advantage of rate of interest be in favour of the buyer of a bill of ex-change he will be inclined, other elements of valuation con-sidered, to give a somewhat larger price for it than if this were not in the account; and if the advantage be in favour of the seller he will be less exacting. The whole advantage on either side may not be realized in the actual terms in either case; but it will have had some effect towards a mediation of the prices.

The price of a bill, apart from otnei elements, is the sum of the bill minus the interest it bears at the rate of dis-count in the country where it is payable. Yet in the practical negotiation this does not hold exact, because the value of the bill to the seller or the buyer is always modi-fied by the relation of the rate of interest where it is pay-able to the rate of interest where it is drawn.

Rate of interest, though in the aspect it presents to the seller and buyer of a bill thus plain enough, yet comes to play so great a part in the general course of exchange that it is worth while to pursue the subject a little further. Rate of interest regulates the supply and demand of bills, and affect3 the rate of exchange through that element; where the balance of indebtedness is against a country an advance of the rate of interest tends to restrain imports and to stimulate exports, by which effects the balance of debt is reduced; and where the action of trade is not sufficient to overcome the evil, further rises of the rate of interest may be employed to attract imports of foreign capital and specie. In the case we have supposed of two countries, where the rate of interest is 100 per cent, more in the one than the other, this relation of their rates of interest may be the normal relation from the greater abundance or the greater profits of capital in the one than the other, and their exchange may be supposed to be in equilibrium, so that this normal relation is not disturbed by any changes of rate of interest to correct the supply and demand of bills, or the balance of trade. The effect, as we have seen, of difference of interest was in favour of the price of the bill drawn by the country of high interest on the country of low interest, from the fact that the buyer was moving the bill out of a market where it bore a weight of 7 per cent, to one where it bore a weight of only 3J per cent, interest. But suppose the balance of indebtedness has become so adverse to the country of low interest that the rate has been increased to 7 per cent, in order to improve the course of exchange, and that the effect has been, as must more or less follow, to render the foreign drawer less eager to sell, and the foreign remitter more eager to buy. The remitter or buyer will find the new influence thus intro-duced operating in the same direction—viz., in favour of the price of the bill; but, on the other hand, the difference of interest has disappeared. Two effects have thus pro-ceeded from the same cause, which neutralize each other so far as they go; and the remitter, instead of buying a bill, may as well, as regards the rate of interest in the two countries, be drawn upon by his foreign creditor. If the rate of interest be further increased to 10 per cent., the drawer may be induced to hold the bill in order to save the 3 per cent, of discount above the rate of interest in his own market, or an investing buyer may intervene, and give such a price for the bill as will allow the seller 11 or 1 per cent, of the profit, and leave lí¡ or 2 per cent, to himself. In either case the bill would be held till it matured, and relief to that extent be afforded to the ex-change of the country raising its rate of interest. But it is clear that not until the rate were raised 3, 4, or 5 per cent, above the rates of the countries drawing upon it could any effect of this kind be produced. It thus appears that the function of rate of interest in controlling the supply and demand of bills is a strictly limited function; and this limitation will probably be found in all the effects expected from it on the state of exchange. It may hasten the course of payments due to a country, but it does not lessen the adverse balance of indebtedness, nor can it much retard the pressure of the foreign claims. It may restrain importation of foreign goods, but it may not at the same time increase exportation of domestic goods; or, if increasing export, it may not diminish import. These are results which will depend on many other causes. It may tend to lower prices, and thus seem to check import, while facilitating export; but, forming in itself an addition to the cost of production and exchange, it may render much outward as well as inward trade less possible. If the rate of interest be carried high enough it may attract much capital from neighbouring countries. Foreign bankers and lenders will buy up bills on the country as the best mode of importing their capital, or may import specie; and admirable as this service may often be, yet it does not lessen the foreign indebtedness of the country. It only transmutes one form of the adverse balance into another more convenient for the time being; and in the meanwhile, if the high rate of interest has crippled the productive and exporting resources of the country, little good or a reverse balance of evil may have been done. Hence bullion reserves are either inadequate in the plan of their formation, or they miss their use and efficacy if, when a heavy balance of indebtedness appears in the exchanges, they cannot be trenched upon without large and excited advances of the rate of interest. Cost of 4. Nothing is more definite in the system of exchange specie than what has been more than once stated in the course of mlt" these remarks, namely, that the cost of remitting specie forms the limit of variation in the rates of bills. That the buyer of a foreign bill will not give more for it than the cost of remitting specie equal in amount to his foreign debt is an axiom which holds good under all the ordinary conditions. But there are exceptions to the rule where the conditions vary from the ordinary. From the countries of productive gold and silver mines bullion flows abroad as naturally as the corn, cotton, wine, or oil which forms the special merchandise of a country, and it will so flow irrespective of supply and demand of bills, rate of interest, and other causes which have so much sway in rates of exchange. San Francisco will export gold and silver to London in all states of supply and demand of bills, and when its rate of interest may be double that of the Bank of England, and in the common parlance money is there dearer than in London, though it may be only that the average profits of capital are larger in the one place than in the other. If bullion is needed at New York, and commanding a higher premium on the Federal currency, it will be matter of calculation to the bullion exporter at San Francisco whether to send a consignment to New York or to London. If, since the dis-covery of the Californian mines, a metallic currency had been established throughout the Federal Union, the United States would no doubt have absorbed a proportion of the gold and silver shipped to Europe ; but this object accom-plished, the export to Europe would have proceeded much as it has been proceeding. In short, from gold and silver producing countries the export of bullion is not a remittance of money, but a transmission of the exportable produce of labour, which but for export would not have been produced. Then, there is the case of exchange between countries of silver standard and countries of gold standard, from either of which remittances of specie cannot be made without exact reference to the market value of the two metals. This will have been already marked in the par of exchange between the gold and the silver country, but it will have introduced a new element into the cost of remit-tance, since the specie remitted will have to be sold into the specie standard of the country to which it is remitted. Silver from India and China, for example, in the circum-stances of recent years, cannot be remitted in payment of an adverse balance of exchange without taking into account a subsequent act of merchandise—namely, what the silver will bring in the gold of England; and this, with silver under a course of depreciation, may be so doubtful that the buyer of a bill on London will rather yield in the rate of exchange, and give some fraction more of a rupee for the pound sterling than run the risk of it. Neither in payment of an adverse balance of debt, nor in transferring capital from one country to another with the view of taking advan-tage of a higher rate of interest, can specie be remitted between gold and silver standard countries free from this contingency. A Hamburg capitalist wishes to profit by a rate of interest two or three per cent, higher in England than at home. He will therefore buy bills on London up to a certain limit of price; if he has any gold, he will then remit gold rather than exceed this limit for bills; or he will remit the silver specie of Hamburg subject to its market value in London. In this case, indeed, the foreign capitalist has more than one act of merchandise to contemplate, for he has to look to the reverse action when the rate of inte-rest may be higher at home than in England, and when it will be his motive to re-convert his English sovereigns into silver, which in the relative condition of the market value of the two metals may be either favourable or unfavourable. If unfavourable, he will buy bills of England on Hamburg, or some other centre with which the exchange is favourable to Hamburg, rather than re-transmit silver at a higher cost than the rate of the bills. It is obvious that all this does not alter the principle that the cost of specie remittance is the limit of rate of exchange on bills, but only that it gives a larger range to the variation of rate, and to the specie limit, between two countries whose money and standard of value are of different metals than would exist between two countries where they were of the same metal.

In exchange between a gold-paying and a silver-paying country, one of which, say the silver country, has gone largely into an inconvertible paper currency, the case becomes more complicated, and the specie limit to adverse rate on bills recedes, till, if the inconvertibility be so great as to be incapable of valuation, or the Government in its ignorance or alarm has prohibited the export of specie, the limit is wholly lost. A Russian merchant, who has ample silver and paper roubles at command for his purposes, but has a debt to discharge in America, or needs to lift a cargo of cotton at Liverpool or of sugar at Glasgow, and finds that the remittance even of such specie as he may be able to produce is illegal, must buy a foreign bill or a banker's draft on London at any price. At this stage the rate of _exchange passes out of the domain of principle, or natural action of principle, into that of purely arbitrary considera-tions. When, from much less sufficient causes, general dis-credit passes upon a country, the rate at which its bills or acceptances may be valued is scarcely more reducible to _rule. It might even be difficult to define why in the same general circumstances there should be collaterally a higher and lower course of exchange, and the bills drawn or pay-able by one firm should differ in their rate from those _drawn or payable by another firm. It is only by removing abnormal conditions that one arrives at the underlying principle which governs exchange, and determines the suc-cess with which it is conducted.

Accordingly it is in countries where bullion, separated from its necessary export from the mines, has become money, and forms the common standard of value in their international trade, that the limitation of the rate of exchange by the cost of specie remittance is most clearly visible. Between all nations trading on a gold basis there is a well-known and definite point above and below the par of exchange where it becomes profitable to move gold from oone to the other, and which marks the extreme range of variation in the price of bills. Thus in the exchange of London with Paris, New York, and Berlin respectively, 25'10, 4-81, and 20'30 mark a point in the price of bills below par when it pays to send gold from London to "these centres; and, on the other hand, 25'30, 4-87, 2O50, & point above par when it becomes profitable to move gold from Paris, New York, or Berlin to London.

When the rate of exchange, touching, under the supply and demand of bills and other elements of valuation, these extreme points on one side or the other, and tending to exceed them, is the result of an actual over-indebtedness, a transmission of bullion is the best and most satisfactory mode of settlement. It directly reduces the balance of debt, and renders the price of bills again more equitable to the traders. All other modes of fencing it off, save an increased export of goods and produce, are more or less illusory. If, in such a juncture, an amount of foreign capital has been invested in bills on the country with the view of holding them to maturity for sake of profit in rate of interest, and now with the view of realizing the value of the bills in gold they should be pressed on the market before maturity for discount, an advance of one per cent, in the rate of discount may be sufficient to induce the foreign capitalists to hold the bills till they mature. And another advance of one per cent, in the rate of discount may induce them to reinvest in other bills on the country. But the root of the adverse oexchange will not have been removed. It will always appear when the foreign capital thus invested in bills on the country is from any cause withdrawn, and until the over-indebtedness is liquidated by remittances of specie, oincreased export of produce, or transfers of saleable shares and securities.

If, on the other hand, the rate of exchange has been brought to the specie limit by bills, representing no actual odebt, but drawn and accepted solely for the purpose of moving bullion, as may probably happen, there is no remedy for what may prove an inordinate. demand for specie by irregular means but the detection of the bills, and either refusing them discount or discounting them under exceptionally high rates of interest.

5. An exposition, however brief, of the causes operating Correct on the rate of exchange would scarce be complete without jndg-including the effect of opinion or estimate, correct or mem% c erroneous, of the probable course of the market; and there- aite°PI>< fore it may be observed that a judgment has to be formed panic, in every new phase of the numerous fluctuations. The seller of bills finds that within a few days the market has taken an unfavourable turn. If he judges that this has arisen from merely accidental or temporary causes he will be inclined to hold his bills for what he deems their true value; or if, on the contrary, he judges that the causes operating are more deeply seated, and likely to become stronger for a time, he will sell with the least possible delay. Should his judg-ment be justified by the event he will have done what is right for him, if otherwise he will have done what is wrong; but in either case, his abstention or action will have affected the supply and demand of bills in the mean-while. In all the great marts of exchange, and in London probably more than in others, there are frequent wave-currents so to speak, which cannot be rightly interpreted either as the sign of a protracted state of exchange between the points of the compass in which they flow, or of the general foreign indebtedness of the centre upon which they are directed. When New York balances its debts to China aud India by bills on London, the bills affect the course of Eastern exchange; but they lose much of the significance they might otherwise bear when it is considered that New York is in course of compensating London in other direc-tions. These operations come to be understood and systematized by dealers and agents in bills with much accuracy; but in addition to the judgment that may be formed by a thorough analysis of the substance of the various cur-rents of exchange, there is the effect of opinion on external events, which, though of almost daily occurrence in one quarter or another, are wholly of future account, and which impress, not only the connoisseurs of exchange, but the whole body of drawers and remitters, from whom the original impulse on the action of exchange in all cases comes. The examples that might be adduced of the great effect of passing events on exchange are innumerable. In the beginning of 1861, when the disastrous rupture between North and South had occurred, and war was imminent, the United States had a most favourable balance of trade with England and Europe. Their exports of wheat and flour and cotton in the previous year had at once reached a maximum in quantity and a rise in value. The drawer of a bill on London was in so good a position that he had only to wait for the buyer to get the value of his bill up to the specie point. But so eager were the drawers, in view of the pending outbreak of civil war, to realize what was owing to them abroad, that they threw their bills on the market in an abundance which reduced their price to the other end of the scale. This, of course, had its converse effect at London, and bills on New York were there selling at such a premium that it seemed as if the United States would have to remit bullion to Europe. The volume of bills, however, told its own tale after a while. England had to remit bullion in large quantity to the United States, and then people began to awake to the perception that, in the exchange transactions, the one element most important of all had been left out'—namely, the relative indebtedness. It must have been a time of much profit to those on both sides of the Atlantic who knew the actual state of affairs, and of much loss to those who did not know, of whom there can be little doubt that the latter were much the greater number, but the balance of value between the two countries, as expressed on the face of the bills, had to be rendered all the same.

To take a more recent case. The exchange value of the Russian rouble during the last twelve months of war between Russia and Turkey will amply illustrate what is meant by the prevailing judgment on events in their future aspect, which, while proceeding on a certain amount of reason, yet borders on panic, and may be of the nature of panic. The issue of paper roubles had gone the length of 730 millions before the war, and there was a constantly in-creased remission during the year, counteracted in some measure by conversions into loans bearing interest. On the mobilization of the troops the value of the rouble was 29d. to 30d.; on war being declared it fell to 27d.; when it seemed as if Plevna could not be taken it sank to 22|d.; when Plevna fell it rose to 26 Jd.; and when it followed that the conquest of Turkey and an armistice did not end the difficulties, it fell to the lowest point it had touched, 22-|d, Favour- The term " favourable exchange," as commonly used, not able and 011|y means a state of the exchanges when the debts due to exchange" a colmtry abroad are so much greater than what it owes ° ' abroad as to affect potentially the demand and supply of bills, and when the money of the country so situated, as expressed in the price of bills, is equal to more of the money of a foreign country than the nominal par—when its bills on abroad, in short, are dull of sale, while the foreign bills on itself are in much demand; it is also applied to all stages, moderate or extreme, of this relation of the foreign exchanges. And so the term " unfavourable," of course, applies to the opposite conditions. If these phrases had ever any reference to the prosperity of the foreign trade of a country, they must have arisen under the sway of " the mercantile system " of the last century, the principle of which was that a balance payable in. specie is the cardinal condition of prosperous trade with any foreign country ; or, if introduced under that erroneous theory, they have been prolonged by the usage of bankers and other dealers in foreign exchange, who, having large liabilities entailing bullion payment, naturally consider a state of exchange which is on the eve of bringing specie more favourable than one on the eve of taking it away. This is quite true in the monetary view of the question, and it is true also as to the relative indebtedness for the time being. But it is not true to extremes even in a monetary sense. The condition of a country to which specie was always flowing in and never going out would be a realization of the fate of Midas. The most favourable exchange, therefore, is that where there are only moderate oscillations up or down from the par of exchange.

While the terms " favourable " and " unfavourable " are thus somewhat misleading as regards substantial inter-ests, they are involved in a minor technical complexity, which, though well understood by those in the business, may here be stated. The terms would be strictly applicable in the sense they are used, were the rate of exchange always quoted in the home money. The certain properly in ex-change transactions is the number of pounds, dollars, francs, or florins a remitter has to pay abroad; the uncertain is what amount of his own money is equal to this amount of the foreign money. Were the quotation on both sides respectively always made in the home money, the fall or rise of the quotation would always be identifiable with such terms as " favourable " or " unfavourable." Both drawers and remitters would be so familiar with their significance as to know what they meant. But this is not the practice, and, with so much variety of currency, could hardly have been the developed practice of exchange. The pound ster-ling of England is the largest monetary unit, and there is always facility of expressing minute shades of difference in the smaller units, more especially when, as in the case of Paris or New York, they have a decimal character. In London, consequently, the public only hear quotations of rate of exchange with such countries as France and the United

States in the foreign money—London thus giving what is called the certain, and the smaller moneys the variable. On the other hand, not only in the Australian and other British colonies, where the standard of value is the same as in the parent country, but in such large commercial regions as China and India the quotation of rate of exchange on both sides is always expressed in sterling. The Chinese tael of silver is worth so many English pence sterling at Canton; and the rupee is worth so many English pence at Bombay or Calcutta; and in the same terms run the quotations in London. The practice may not alter in any iota the true rate of exchange, but it has the result that when the rate is quoted in sterling money, as in the Indian, Chinese, and Australian exchanges, every drop in the quotation is " more favourable" to England, every rise " less favourable," and this will hold good whether the quotations are made in England or in India, China, or Australia; whereas, on the other hand, when exchanges are quoted in foreign money—French, German, or American, &c.—every drop in the rate by the same rule is "less favourable," every rise in the rate " more favourable " to England, whether the quotation be made in England or in the foreign countries.
The states of exchange to which the terms " favourable " and " unfavourable " are thus applied refer wholly to the effect of the demand and supply of bills; so that, since the fluctuations of exchange are due to various causes, it would be an improvement were the quotation always to include the par of exchange, whether between the gold money of one country and the silver money of another, or between either and inconvertible paper, the depreciation of which has to be determined by the gold or silver premium in the country of its currency. The actual rate above or below par would show the effect due to the supply and demand of bills. When a sudden alteration takes place in foreign exchange, nothing is more difficult than to discover the relative force of the cause or causes to which it is to be ascribed, and yet nothing is more necessary to know than this, whether in the correctives that may be applied or in the lessons to be conveyed to importers and exporters.

The limited meaning to be given to such terms as " favourable" and " unfavourable" exchange probably applies to other statements that may arise legitimatel in connexion with this subject. The principle, for instance, that the profit and loss of exchange transactions fall, not between the two countries concerned, but between the foreign creditors and debtors in one or other, is exact within its own range; but it leaves as an open question whether in a country where from a depreciated and depre-ciating currency the rate of foreign exchange is always rising, the general result may not be adverse to its interests in ex-port and import trade. In like manner it would be more than questionable, because " the mercantile theory" was wrong in supposing that a balance of foreign trade in specie, or an excess of export value over import value, was the necessary condition of national prosperity, to posit the opposite doctrine that an excess of imports over exports is the only prosperous condition. The solution of this ques-tion must depend on what may be called the permanent in-debtedness of some countries to others. A country which is under large tribute to foreign capital is assuredly in the right way for itself and for other countries when the value of its exported exceeds that of its imported produce. And so also it may be observed that " rate of interest," if we are correct in our reasoning on that head, may not have the absolute control over the exchanges which was so strongly emphasized for some years after the passing of the Bank Charter Act of 1844, and has since only been modified in practice without any express recognition of the principles involved.


Rates of exchange have undergone much variation of late years from changes of standard—in some cases from gold to silver, and in others from silver to gold—and from the circulation of forced paper currency. The tendency, however, is to greater uniformity. The gold standard of value adopted at Berlin extends to the whole German empire, and the rates of exchange are now calculated in imperial marks and pfennige at Hamburg, Frankfort-on-the-Maine, Altona, and other German places, where different moneys formerly were used. The money under the new system is 100 pfennige = 1 mark, 20 marks = 1 twenty-mark gold piece (imperial mark) = 19s. 6-954 sterling mint par. The mark, which is the unit or in-teger of the system, is a silver coin based on the ratio of 1 to 15 J as the relative value of silver and gold. In like manner the kingdom of Italy has extended a uniform exchange ; and the rates at Naples, Palermo, Messina, Milan, Turin, Florence, Leghorn, and other Italian towns are similar to the rates at Genoa.

Bills of exchange may be made payable on demand (as the invariable rule is in the case of chèques), at sight, at a certain speci-fied time after sight or after date, or at usance, which means the customary or usual time for which bills are drawn from a given place, and when the time is doubled it is called double usance. No bills are now drawn in London at usance, and the practice is being gradually dropped in other countries. The usance of bills drawn from France, Holland, and Germany is 30 days' date ; from Spain and Portugal 60 days' ; and from Italy 3 months' date ; but the currency of bills is regulated more by the classes of business to which they relate than to the usage of any country. The allowance of days of grace is also going out of fashion. Three days are still given on bills drawn upon or payable in the United Kingdom other-wise than at sight, and a similar practice holds in the United States. St Petersburg gives 3 days on sight bills and 10 days on date bills, Copenhagen 8 days, Christiania 8 days ; but in these and other cases the allowance may not mark so distinctly the day when a bill is legally due as an interval within which certain legal pro-ceedings of the respective countries cannot be instituted. The practice, which was at one period extremely various, has now been reduced within such narrow limits that in exchange transactions in London no account is taken of days of grace.

Bills of exchange in London are bought and sold through brokers, who go round the mercantile and banking houses, and discover whether they are buyers or sellers of bills. The negotiations are determined on Tuesdays and Fridays, which correspond with the principal post days in foreign exchange business. In London, as in other great commercial cities, bankers deal largely on the rise and fall of exchanges,—buying bills when they expect a rise, and selling bills when they expect a fall.

Foreign bills are generally drawn in duplicate or triplicate, lest the first should miscarry. When thus drawn in sets, the first is payable only "second and third unpaid," the second " first and third unpaid," and the third "first and second unpaid." Where there is a doubt as to the acceptance, the first may be sent unindorsed to a correspondent of the drawer in the place of payment to have it ' accepted, and the second sold and put in circulation, bearing the name and address of the party holding the first or accepted bill "in case of need," that is, in case he may not have obtained accept-ance, and will protect the drawer from having the bill returned through the indorsers. The indorsed second, and the accepted first of exchange, when wafered together, become one bill and are valid.

Exchange, as regards the abundant arithmetic to which it gives rise in its negotiation, may be divided into—(1) Direct, or exchange between two countries wholly based on their rates of exchange, which is so simple as to need no remark ; (2) Cross, or exchange between two countries in which a third country has an interest, as when London, say, has 10,000 francs in Paris which he wishes to move to Hamburg, and has to take account of his own course of exchange to Hamburg as well as the direct between Paris and Hamburg, which is only less simple than direct exchange, inasmuch as it requires two formulée instead of one ; and (3) Indirect or arbitrated, where exchange between two countries is conducted through the medium of a third, or more than one other country, and thus becomes more compound as the sphere of the operation is extended. It is an arbitrated rate because it has no actual form, and is found only in figures out of the current rates of exchange between more than two countries. The object being to discover how a debt in one place may be most economically paid from another, the question carries along with it not only the difference between remitting and drawing which exists in the simplest direct exchange— the debtor in the one country and the creditor in the other having always the option of the one remitting or the other drawing—but such minutiœ as whether the rate of exchange given be in the foreign money or in sterling, till it results in the following rules :—

"For Remittances:—

"With a foreign rate, any arbitrated rate is better than the direct rate if it is greater than the latter ;

" With a sterling rate, any arbitrated rate is better than the direct rate, if it is less than the latter :

"Because, in either case, a given sum in sterling will produce a greater sum in, foreign money, or a given sum in foreign money will cost a less sum in sterling.

"For Drafts or Returns:—_

" With a foreign rate, any arbitrated rate is better which is less than the direct rate;

" With a sterling rate, any arbitrated rate is better which is greater than the direct rate:

"Because, in either case, a greater sum in sterling will be obtained from a given sum drawn for in foreign money." 1

Nor is this all. Arbitrated rates are calculated for present money ;, the actual rates of exchange on which they are calculated have been affected by time and rate of interest. In the rate of direct exchange particularly, with which the arbitrated rate has to be com-pared, this effect has to be estimated, long bills reduced to short and the difference of interest on them discounted from the basis of calculation prima facie. This, in a superficial view, may be counterpoised by drawing speculative bills of long date on a foreign centre, but there are limits to drawing on a place for purposes external to its ordinary course of exchange, and a large amount of bills thus directed without corresponding remittances might produce an effect on the exchanges which would go far to upset the calculation.

It is obvious that arbitration of exchange, thus burdened at every additional length of the chain by difficulties of estimate, cannot be much extended or become too artificial without the risk of mis-carriage. But the mediation of direct exchange through a third place is of such common and useful practice that it may be desirable to give an example broad enough to illustrate the general method of equation.

Take London on Paris at 3 months, quoted f. 25 '55; Paris on Lon-don at 3 months, quoted f.25'10.

The discount for 3 months, in the example to be given, is taken at 1 per cent., or 25 cents., which is deducted from the London rate and added to the Paris rate, to make the two short or cash rates ; thus reducing the former to f.25'30, and raising the latter to f.25'35.
If this variable price were in sterling, as for instance with Madrid, the allowance for interest would have to be reversed, that is, added to the London price, and subtracted from the price abroad.


From the following rates of bills in London and Paris it is required to find—

1st.—Whether, having money to transmit from London to Paris, it will he better for me to remit direct bills on Paris, or to order bills in Paris to he drawn upon me in London, at the rate of 4 per cent, per annum.
2d.—Whether, having money to draw from Paris, it will be better for my correspondents there to make me remittances, or for me to draw upon them.
3d.—If I have to make remittances to Paris, whether any indirect rate will answer better than the rates of direct bills.
4th.—If I have to obtain returns from Paris, whether any indirect rate will answer better than either of the direct rates.

== TABLE ==


It appears from the direct rates between London and Paris at 25-30 and 25-35 that—
1st.—To remit or transfer money from London to Paris, it is better for Parrs to draw upon London at 25-35 short, than for London to remit to Paris at 25-30 short, because by the former operation there will be made 5 cents, per pound, or about one-fifth per cent, more than by the latter.
2d.—To have returns from Paris, it is better, by the same 5 cents., for London to draw upon Paris than for Paris to remit to London, because the bills will cost so much less French money, or produce so much more in sterling.


lst—For remittances to Paris, it appears from the arbitrated results that bills on Frankfort, bought in London at 121 florins per £10 sterling, and sold in Paris at 212 francs per 100 florins, will produce 12 cents, more than direct remittances from London to Paris, or 7 cents, more than is yielded by direct drafts of Paris upon London.
2d—For returns from Paris, it appears from the arbitrated results that bills on Leghorn, bought in Paris at 85 centimes per paper lira Italiana, and sold in Lon-don at paper lira Italiana 2SK7J per pound sterling, will cost 29 cents, less than direct bills from Paris, and will give 24 cents, more than drafts from London on Paris.
Such is the manner in which the various exchanges are calculated in order to ascertain which will answer best for a speculation in bills through intermediate places. The contingency of a change of rates has to be considered, and the charges of brokerage and com-mission on the operation have to be deducted from the result, or may be reduced when the operation is done by branches of the same house, or on joint account.
The elasticity of arbitrated rates of exchange is put to the severest strain when a large subsidy, or monster indemnity, like that of France to Germany, has to be paid by one country to another. In these cases it is necessary to employ extensive banking co-opera-tion, and at centres on which the drafts are heavy to arrange means for the support of the exchange.

PARS OF EXCHANGE. (Abstracted from Tate's Modern Cambist, lGth edition.) London receives from or gives to
Amsterdam, 11"19 florins and stivers for £1 sterling.
Antwerp and Brussels, 25-15 francs „ £1 sterling.
Hamburg, Berlin, and German bank places, 20"43) gterjjn-
imperial marks and pfennige f " *>"
Paris, 25-22 francs ,, £1 sterling.
_Vienna, 11-50 florins and kreuz ,, £1 sterling.
_Genoa, and Italian towns, 29-50 lire and centes , £1 sterling.
Lisbon, 53J pence sterling „ 1 milreis.
Madrid, 48 to 50 pence sterling „ 1 duro (hard dollar).
Gibraltar, 49j pence sterling ,, 1 hard dollar.
Malta, 49 pence sterling „ 1 pezza.
_Constantinople, 125 piastres „ £1 sterling.
St Petersburg, 37i pence sterling ,, 1 silver rouble.
Warsaw, 6-40 silver roubles and cop „ £1 sterling.
Copenhagen, 9-10 rigsdal and sk „ £1 sterling.
Christiania, 4"G6k species and sk „ £1 sterling.
Stockholm, 18-05 riksdaler „ £1 sterling.
New York, 49.V pence sterling „ 1 gold dollar.
Rio Janeiro, 27 pence sterling „ 1 milreis gold.
Buenos Ayres, G7 shillings sterling ,. 1 onca gold.
Calcutta, Bombay, and Rangoon, 23 pence sterling 1 Govt, rupee.
Canton, 78^, pence sterling , 1 tael sycee silver.
Japan, 51 to 52 pence sterling „ 1 Span, or Mex. dollar.
(R. SO )

EXCHEQUER, COURT OF EXCHEQUER, EXCHEQUER CHAMBER. The name scaccarium, from which the word "exchequer" is derived, was used under the Norman kings of England to signify the treasury. Madox, in his learned History of the Exchequer; exhausts the possible definitions of the word. According to some, it is connected with .scaccus or scaccum, a chess-board, and the exchequer of England " was in all probability, called scaccarium because a chequered cloth (figured with squares like a chess-board) was anciently wont to be laid on the table in the court or place of that name." " From the Latin," continues Mado*. " cometh the French eschequier or exchequier, and the English name from the French. Or if any one thinks more likely that -the French word was the ancienter, and the Latin one formed from it, I do not oppose him,—nay, I incline to believe it was so." Another and less probable explanation is, that the original word was statarium, " from its stability, as it was the firm support of the crown or kingdom." But Madox points out that from the early times of the Conquest onwards it was always called scaccarium and never statarium.

At the present day, exchequer means two very different and independent institutions, the historical origin of which is one and the same. It is a court of law—one of the three superior courts at Westminster. It is also the treasury. The connexion between the treasury and the court is still kept up in one or two points. The chancellor of the exchequer still takes his seat in the Exchequer Court on certain formal occasions, and the Exchequer Court (or, as it is now called, the Exchequer Division) is still the appropriate tribunal for cases connected with the revenue.

The Exchequer makes its appearance among English institutions in close connexion with the King's Court (curia regis)—the germ from which so largo a portion of the English constitution has sprung. In the language of later times it might be called a committee of that court specially charged with the management of the revenue. The King's Exchequer, says Theodore, " was anciently a member of his court, and was wont to be held in his palace. It was a sort of subaltern court, partly resembling in its model that which was properly called the curia regis, for in it the king's barons and great men who used to be in his palace near his royal person ordinarily presided, but sometimes the king himself; in it the king's chief-justiciar, his chancellor, his treasurer, his constable, his marshal, and his chamberlain performed some part of their several offices." And just as the curia regis was not a pure court of law, so the Exchequer was not merely a financial council but a court of law. Its principal business, sa,y3 Madox, related to the revenue, and although the justices on circuit had cognizance of revenue matters, such matters, as they arose, were certified or sent into the Exchequer "to which place the affairs of the royal revenue tended as to their centre." Madox divides the business of the Exchequer, during the period between the Conquest and the reign of King John, under the head of revenues, causes, non-litigious business, and matters of public policy.

From the reign of Henry III. the Exchequer was recognized as a separate court, the others being the King's Bench and the Common Pleas (q.v.). Mr Stubbs thinks that a separate staff of judges was not assigned to each court until the end of the reign of Henry. The special business of the Exchequer was as before the decision of revenue cases, but from a very early time, and in spite of repeated prohibitions, the lawyers of the Exchequer com-peted for the ordinary litigious business—the common pleas—of the country. They finally succeeded by means of the well-known fiction which allowed oue of the litigants to own that he was indebted to the king, and forbade his opponent to traverse the averment. The organization of the court seems to have been somewhat later in point of time than that of the Common Pleas and the King's Bench. The barons of the Exchequer were not at first recognized as judges. They are not mentioned in the statutes of Nisi Prius (13 Edward I. c. 30, and 14 Edward III. c. 16). In the reign of Elizabeth the Exchequer was definitely recognized a court of co-ordinate jurisdiction with the Com-mon Pleas and the King's Bench.

The Exchequer was furthe- distinguished from the two other courts by possessing an eq itable as well as a common law jurisdiction. " The Court ot Equity," says Blackstone, " is held before the lord treasurer, the chancellor of the ex-chequer, the chief baron, and the three puis?ie ones," whereas the common law jurisdiction is exercised by the barons onlyof the exchequer, and not the treasurer or chancellor. This equity jurisdiction was abolished in 1841, when two addi-tional vice-chancellors were appointed in the Court of Chancery.
Bv the Judicature Act of 1873 the Court of Exchequer

was abolished as a separate court, and its jurisdiction was transferred to the new High Court of Justice. The Ex-chequer still survives, however, as one of the divisions of the High Court, and still retains under its new name its old exclusive jurisdiction.

The Court of Exchequer Chamber was, until the passing of the Act just referred to, the court of appeal from the three courts of common law. Appeals from any one of these were heard before judges of the other two. It was originally intended (by statute 31 Edward III. c. 12) to de-termine causes by writs of error from the common law side of the Court of Exchequer, the judges being the lord chan-cellor, lord treasurer, and the justices of the King's Bench and Common Pleas. A statute of 27 Elizabeth (c. 8) made similar arrangements for writs of error from the King's Bench. The jurisdiction of the Exchequer Chamber is transferred by the Judicature Act to the new Court of Appeal.

The chancellor of the exchequer is the second commissioner of the treasury, the first lord being the premier. Occasionally both offices are held by the same person. It is the duty of the chancellor to prepare and lay before the House of Commons the " budget " for the year, and therefore he must be a commoner. The chancellor takes his seat in the Court of Exchequer once a year—at the nomination of persons to serve as sheriffs. (E. E.)


The Theory of Foreign Exchanges, by the Right Hon. G. J. Goschen, M.P., ninth edition, London, Effingham Wilson, 1876.

Mr Goschen, in his book on Foreign Exchanges, gives the follow-ing definition of the process of exchange between New York and London :—" If, before the issue of paper money, the purchaser of a bill on England paid 100 dollars and 9 dollars for it, he would, if the premium on gold had risen to 50 per cent., in the first place pay 150 dollars instead of the 100, and in the second 13J dollars instead of 9 dollars, or half as much again as what we may call the correcting premium. Thus, if the price of bills when gold stood at 150 was 163£, this price would correspond to the price of 109 at the time when there was no premium on gold. The price might rise to 165, or fall to 161, according as there was supply or demand, but the mean point would he ascertained by the process which has been described."

1 The Bullion Inquiry and Report of 1819 is full of information and discussion as to the effects on exchange of the long breach in our monetary system during the French Revolutionary wars, which will always be highly instructive, but on which it would here be out of date to dwell. The Scotch banks do not appear, during that trying period, to have departed from the rule of paying their notes in gold on demand. The contrary lesson may have been so well impressed on them by the experience of the previous century, and so well explained by the intermediate instructions of Adam Smith, whom, of course, they were the first to read, as to raise them above temptation.

r These rules of arbitrated exchange, accurately given in Tate's Modern Cambist, and the verbal puzzle of which turns chiefly on whether the rate forming the basis of calculation be foreign or sterling, lend force to the observation above that the one rate should never be lost in the other one-sidedly. If distinguished in the practical quotation of exchanges, there seems no reason to take other than one in arbitrated exchange.
2 The loss at Leghorn is owing to cash premium on forced paper currency, but, as it affects London and Paris equally, does not disturb the calculation.

Those marked (_) include premium on gold or silver on account of depreciation of paper currency. The mint par of Vienna is about 10-35. In Genoa and other Italian cities it would be about 25-30. The full metallic par of the Turkish piastre is 111-5 = £1 sterling. Where the quotations in the above table are sterling wi!h silver money, the price of silver lias been taken at 5s. an ounce, and the par of exchange has to be deduced from lower and higher prices of silver, as compared with that standard.
Foreign merchants trading with China usually keep their accounts in dollars and cents; and the dollar issued from the mint at Hong Kong forms an acceptable baeis of exchange from that station.

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