and may receive it at its nominal value long after it has lost its legal weight, a foreigner sees in it nothing but so much bullion. When a person takes the coin of one country to another, and purchases the coin of that country with it, he is said to exchange it. Now suppose that the coinage of two countries is of the same metal and that both coinages are at their full weight and fineness then if either of them be taken as the standard which may be called A, then the number of units, or parts of a unit of the coinage of the other, which may be called B, which contains precisely the same quantity of pure metal, is called the Par of Exchange between the country A and the country B. Thus if the legal standard of France and England were gold, and the Pound be taken as the standard unit of England, the number of the standard units of the French coinage which contain precisely as much pure gold as the English pound would be the Par of Exchange between England and France. There is as nearly as possible one-fourth more pure gold in a Sovereign than in a twenty franc piece, called a Napoleon. Therefore we might say that 1.25 is the gold Par of Exchange between England and France. The French Exchanges however are expressed in francs, which is a silver coin. Hence if the Sovereign contained exactly onefourth more gold than the Napoleon, we should say that 25 was the Par of Exchange.

If the English coinage of sovereigns became worn, clipped, and degraded, they would not exchange for so many francs as they would do if they were of full weight: an English sovereign might perhaps only exchange for 22 francs: and this would be called a fall in the foreign exchanges: or if an English merchant were bound to pay his creditor in Paris 2,500 francs, he would have to give more than £100 to purchase them, and the exchange would be said to be so much per cent. against England, by the amount of that difference.

It is evident that this adverse state of the exchange would continue so long as the English coinage remained depreciated: but that if it were restored to its legal standard, that restoration would be itself sufficient to restore the exchange to its usual rate. Hence we see that if any country maintains its coinage of full weight and purity, a Depreciation of the Coinage of England

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necessarily produces an apparently adverse state of the Exchanges, and that a reform of the English Coinage is sufficient by itself to restore them to their proper state.

It is also evident that a Depreciation of the Coinage, by a debasement of its purity, will produce exactly the same effects. It is also clear that if the Coinage of both countries was equally degraded, the Rate of Exchange between them would not be altered, and that the Rate would vary just in proportion as one was more or less degraded than the other.

When the Coinage of a country has become depreciated either from wear and tear, or a debasement of the standard, the consequence is said sometimes to be a fall in the Foreign Exchanges and sometimes a rise in the Foreign Exchanges, and it is well to fix clearly what these expressions mean, as it might seem that they are contradictory, when they are not so. They only refer to two different methods of estimating the Coinage.

When a Depreciated Coinage is said to produce a FALL in the Foreign Exchanges, it means that a given amount of Home Coinage will purchase a LESS amount of Foreign Coin.

When a Depreciated Coinage is said to produce a RISE in the Foreign Exchanges it means that a GREATER quantity of Home Coinage is required to purchase a given amount of Foreign Coin.

A clear understanding of these expressions will prevent any confusion arising when they are used indiscriminately, as they often are, in discussions on the Exchanges.

It is also evident that there can be no fixed Par of Exchange between two countries which do not employ the same metal as their legal standard: because their market values are constantly varying from causes quite beyond the reach of any law and it is no more possible to have a fixed price of one in terms of the other, than to have a fixed legal price for wheat or any other commodity. The very same rule must also apply to two countries, one of which uses gold, and the other silver, as the measure of value. The only correct mode of expressing it is, therefore, to say that such is the usual Rate of Exchange between them.

Although when the Coinage is in a depreciated state, the

exchange will be apparently adverse with these countries which maintain their Coinage in its standard state, it is quite clear that the exchange founded upon the commercial operations of the two countries may be above, below, or at Par: and it is very easy to discover its true state.

The Rate of Exchange which arises out of the state of the Coinage is called the Nominal Exchange; the Rate which arises out of the commercial operations of the country is called the Real Exchange.

To take an example. Suppose the Exchange on Paris is 2,521 francs for £100 in gold at the Mint Price: or when the Coinage is at its full legal weight. Then suppose that in consequence of the Depreciation of the Coinage, the Market Price of gold bullion rises to £4 38. per oz.: then the Market Price of £100 is £106 11s. 74d. Now suppose the Exchange on Paris is 23.80, or £100 will purchase 2,380 francs, then £106 11s. 7 d. would be able to purchase 2,536.36 francs. But as the real Par at the Mint Price is 2,521, it is evident that the difference between these two sums is the extent to which the Real Exchange is in favour of London. We can also see to what extent the Exchange is depressed, because £100 at the above exchange will purchase 2,380 francs, whereas they ought to purchase 2,536.63 if they were of full weight: and the difference between these two sums shows the extent by which the Nominal Exchange is depressed. Hence we have the following rule

Find the Market Price of the sum in London compared to the Mint Price: multiply the Market Price so found by the Rate of Exchange: then if the result be equal to the Par of Exchange, the Exchange is at par: and if there be a difference, the Exchange is favourable or adverse, according as the difference is above or below the par.

And the depression of the Exchange caused by the Depreciation of the Coinage, is the difference between the sum so expressed in the Mint and Market Prices multiplied by the Rate of Exchange.

In the excellent state in which our Coinage now is, the question of the Nominal Exchange, so far as regards this country, is of little importance; but it is essential as regards several

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foreign countries which use an inconvertible and depreciated Paper Currency.

On the Nature of an EXCHANGE.

3. We will now show how the example of the nature of an "Exchange" we began with is exemplified in practice. Suppose two cities, London and Edinburgh. Suppose a trader A in London is debtor to a trader B in Edinburgh for a certain sum: suppose also that a trader B' in Edinburgh is debtor to A' in London for an equal sum. Then, in order to pay their debts, A would have to send the money to B: and B' would have to send an equal sum to A', thus causing two separate transmissions of bullion between London and Edinburgh, at some expense for freight and insurance.

Now this settlement of debts may be greatly facilitated if A in London goes and pays his debt to A', and buys from A' the debt due to him from B', and sends this debt by post to B in Edinburgh. B then goes to B' and demands payment from him of his debt due to A. Thus it is clear that the whole business has been settled by the transmission of the debt, instead of by the transmission of twice the amount in bullion, and each debtor has paid the debt to the creditor in the same town.

The whole transaction is called an "Exchange; " and it is clear that there must be a debtor and a creditor in each city. In the case given there are four parties: but it may be done by three parties. Suppose A in London has a debt due to him from B in Edinburgh, but at the same time owes B' an equal sum. To pay his debt to B' he has only to give him an order on B, and the accounts between the parties are adjusted without any transission of bullion.

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When the debts between London and Edinburgh are equal, they may all be discharged by means of such an exchange, without sending any specie. The exchanges are then said to be at PAR.

Supposing, however, that the debts are unequal, and Edinburgh wishes to send more money to London than it has to receive, it is clear that the demand for bills is greater than the

supply and as every one would rather send a bill than cash, as it is cheaper to do so, those who had to send money would bid against each other for the bills in the market as for any merchandise, and the price of them would rise, as a premium would have to be paid for a bill on London.

London is the great centre of commerce. It is the seat of Government to which the revenue is remitted from all parts of the country: the great families from all parts of the country go to reside there, and their incomes must be remitted to them there: hence there is always a much greater quantity of money seeking to flow from the country to London than the contrary: consequently the demand for bills on London in the country is greater than the supply; and, therefore, inland bills upon London are always at a premium.

This premium is computed by time.

If a person wants

a bill at sight on London he must pay 18. per cent., or four days' interest. This is called the Time Par of Exchange, between Edinburgh and London. There is a similar premium on bills, or par of Exchange between all other towns in the country on London. This is called Inland exchange.

The exchange of the country upon London is said to be in favour of London, and against the country. But it must be observed that it is only unfavourable to the buyers of bills, or those who wish to send money. It is equally favourable to the sellers of bills or those who have to receive money.

It appears from this that when in any place the demand for bills is greater than the supply, the Exchanges are adverse to that place, because it has more money to pay than to receive: when the supply is greater than the demand, the Exchanges are favourable to it, because it has more money to receive than to pay.

On FOREIGN EXCHANGE,

4. The principle of Foreign Exchange is exactly the same as that of Inland Exchange. But there is somewhat more complication in the detail, on account of the different moneys of different countries.

In Exchange between two foreign places and of different