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, banking 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 comprehended than foreign exchange, but in reality presents the same phenomena and the same sequence of cause and effect as the other, so far as the circumstances of any country allow these to come into operation.

Mr M t 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 be 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 tc make, and reduced in tlιat which has the fewest. If Glasgow owe Loudon £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 discount; 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 indebted, and from whom the bills were purchased. The loss to Glasgow would, therefore, be limited to thepreτn⅛m paid on the balance of £10,000. Thus, supposing that A of Glasgow owes D of London £100,000, and that C of London ow es 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 merchant, 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 Manchester. 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 conducted 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 a premium of about ⅜ per cent.; but, owing to the greater facility of communication, this premium is now reduced to twenty days’ interest, or to about ⅛ per cent. Bills for remitting the, revenue from Scotland are now drawn at thirty days; previously to 1819 they were drawn at sixty days.”

The cost of remittance from Scotland to London has continued 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. Ou the other hand, the Loudon 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 exchange is still adverse to Edinburgh and Glasgow, and in favour of London. Tn 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 Englaud. 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 reducing 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 banknotes of Ireland and Scotland are payable on demand in the common imperial standard of value, as the country banknotes 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 higldy 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 oscillations of exchange, inland and foreign, will be reduced within narrower limits.

The history of inland exchange in the three kingdoms presents abundaut 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 impracticable. 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 transaction, 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 prevailing circulation. In 1689, when, by a proclamation of James IL, one penny was added to the nominal value of the Irish shilling, £108, 6s. 8d. Irish money became equal to only £100 of British money in the nominal par of exchange, between Great Britain and Ireland, or a difference of 8∣ 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 7∣ to 9 per cent., being from ⅞ 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 Ireland had increased its issues from £621,917 to £2,707,956, being in the proportion of 1 to 4 3; while the Bank of England 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 8g- 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 2£ per cent., and the issues of the Bank of England at the rate of 5 per cent., while the country bank issues of Ireland were much diminished in amount, and those of England were largely increased. During this period the current rates of exchange became more favourable to Dublin. The inconvertible 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 currency; 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.

Apart, however, from this element of the differing standards 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 i Culloch without apprehending many of the principal characteristics of the operation, which, as they are sure to arise in exchange transactions under all circumstances, 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 arises from the twofold character of the action and its results, and the necessity of realizing in one conception the 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, therefore, 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 exported 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...