Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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New York: Maynard, Merrill, and Co.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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BILL OF EXCHANGE. In commerce this term is generally used to designate that species of mercantile transactions by which the debts of individuals residing at a distance from their creditors are canceled without the transmission of money.


—Among cities or countries having any considerable intercourse together, the debts mutually due by each other approach, for the most part, near to an equality. There are at all times, for example, a considerable number of persons in London indebted to Hamburg; but, speaking generally, there are about an equal number of persons in London to whom Hamburg is indebted. And hence, when A of London has a payment to make to B of Hamburg, he does not remit an equivalent sum of money to the latter, but he goes into the market and buys a bill upon Hamburg; that is, he buys an order from C of London addressed to his debtor D of Hamburg, requesting him to pay the amount to A or his order. A, having indorsed this bill or order, sends it to B, who receives payment from his neighbor D. The convenience of all parties is consulted by a transaction of this sort. The debts due by A to B, and by D to C, are extinguished without the intervention of any money. A of London pays C of ditto, and D of Hamburg pays B of ditto. The debtor in one place is substituted for the debtor in another; and a postage or two, and the stamp for the bill, form the whole expenses. All risk of loss is obviated.


—A bill of exchange may, therefore, be defined to be an order addressed to some person residing at a distance, directing him to pay a certain specified sum to the person in whose favor the bill is drawn, or his order. In mercantile phraseology, the person who draws a bill is termed the drawer; the person in whose favor it is drawn, the remitter; the person on whom it is drawn, the drawer; and after he has accepted the acceptor. Those person into whose hands the bill may have passed previously to its being paid, are, from their writing their names on the back, termed indorsers; and the person in whose possession the bill is at any given period, is termed the holder or possessor.


—The negotiation of inland bills of exchange, or of those drawn in one part of Great Britain and Ireland on another, is entirely in the hands of bankers, and is conducted in the manner already explained. Bills drawn by the merchants of one country upon another are termed foreign bills of exchange, and it is to their negotiation that the following remarks principally apply.


Par of exchange. The par of the currency of any two countries means, among merchants, the equivalency of a certain amount of the currency of the one in the currency of the other, supposing the currencies of both to be of the precise weight and purity fixed by their respective mints. Thus, according to the mint regulations of Great Britain and France, £1 sterling is equal to 25 fr. 20 cent. which is said to be the par between London and Paris. And the exchange between the two countries is said to be at par when bill are negotiated on this footing; that is, for example, when a bill for £100 drawn in London is worth 2,520 fr. in Paris, and conversely. When £1 in London buys a bill on Paris for more than 25 ft. 20 cent., the exchange is said to be in favor of London and against Paris; and when, on the other hand, £1 in London will not buy a bill on Paris for 25 fr. 20 cent., the exchange is against London and in favour of Paris.


—The foregoing statements explain what is usually meant by the par of exchange; but its exact determination, or the ascertaining of the precise equivalency of a certain amount of the currency of one country in the currency of another, is exceedingly difficult. If the standard of one be gold and that of another silver, the par must necessarily vary with every variation in the relative values of these metals. This, however, is not all: even where two countries use the same metal for a standard, its value may be greater in one than in the other, and in estimating the par of exchange between them this difference must be taken into account. In illustration of this we may take the case of France and Mexico: they both, let us suppose, use silver for a standard; but silver being largely produced in Mexico, is always cheaper there than in France, and is extensively imported into the latter; and taking the cost of this importation at 2 or 3 per cent., it is plain that the exchange would be really at par when it appeared to be 2 or 3 per cent. Against Mexico. But the value of the precious metals, even in contiguous countries, is always exposed to fluctuations from the over-issue or withdrawal of paper, from circumstances affecting the balance of payments, etc., as shown above. It is obvious, therefore, that it is all but impossible to say, by merely looking at the mint regulations of any two or more countries, and the prices of bullion in each, what is the par of exchange between them. And, luckily, this is not necessary. The importation and expiration of bullion is the real test of the exchange. If bullion be stationary, neither flowing into nor out of a country, its exchanges may be truly said to be at par; and, on the other hand, if there be an efflux of bullion from a country, it is a proof that the exchange is against it, and conversely if there be an influx of bullion into a country.


Circumstances which Determine the Course of 'Exchange. The exchange is effected, or made to diverge from par, by two classes of circumstances: first, by any discrepancy between the actual weight or finances of the coins, or of the bullion for which the substitutes used in their place will exchange, and their weight or fineness as fixed by the mint regulations; and secondly, by any sudden increase or diminution of the bills drawn in one country upon another.


—1. It is but seldom that the coins of any country correspond exactly with their mint standard; and when they diverse from it, an allowance corresponding to the difference between the actual value of the coins and their mint value must be made in determining the real par. Thus, if, while the coins of Great Britain correspond with the mind standard in weight and purity, those of Finance were either 10 per cent. worse or debased below the standard of her mint, the exchange, it is obvious, would be at real par when it was nominally 10 per cent. against Paris, or when a bill payable in London for £100 was worth in Paris 2,772 fr. instead of 2,520 fr. In estimating the real course of exchange between any two or more places, it is always necessary to attend carefully to this circumstance; that is, to examine whether their currencies be all of the standard weight and purity, and if not, how much they differ from it. When the coins circulating in a country are either so worn or rubbed as to have sunk considerably below their mint standard or when paper money is depreciated from excess or want of credit, the exchange is at real par only when it is against such country to the extent to which its coins are worn or its paper depreciated.


—2. Variations in the actual course of exchange, in the price of bills, arising from circumstances affecting the currency of either of two countries trading together, are nominal only: such as are real grow out of circumstances affecting their trade.


—When two countries trade together, and each buys of the other commodities of precisely the same value, their debts and credits will be equal, and, of course, the real exchange will be at par. The bills drawn by the one will be exactly equivalent to those drawn by the other, and their respective claims will be adjusted without requiring the transfer of bullion or any other valuable produce. But it very rarely happens that the debts reciprocally due by any two countries are equal. There is almost always a balance owing on the one side or the other; and this balance must affect the exchange. If the debts due by London to Paris exceeded those due by Paris to London, the competition in the London market for bills on Paris would, because of the comparatively great amount of payments our merchants had to make in Paris, be greater than the competition in Paris for bills on London; and, consequently, the real exchange would be in favor of Paris and against London.


—The cost of conveying bullion from one country to another forms the limit within which the rise and fall of the real exchange between them must be confined. If 1 per cent. sufficed to cover the expense and risk attending the transmission of money from London to Paris, it would be indifferent to a London merchant whether he paid 1 per cent. premium for a bill of exchange on Paris, or remitted money direct to that city. If the premium were less than 1 per cent., it would clearly be his interest to make his payments by bills in preference to remittances; and that it could not exceed 1 per cent. is obvious; for every one would prefer remitting money to buying a bill at a greater premium than sufficed to cover the expense of a money remittance. If, owing to the breaking out of hostilities between the two countries, or to any other cause, the cost of remitting money from London to Paris were increased, the fluctuations of the real exchange between them might also be increased; for the limits within which such fluctuations may range correspond in all cases with the cost of making remittances in cash.


—Fluctuation in the nominal exchange, that is, in the value of the currencies of countries trading together, have no effect on foreign trade. When the currency is depreciated, the premium which the exporter of commodities derives from the sale of the bill drawn on his correspondent abroad is only equivalent to the increase in the price of the goods exported, occasioned by this depreciation. But when a premium on a foreign bill is a consequence, not of a fall in the value of money, but of deficiency in the supply of bills, there is no rise of prices; and in these circumstances the unfavorable exchange operates as a stimulus to exportation. As soon as the real exchange diverges from par, the mere inspection of a price current is no longer sufficient to regulate the operations of the merchant. If it be unfavorable, the premium which the exporter will receive on the sale of his bill must be included in the estimate of the profit he is likely to derive from the transaction. The greater that premium, the less will be the difference of prices necessary to induce him to export. And hence an unfavorable real exchange has an effect exactly the same with what would be produced by granting a bounty on exportation equal to the premium on foreign bills.


—But for the same reason that an unfavorable real exchange increases exportation, it proportionally diminishes importation. When the exchange is really unfavorable, the price of commodities imported from abroad must be so much lower than their price at home as not merely to afford, exclusive of expenses, the ordinary profit of stock on their sale, but also to compensate for the premium which the importer must pay for a foreign bill if he remit one to his correspondent, or for the discount, added to the invoice price, if his correspondent draw upon him. A less quantity of foreign goods will, therefore, suit our market when the real exchange is unfavorable; and fewer payments having to be made abroad, he competition for foreign bills will be diminished, and the real exchange rendered proportionally favorable. In the same way it is easy to see that a favorable real exchange must operate as a duty on exportation, and as a bounty on importation.


—It is thus that fluctuations in the real exchange have a necessary tendency to correct themselves. They can never, for any considerable period, exceed the expense of transmitting bullion from the debtor to the creditor country. But the exchange can not continue either permanently favorable or unfavorable to this extent. When favorable, it corrects itself by restricting exportation and facilitating importation; and when unfavorable, it produces the same effect by giving an unusual stimulus to exportation, and by throwing obstacles in the way of importation. The true PAR forms the center of these oscillations; and although the thousand circumstances which are daily and hourly affecting the state of debt and credit prevent the ordinary course of exchange from being almost ever precisely at par, its fluctuations, whether on the one side or the other, are confined within certain limits, and have a constant tendency to disappear.


—This natural tendency which the exchange has to correct itself is powerfully assisted by the operations of the bill-merchants.


—England, for example, might owe a large excess of debt to Amsterdam; yet, as the aggregate amount of the debts due by a commercial country is generally balanced by the amount of those which it has to receive. The deficiency of bills on Amsterdam in London would most probably be compensated by a proportional redundancy of those on some other place. Now, it is the business of the merchants who deal in bills, in the same way as of those who deal in bullion or any other commodity, to buy them where they are cheapest, and to sell them where they are dearest. They would, therefore, buy up the bills drawn by other countries on Amsterdam, and dispose of them in London; and by so doing, would prevent any great fall in the price of bills on Amsterdam in those countries in which the supply exceeded the demand, and any great rise in Great Britain and those countries in which the supply happened to be deficient. In the trade between Italy and Great Britain the bills drawn on the latter country amount almost invariably to a greater sum than those drawn on Italy. The bill-merchants, however, by buying up the excess of the Italian bills on London, and selling them in Holand and other countries indebted to England, prevent the real exchange from ever becoming very much depressed.


Negotiation of Bill of Exchange. Bills of exchange may be made payable on demand (the invariable term of payment in the case of checks), at sight, at a certain specified time after sight or after date, or at usance, which is the usual term allowed by the custom or law of the place where the bill is payable. In most countries, though not in all, a few days are allowed for payment beyond the term when the bill becomes due. These are denominated days of grace, and vary in different parts. In Great Britain and Ireland, and the United States, there days' grace are allowed on all bills except those payable on demand, which must be paid as soon as presented.


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