Essai sur la Nature du Commerce in Général (Essay on the Nature of Trade in General)

Part III, Chapter II

Of the Exchanges and their Nature

Inside the City of Paris the carriage of money from one house to another usually costs 5 sols per bag of 1000 livres. If it were necessary to carry it from the Fauxbourg St Antoine to the Invalides it would cost more than twice as much, and if there were not generally trustworthy porters of money it would cost still more. If there were often robbers on the road the money would be sent in large amounts, with an escort, at greater cost, and if some one charged himself with the transport at his own cost and risks he would require payment for it in proportion to these costs and risks. So it is that the expense of transport from Rouen to Paris and from Paris to Rouen amounts generally to 50 sols per bag of 1000 livres which in Bank language is ¼ percent. The Bankers generally send the money in strong kegs which robbers can hardly carry off because of the iron and the weight, and as there are always mail coaches on this route the Costs are not considerable on the large sums sent between these two places.

If the City of Châlons sur Marne every year pays the Receiver of the King’s taxes, 10,000 ounces of silver on the one hand, and on the other the wine Merchants of Châlons and its neighbourhood sell to Paris, through their agents, Champagne wine of the value of 10,000 ounces of silver, if the ounce of silver in France passes in trade for 5 livres, the total of the 10,000 ounces in question will be 50,000 livres both in Paris and in Châlons.

The Receiver of Taxes in this example has 50,000 livres to send to Paris, and the agents of the Châlons Wine-merchants have 50,000 livres to send to Châlons. This double transaction or transport may be avoided by a set-off or as they are called bills of exchange, if the parties get together and arrange it.

Let the agents of the Châlons wine-merchants take (each his own part) the 50,000 livres to the cashier of the Tax Office at Paris. Let him give them one or more cheques or bills of exchange on the Receiver of Taxes at Châlons, payable to their order. Let them endorse or transfer their order to the Châlons wine-merchants and these will obtain from the Receiver at Châlons the 50,000 livres. In this way the 50,000 livres at Paris will be paid to the Cashier of the Tax department at Paris and the 50,000 livres at Châlons will be paid to the wine-merchants of that City, and by exchange or set-off there will be saved the trouble of sending this money from one city to the other. Or else let the wine-merchants at Châlons, who have 50,000 livres at Paris, go and offer their bills of exchange to the Receiver of Taxes, who will endorse them to the Cashier of the Tax Office at Paris who will collect the amount there, and let the Receiver at Châlons pay the merchants for their bills of exchange the 50,000 livres which he has at Châlons. Whichever way this set-off is effected, whether the bills of exchange be drawn from Paris on Châlons or from Châlons on Paris, as in this example ounce for ounce is paid, and 50,000 livres for 50,000 livres, the exchange is said to be at par.

The same method might be adopted between these wine-merchants at Châlons and the Agents of the Nobility in Paris who have land in the Châlons district, and the Wine Merchants or other Merchants at Châlons who have sent goods or merchandise to Paris and have money there and other merchants who have drawn merchandise from Paris and sold it at Châlons. If there is a large trade between these two cities Bankers will set up at Paris and Châlons who will enter into relations with the interested parties on both sides and will be the agents or intermediaries for the payments which would have to be sent from one of these cities to the other. Now if all the wine and other goods and merchandise which have been sent from Châlons to Paris and have actually been sold there for ready money exceed in value the total receipts of the taxes at Châlons, and the Rents which the nobility of Paris have in the Châlons district as well as the value of the goods and merchandise sent from Paris to Châlons and sold there for ready money, by 5000 ounces of silver or 25,000 livres it will be necessary for the Banker in Paris to send this amount to Châlons in money. This will be the excess or balance of trade between these two cities. It will, I say, be of necessity sent to Châlons in specie, and this operation will be carried out in the following way or in some similar fashion.

The Agents or correspondents of the Wine merchants of Châlons and of others who have sent goods or merchandise from Châlons to Paris have the money for these sales in hand at Paris. They are ordered to remit it to Châlons. They are not accustomed to risk it by carriage, they will apply to the Cashier to the Tax Office who will give them cheques or bills of exchange on the Receiver of Taxes at Châlons up to the amount which he has at Châlons, and generally at par. But as they need to send further sums to Châlons they will apply to the Banker who will have at his disposal the Rents of the Paris nobility who have lands in that district. This Banker will furnish them, like the Cashier of the Tax Office, with bills of exchange on his correspondent at Châlons up to the amount of the funds which he has at his disposal at Châlons and had been ordered to bring to Paris. This set-off will also be made at par, unless the Banker tries to make some little profit out of it for his trouble, as well from the Agents who apply to him to send their money to Châlons as from the nobility who have charged him with the transmission of their money from Châlons to Paris. If the Banker has also at his disposal at Châlons the value of the merchandise sent thither from Paris and sold there for ready money he will also furnish letters of exchange for this value.

But in our case supposed the Agents of the Châlons merchants have still in hand at Paris 25,000 livres which they are ordered to remit to Châlons above all the sums mentioned above. If they offer this money to the Cashier of the Tax Office he will reply that he has no more funds at Châlons, and cannot supply them with bills of exchange or cheques on that city. If they offer the money to the Banker he will tell them that he has no more funds at Châlons and has no need to draw, but if they will pay him 3 per cent. for exchange he will provide cheques. They will offer one or two per cent. and at last 2½, not being able to do better. At this price the Banker will decide to give them bills of exchange, that is if they pay to him at Paris 2 livres 10 sols he will supply a bill of exchange for 100 livres on his Châlons correspondent, payable at 10 or 15 days, so as to put his correspondent in a position to make the payment of the 25,000 livres for which he draws upon him. At this rate of exchange he will send him the money by mail or carriage in specie, gold or, in default of gold, silver. He will pay 10 livres for each bag of 1000 livres, or in Bank parlance 1 per cent. He will pay his Châlons correspondent as commission 5 livres per bag of 1000 livres or ½ per cent., and will keep one per cent. for his own profit. On this footing the exchange at Paris for Châlons is at 2½ per cent. above par, because one pays 2 livres 10 sols for each 100 livres as the commission on exchange.

It is somewhat in this way that the balance of trade is transported from one city to the other through Bankers, and generally on a large scale. All those who bear the name of Bankers are not accustomed to these transactions and many of them deal only in commissions and bank speculations. I will include among Bankers only those who remit money. It is they who always fix the exchange, the charge for which follows the cost and risks of the carriage of specie in the different cases.

The charge of exchange between Paris and Châlons is rarely fixed at more than 2½ or 3 per cent. over or under par. But from Paris to Amsterdam the charge will amount to 5 or 6 per cent. when specie has to be sent. The journey is longer, the risk is greater, more Correspondents and Commission agents are involved. From India to England the charge for carriage will be 10 to 12 per cent. From London to Amsterdam it will hardly exceed 2 per cent. in peace time.

In our present example it will be said that the exchange at Paris for Châlons will be 2½ per cent. above par, and at Châlons it will be said that the exchange for Paris is 2½ per cent. below par, because in these circumstances he who will give money at Châlons for a letter of exchange for Paris will give only 97 livres 10 sols to receive 100 livres at Paris. And it is evident that the City or Place where exchange is above par is in debt to that where it is below par so long as the exchange continues on this basis. Exchange at Paris is 2½ per cent. above par for Châlons only because Paris is indebted to Châlons and that the money for this debt must be carried from Paris to Châlons. This is why when exchange is commonly seen to be below par in one city as compared with another it may be concluded that this first city owes a balance of trade to the other, and that when the exchange at Madrid or Lisbon is above par for all other countries it shows that these two Capitals must send specie to other countries.

In all Places and Cities which use the same money and the same gold and silver specie like Paris and Châlons sur Marne, London and Bristol, the charge for exchange is known and expressed by giving and taking so much per cent. above or below par. When 98 livres are paid in one place to receive 100 livres in another it is said that exchange is about 2 per cent. below par; when 102 livres are paid in one place to receive only 100 livres in another it is said that the exchange is exactly 2 per cent. above par, when 100 livres are given in one place for 100 livres in another it is said that the exchange is at par. There is no difficulty or mystery in all this.

But when exchange is regulated between two Cities or Places where the money is quite different, where the coins are of different size, fineness, make, and names, the nature of exchange seems at first more difficult to explain, though at bottom this exchange differs from that between Paris and Châlons only in the jargon of Bankers. At Paris one speaks of the Dutch exchange by reckoning the écu of three livres against so many deniers de gros of Holland, but the parity of exchange between Paris and Amsterdam is always 100 ounces of gold or silver against 100 ounces of gold or silver of the same weight and fineness. 102 ounces paid at Paris to receive 100 ounces at Amsterdam always comes to 2 per cent. above par. The Banker who effects the remittance of the balance of trade must always know how to calculate parity. But in the language of Foreign exchange the price of exchange at London with Amsterdam is made by giving a pound sterling in London to receive 35 Dutch escalins at the bank: with Paris in giving at London 30 deniers or pence sterling to receive at Paris one écu or three livres tournois. These methods of speech do not say whether exchange is above or below par, but the Banker who remits the balance of trade reckons it up well and knows how much foreign money he will receive for the money of his own Country which he despatches.

Whether we fix the exchange at London for English silver in Muscovy roubles, in Mark Lubs of Hamburg, in Rixdollars of Germany, in Livres of Flanders, in Ducats of Venice, in Piastres of Genoa or Leghorn, in Millreis or Crusadoes of Portugal, in Pieces of Eight of Spain, or Pistoles, etc. the parity of exchange for all these countries will be always 100 ounces of gold or silver against 100 ounces; and if in the language of exchange it happens that one gives more or less than this parity, it comes to the same in effect as if exchange is said to be so much above or below par, and we shall always know whether or not England owes a balance to the place with which the exchange is settled just as in our example of Paris and Châlons.