Exchange

THE relative abundance and scarcity of coin in different countries leads to the course of exchange. Exchange is a fixing of the actual and momentary value of coin.

Silver, as metal, has a value like all other merchandise.

• It has an additional value as it can be the sign of other merchandise
• If it were just a mere merchandise, it would lose much of its value.

Nominal Value of Coin

Silver, as coin, has a value which the prince in some respects can fix, and in others he cannot.

In each kind of coin, the prince establishes:

1. The amount of silver
2. The amount of alloy
3. The weight and standard of every kind of coin
4. The face value or ideal value

The “positive” value of coin is the value of coin in these 4 respects as may be fixed by law.

Relative Value of Coin

Besides this, the coin of every state has a “relative” value when it is compared with the money of other countries. This relative value is:

• established by the exchange, and
• greatly depends on its positive value.

It is fixed by the general opinion of the merchants. It is never by the decrees of the prince, because it:

• is subject to incessant variations, and
• depends on a thousand accidents.

This relative value is determined by that which has the most coin.

If the coin of a nation is as much as all foreign coins put together, it is most proper for the other to regulate theirs by her standard. The regulation between all the others will pretty nearly agree with the regulation made with this principal nation.

Holland is such a nation.

It has a silver coin called a florin, worth 20 sous, or 40 gros (half-sous).

If they only had gros, then a man who had 1,000 florins, would have 40,000 gross [1,000 * 40].

The exchange with Holland is determined by us knowing how many gros makes up the value of every foreign coin.

The French commonly value a crown as 3 livres.

If the course of exchange is at 54, then a crown of 3 livres will be worth 54 gros.

• If the exchange is at 60, then a crown will be worth 60 gros
• If silver is scarce in France, a crown will be worth more gros
• If silver is plentiful, a crown will be worth fewer gros

This supply of silver leads to the mutability of the course of exchange and is a relative scarcity or plenty.

For example, when France has more funds in Holland than the Dutch of have funds in France, then specie is said to be common in France and scarce in Holland and vice versa.

If France and Holland were in one city, they would act as we do when we give change for a crown. If the exchanger were at 54, the Frenchman would take three livres and the Dutchman 54 gros.

But Paris is far from Amsterdam. A Dutch who gives me 54 gros for my 3 livres will give me a cheque for 54 gros payable in Holland.

Thus, to judge the supply of a money, we must know if there are in France more cheques of 54 gros payable in Holland, than there are cheques of crowns payable in France.

• If there are more cheques from Holland, than there are from France, then money is scarce in France, and common in Holland. [more notes to represent money]
  • The exchange then necessarily should rise so that they give for my crown more than 54 gros
• Otherwise I will not part with it and vice versa.

Thus, the various turns in the course of exchange form an account of debtor and creditor, which must be frequently settled. and which the state in debt can no more discharge by exchange, than an individual can pay a debt by giving change for a piece of silver.

Suppose that there is only France, Spain, and Holland.

• The Spanish are indebted to France for 100,000 marks of silver.
• The French owe in Spain 110,000 marks.

If the Spanish and French withdrew their money, what will be the course of exchange?

• These two nations will reciprocally acquit each other of 100,000 marks.
• But France will still owe 10,000 marks in Spain.
• The Spaniards will still have cheques payable in France of 10,000 marks

But if Holland were in debt to France by 10,000 marks, the French would have two ways of paying the Spaniards:

• giving their Spanish creditors in Spain cheques for 10,000 marks payable by Dutch debtors, or
• sending money worth 10,000 marks to Spain.

Thus, when a state remits a sum of money into another country, it does not care whether they are in coin or cheques. The advantage or disadvantage of these two methods solely depends on actual circumstances. Which will yield most gros in Holland:

• Money carried thither in coin, or
• a cheque on Holland for the like sum

The exchange is at par when money of the same standard and weight in France yields money of the same standard and weight in Holland. In the actual state of the coin, the par is nearly at 54 gros to the crown.

• When the exchange is above 54 gros, we say it is high
• When it is under 54 gros, we say it is low

In order to know the state’s loss and gain, in a particular exchange, it must be considered as debtor and creditor, as buyer and seller.

• When the exchange is below par, it means each crown will get less than 54 gros. If the exchange is at 50:

• If France is a debtor to Holland for 500 gros, then she owes 10 crowns instead of 9.26.
• If France is creditor to Holland for 500 gros, then she is owed 10 crowns instead of 9.26.
• If France is a buyer of Dutch goods worth 500 gros, then she has to pay 10 crowns instead of 9.26.
• If France is a seller of French goods worth 500 gros, then she will receive 10 crowns instead of 9.26.
• If France sends cheques to Holland for 54,000 crowns, it could buy merchandise only worth 50,000 crowns.
• If the Dutch send 50,000 crowns to France, might buy 54,000 worth of goods and would be a loss to France of 8% [4,000/50,000]. France would be obliged to send to Holland 80 crowns more in coin or merchandise, than if the exchange were at par.

Thus, the state is a gainer if it is a creditor or seller if the exchange is below par. It is a loser if the exchange is above par.

The mischief must constantly increase as such a debt would bring the exchange still lower until France would be ruined in the end. This does not happen because states constantly lean towards a balance in order to preserve their independence – they borrow only in proportion to their ability to pay, and measure their buying by what they sell.

If the exchange falls in France from 54 to 50, the Dutch who buy merchandise in France worth 1,000 crowns, previously paid with 54,000 gros, would now pay only 50,000 gros. The merchandise of France will sell more, and so both French and Dutch merchants profit.

At the same time, the French, who bought merchandise in Holland for 54,000 gros and previously paid 1,000 crowns, must add 80 crowns. This will cause the French merchant to buy less merchandize of Holland. The French and the Dutch merchant will then be both losers.

The state will insensibly fall into a balance. The lowering of the exchange will not be attended with all those inconveniencies which we had reason to fear.

• A merchant may send his stock into a foreign country, when the exchange is below par without injuring his fortune; because when it returns, he recovers what he had lost.
• But a prince, who sends only coin into a foreign country, which never can return, is always a loser.

When the merchants have great dealings in any country, the exchange there infallibly rises. This proceeds from their entering into many engagements, buying great quantities of merchandizes, and drawing upon foreign countries to pay for them.