Exchange

by Montesquieu

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, Real value, and Relative value

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:

• the amount of silver
• the amount of alloy
• the weight and standard of every kind of coin
• the face value or ideal value

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

Besides this, the coin of every state has a “relative” value, as 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, 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 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. 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 greater occasion for funds in Holland, than the Dutch of having funds in France, 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.

A prince may amass great wealth in his dominions. Yet coin may be really scarce, and relatively common. For instance, if this state is indebted for many merchandizes to a foreign conntry, the exchange will be low, though specie be scarce.

The exchange of all places constantly tends to a certain proportion, and that in the very nature of things.

If the course of exchange from Ireland to England is below par, and that of England to Holland is also under par, that of Ireland to Holland will be still lower; that is in the compound ratio of that of Ireland to England, and that of England to Holland; for a Dutch merchant who can have specie indirectly from Ireland, by the way of England, will not chuse to pay dearer, by having it in the direct way. This should naturally to be the case. But, however, it is not exactly so. There are always circumstances which vary these things. The different profit of drawing by one place, or of drawing by another, constitutes the particular art and dexterity of the bankers, which does not belong to the present subject.

When a state raises its specie, for instance, when it gives the name of 6 livres, or 2 crowns, to what was before called 3 livres, or 1 crown, this new denomination, which adds nothing real to the crown, should not procure a single gros more by the exchange.

We should only have for the 2 new crowns, the same number of gros which we before received for the old one.
If this does not happen, it must not be imputed as an effect of the regulation itself; but to the novelty and suddenness of the affair.
The exchange adheres to what is already established, and is not altered till after a certain time.

A state sometimes raises the specie by a law and calls it in, in order to reduce its size.

It frequently happens, that during the time taken up in passing again through the mint, there are two kinds of money:
    the old large one, and
        This is cried down, as not to be received as money
        Bills of exchange must consequently be paid in the new specie
    the new small one.
        One would think that the exchange would be regulated by the new specie.
            If, for example, in France the ancient crown of 3 livres, being worth in Holland 60 gros, was reduced one half, the new crown ought to be valued only at 30.
            On the other hand, it seems as if the exchange should be regulated by the old coin; because the banker who has specie, and receives bills, is obliged to carry the old coin to the mint, in order to change it for the new; by which he must be a loser.
            The exchange then ought to be fixed between the value of the old coin, and that of the new.
The value of the old is decreased both because there is already some of the new in trade, and because the bankers cannot keep up to the rigour of the law;
It has an interest in letting loose the old coin from their chests, and being sometimes obliged to make payments with it.
Again, the value of this new specie must rise; because the banker having this, finds himself in a situation, in which, as we shall immediately prove, he will reap great advantage by procuring the old.
The exchange should then be fixed, as I have already said, between the new and the old coin.
For then the bankers find it their interest to send the old out of the kingdom; because by this method they procure the same advantage as they could receive from a regular exchange of the old specie, that is, a great many gros in Holland; and in return, a regular exchange a little lower, between the old and the new specie, which would bring many crowns to France.   

Suppose that:

3 livres of the old coin yield by the actual exchange 54 gros
by sending this same crown to Holland, they receive 60;
but with a bill of 45 gros, they procure a crown of 3 livres in France, which being sent in the old specie to Holland, still yields 60 gros;
thus all the old specie would be sent out of the kingdom, and the bankers would run away with the whole profit.

To remedy this, new measures must be taken.

The state, which coined the new specie, would itself be obliged to send great quantities of the old to the nation which regulates the exchange, and by thus gaining credit there, raise the exchange pretty nearly to as many gros for a crown of three livres out of the country.
I say, to nearly the same; for while the profits are small, the bankers will not be tempted to send it abroad, because of the expence of carriage, and the danger of confiscation.

It is fit that we should give a very clear idea of this.

Mr. Bernard, or any other banker employed by the state, proposes bills upon Holland, and gives them at 1, 2, or 3 gros higher than the actual exchange.
He has made a provision in a foreign country, by means of the old specie which he has continually been sending thither;
and thus he has raised the exchange to the point we have just mentioned.
In the mean time, by disposing of his bills, he seizes on all the new specie, and obliges the other bankers, who have payments to make, to carry their old specie to the mint;
as he insensibly obtains all the specie, he obliges the other bankers to give him bills of exchange at a very high price.
By these means, his profit, in the end, compensates the loss he suffered at the start.

During these transactions, the state must be in a dangerous crisis.

Specie must become extremely scarce because:
    Much the greatest part is cried down
    A part will be sent into foreign countries
    Every one will lay it up, as not being willing to give that profit to the prince, which he hopes to receive himself.
        It is dangerous to do it slowly or too quickly.
        If the supposed gain is immoderate, the inconveniencies increase in proportion.

When the exchange is lower than the specie, a profit may be made by sending it abroad.

For the same reason, when it is higher than the specie, there is profit in causing it to return.

But there is a case in which profit may be made by sending the specie out of the kingdom, when the exchange is at par; that is, by sending it into a foreign country to be coined over again.

When it returns, an advantage may be made of it, whether it be circulated in the country, or paid for foreign bills.

If a stated created a company had a prodigious stock which in a few months were raised 20 or 25 times above the original purchase

If the same state established a bank, whose bills were to be good as money, while the numerary value of these bills was prodigious, in order to answer to the numerary value of the stocks, (this is Mr. Law’s system;) it would follow that these stocks and these bills would vanish as they arose.
Stocks cannot suddenly be raised 20 or 25 times above their original value, without giving people the means of procuring immense riches in paper.
Every one would endeavour to secure his fortune.
As the exchange offers the easiest way of removing it from home, or conveying whither one pleases, people would incessantly remit a part of their effects to the nation that regulates the exchange.
A project for making continual remittances into a foreign country, must lower the exchange.
    Let us suppose, that at the time of the System, in proportion to the standard and weight of the silver coin, the exchange was fixed at 40 gros to the crown.
    When a vast quantity of paper became money, they were unwilling to give more than thirty-nine gros for a crown, and afterwards 38, 37, etc.
    This proceeded so far, that after a while they would give but eight gros, and at last there was no exchange at all.

The exchange should in this case have regulated the proportion between the specie and the paper of France.

By the weight and standard of the silver, the crown of 3 livres in silver was worth 40 gros, and that the exchange being made in paper, the crown of 3 livres in paper was worth only 8 gros, the difference was 4/5.
The crown of 3 livres in paper was then worth 4/5 less than the crown of 3 livres in silver.