Exchange

A prince may amass great wealth in his dominions. Yet coin may be really scarce, and relatively common.

For instance, if France is indebted for many merchandizes to a foreign conntry, the exchange will be low even if specie is scarce.

The exchange of all places constantly tends to a certain proportion.

If the course of exchange from Ireland to England is below par, and that of England to Holland is also under par, then 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.
• This is because 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.

However, this does not always happen.

• 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.

For instance, a state might raise its specie giving the name of 6 livres, or 2 crowns, to what was before called 3 livres, or 1 crown.

• This new denomination does 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.