[§ 15. Of Exchange.]

Exchange is a method invented by merchants to facilitate the payment of money at a distance. Suppose I owe £100 to a merchant at London, I apply to a banker in Glasgow for a bill upon another merchant in London, payable to my creditor. For this I must not only give the banker £100, but I must also reward him for his trouble. This reward is called the price, or premium, of exchange. Between Glasgow and London it is sometimes at 2 per cent., sometimes more, sometimes less. Between London and Glasgow again it is sometimes 4 or 5 per cent. below par; and between Glasgow and the West India colonies it is often at 50 per cent. below par. The value of exchange is always regulated by the risk of sending money between two places. It is often, however, greater than the risk can be supposed to be, and this is owing to paper circulation. Between Glasgow and London one can easily get £100 carried for fifteen or sixteen shillings; but as paper in Scotland makes a great part of the currency, and as there is an inconveniency in getting bank notes exchanged for gold and silver, a merchant chooses rather to pay 2 per cent. than take the trouble of changing the notes for cash, and sending the money1. This too is the cause of the high price of exchange between Virginia and Glasgow. In the American colonies the currency is paper, and their notes are 40 or 50 per cent. below par, because the funds are not sufficient. In every exchange you must pay the price, the risk, some profit to the banker, and so much for the degradation of money in notes. This is the cause of the rise of exchange. Whenever it rises beyond the price of insurance it is owing to the money of one country being lower than that of another. This was the cause of the high price of Edition: current; Page: [222] exchange between France and Holland about the time of the Mississippi Company. It was then at 80 or 90 per cent. All the money had been expelled from France by the scheme of Mr. Law, and the whole circulation was paper, and the credit of the bank had fallen. All these reasons conspired to raise the exchange to such an enormous pitch.