(3.xvi.12) If a balance is due by England to Holland, and by Hamburgh to England, theholder of a bill at Amsterdam for 1,000 l. upon England, will not send his bill to England, where it willfetch him only 1,000 l.,; if by sending it to Hamburgh, it will fetch him something more; (i.e.) ifhe has a debt to pay at Hamburgh, when bills upon England are there at a premium, or if thepremium will exceed the cost of transporting the gold from Hamburgh to Amsterdam. A debt,which England owed to Holland, is thus paid by a credit which it had at Hamburgh. In England,the merchants who have imported from Holland, pay for the goods which they have imported, bypaying the merchants, who have exported to Hamburgh, for the goods which they have exported.
(3.xvi.13) Such are the transactions between country and country, by means of bills ofexchange; and such is the language in which they are expressed. There are two states of things, in whichthese operations take place : The First, when the currency of both countries remains the same asat the time when the par of exchange was originally computed; when 10 guilders of Holland, forexample, contained as much of the precious metal as 1 l. sterling; and the par of exchange, ofcourse, was said to be 10: The Second, when the relative value of the two currencies does notremain the same; as, for example, when 1 l., instead of being equal to 10 guilders, becomesequal to 12, or to no more than 8.
(3.xvi.14) If we suppose the quantity of the precious metal in the pound sterling to bediminished in such a degree, that it contains no greater quantity than that which is contained in 8 guilders,the par of exchange, in this case, would really be 8, instead of 10. The merchants, however, fromthe time at which the par of exchange appears to have been originally computed, never alteredtheir language. If the par of exchange between the guilder and the pound sterling was 10, itcontinued to be called 10, though the relative value or the currencies might be changed; thoughthe pound sterling, for example, might become equal to 8 guilders only, instead of 10.
Notwithstanding this the value of the bills was regulated according to the real value of thecurrencies; a bill for so many pounds sterling was not when such a change took place equal to abill for as many times 10 guilders, but for as many times 8. As the par of exchange, however,still was called 10, though really 8, the exchange was said to be against England, in theproportion of 10 to 8, or 20 per cent. This 20 per cent. of unfavourable exchange was altogethernominal; for when there was this 20 per cent. of discount on the English bill, the exchange wasreally at par. The language, therefore, was improper and deceptious but if, in such case, it isborne in mind, that 20 per cent. against England means the same as par, it will then be easy tosee that every thing which we demonstrated, in the preceding pages, as true with respect to thepar, will, in this case, be true with respect to the 20 per cent. Every thing which raises theexchange above par, according to the proper language, makes it as much less than 20, accordingto the im. proper; every thing which reduces it below par, according to the proper, makes it asmuch more than 20, according to the improper. All the effects which follow from what is calledthe rise above, or fall below par, in the one case, follow from the same things, but called bydifferent names, in the other. On this, therefore, I have no occasion to enlarge.
(3.xvi.15) When the currencies of two countries are metallic, a change in their relative valuebeyond the fluctuations which are limited by the expense of transmiting the metals, andcontinually corrected by their transmission, can only happen by a change in the relative quantityof the metal they contain; there being checks, as we have already seen, which prevent anyconsiderable difference between the value of a metallic currency and that of the metal which itcontains There is, however, another case, namely, that of a paper money, not convertible into themetallic. This requires to be considered by itself.
(3.xvi.16) Let us resume the former supposition, that the pound sterling contains as much ofthe precious metal as 10 guilders; and let us suppose that a paper money, not payable in the metals,is issued in England, in such quantity, that a pound in that money is reduced 20 per cent. belowthe value of the metal contained in a pound sterling; it is easy to see that a bill for 100 l. sterling,in this case, is of the same value exactly as a bill for 100 l. sterling when the currency wasdegraded by losing 20 per cent. of its metal. A bill for 100 l. in both cases, is equal not to 100times 10 guilders, but 100 times 8 guilders. The reason is, that the bill will in England buy onlyas much of the metal as is contained in 100 times 8 guilders. It will exchange, therefore, ofcourse, only for a bill of 800 guilders.
