(3.xvi.5) The simple transaction is this. The merchant in London, to whom a merchant inAmsterdam owes a sum of money, writes a line to the merchant in Amsterdam, directing him topay the money. The writing of this line is called drawing; the line itself is called a bill; and theperson whom the line is written to, is said to be drawn upon. If the merchant in London, at thesame time that he has money to receive from Amsterdam, has money to pay in Amsterdam, hedraws his bill upon his debtor in Amsterdam, to the order of his creditor; or, in other words, hisline written to the person who owes him money in Amsterdam, is a line directing him to pay theamount to that other person to whom he is indebted. If the sum to be received is equal to the sumto be paid, the bill discharges the debt; if it is less, it pays as far as it goes, and the differenceconstitutes a balance.
(3.xvi.6) It so happens, in the course of business, that the individuals who import goods fromHolland, for example, are not the same individuals who export goods to Holland. The merchantswho import corn, or butter, or tallow, from Holland, are one set of merchants; the merchantswho export cottons and hardware to Holland, are merchants of another description; theindividuals, therefore, who have money to receive from Holland, have nothing to do with anypayments in Holland; they make a demand for their money, and expect it shall be paid. Thereare other individuals, however, who have money to pay in Holland, and who, to save themselvesthe expense of sending money, are desirous of obtaining from the individuals, who have moneyto receive from Holland, orders upon their debtors, that is, bills drawn upon them for the sum.
The English exporters, who have money to receive from Holland, therefore, draw bills, upontheir correspondents in Holland, and, without needing to wait for the return from Holland,receive the money in England from the English importers.
(3.xvi.7) There are thus two sets of persons in England: one, who have money to receive from Holland; another, who have money to send to Holland. They who have money to send, aredesirous of meeting with the persons who have money to receive, and bills to draw; the persons,again, who have bills to draw, and money to receive, are desirous of meeting with the personswho have' money to pay, and who would give it them immediately, and save them the delay ofwaiting the return from Holland. But these two sets of men do not always know how to find oneanother. This gives rise to a set of middle men, who, under the name of bill-brokers andexchange brokers, perform the function of bringing them together, or rather act as the mediumbetween them.
(3.xvi.8) When it so happens that the amount, for which bills are drawn, is the same withthat, for which bills are wanted; in other words, when those, who have money to receive abroad areequal to those who have money to pay; the amount of bills to be bought, and the amount to besold, will be exactly the same. For each man desirous to purchase a bill on Holland, there will beanother man, equally desirous to sell one. There will be neither premium, therefore, on the oneside, nor discount on the other; the bills, or in the language of the merchants, the exchange, willbe at par.
(3.xvi.9) When it happens, however, that the debts and credits are not equal; that England,for example, has more money to pay, than she has to receive; in other words, has imported to agreater amount than she has exported, there are more persons who want to purchase bills onHolland, than there are persons to sell them. Those who cannot obtain bills to discharge theirdebts in Holland must send the metals. That, however, is an operation, attended with aconsiderable cost. There is, therefore, a competition for bills; and the merchants give for themrather more than they are worth. A bill, for example, drawn on Holland, for 10,000 guilders, (the10,000 guilders being, by supposition, equal to 1,000 l.) will be willingly purchased forsomething more than 1,000 l. In this case, the exchange is said to be in favour of Holland, andagainst England. It is against England, because in Holland, when bills are drawn upon England,there are more people who have bills to sell, than people who have any occasion to buy. There isa competition, therefore, among the people who wish to sell, and the price falls. A bill onEngland for 1000 l., instead of selling for 10,000 guilders, will sell for something less. This, it isevident, is a discouragement to the Dutch merchant who exports goods to England. It is also adiscouragement to the English merchant who imports goods from Holland, and who, in additionto the 10,000 guilders, which his goods have cost, must pay something more than 1000 l., or10,000 guilders, for a bill to pay them. On the other hand, there is an encouragement to theEnglish merchant, who exports goods to Holland, inasmuch as he receives for his bill of 10,000guilders on Holland, rather more than 1,000 l., which is the value of his goods; be is, therefore,stimulated, by this increase of profit, to increase the quantity of his trade.
(3.xvi.10) It is very easy to see, what is the limit to this variation in the price of bills, calledin the language of merchants, the exchange. The motive to the purchase of a bill is the obligation ofpaying a debt. The merchant, however, on whom it is incumbent to pay a debt in Holland, canpay it without a bill, by sending the metal. To send the metal is attended with a certain cost. If hecan obtain the bill without paying beyond this cost, he will purchase the bill. This cost, therefore,is the utmost amount of the premium which he will pay for a bill, and the limit to the rise of itsprice. As the cost of sending the metal, which is a great value in a small bulk, is neverconsiderable, the exchange can never vary from par to a considerable amount.
(3.xvi.11) It is well known in commerce, how a balance is transferred from one country toanother, by means of bills of exchange.
