(3.xvi.17) The facts may be expressed in the form of a general rule. The value of a billdrawn upon any country is equal, when it arrives, to all the precious metal which the money for whichit is drawn can purchase in the market: a bill for 100 l., for example, is equal to all the metalwhich it can purchase, whether it is the same quantity which would be purchased by 100 l.,sterling, or less. To whatever amount the portion which it can purchase is less than what couldbe purchased by 100 l. of the coins, the paper money is degraded below what would be the valueof the coins, if they circulated in its stead. The exchange, therefore, against any country, cannever exceed the amount of two sums; First, the difference between the value of the degradedand the undegraded currency or that between the nominal amount of the currency, and thequantity of the precious metal which it can purchase; secondly, the expense of sending the metal,when purchased. It thus appears, how perfectly unfounded is the opinion of those (and somepolitical economists of great eminence are included in the number) who conceive that the real,not merely the nominal, exchange, may exceed the expense of transmitting the precious metals.
They say, that when, by some particular cause, a great absorption of the precious metals hastaken place, creating a scarcity in consequence of which goods must be sent from the countrywhere it is scarce, to bring it back from the countries where it abounds, bills, drawn by thecountry in which it is scarce, upon the countries where it abounds, may bear a premium, equal tothe cost of sending goods which may fetch in the foreign market the value of the bill; and this, incertain cases, may greatly exceed the cost of sending the precious metals.
(3.xvi.18) If the facts are traced, the answer will be seen to be conclusive.
(3.xvi.19) When the exchange between two countries (call them A and B) is at par, it isimplied, that the exports and imports of both are equal: that each receives from the other as much as itsends. In this case the goods which A sends to B must be so much cheaper in A than they can bemade in B, that they can there be sold with all the addition required on account of the cost ofcarriage: in like manner the goods which B sends to A must be so much cheaper in B, that thecost of carriage is covered by the price which they fetch in A. This cost of carriage, it is obvious,does not affect the exchange, any more than an item in the cost of production.
(3.xvi.20) Next, let us observe what happens, when the state of the exchange is disturbed.
Let us suppose that a demand is suddenly created in A, for the means of making payments in B, greatlybeyond the value of the former exportations. The demand for bills on B is consequentlyincreased beyond the supply, and the price rises. The question is, what is the limit to that rise inthe price of bills? At first it is evident the rise of price is limited to the cost of sending theprecious metal. As the metal, however, departs, the value of it rises. If the currency is paper, andits value stationary, the gold will rise, and rise equally, both in currency and commodities. Thefinal question, then, is, what is the limit to the rise in the value of gold?
(3.xvi.21) Before the premium on the bills commenced, goods in A were so cheap, that aportion of them could be sent to B, and sold, with all the addition of the cost of carriage, and ofcourse with the ordinary profits of stock. The whole of the premium on the bills, therefore, is anaddition to the ordinary profits of stock.
(3.xvi.22) If A be taken for England, and B for the continent of Europe, the case will be, thatEnglish goods, when the interchange is at par, go abroad, and are sold at a price which includesboth profits and cost of carriage; when the premium on bills rises only so high as to equal thecost of sending bullion, it is to that extent an additional profit on the sending of goods.
(3.xvi.23) It is evident that, in proportion as this premium should rise, it would not onlyenhance the motive to increase the exportation of the goods which could be exported with a profit beforethe rise of the bills, but that it would render many other kinds of goods exportable, which beforecould not be exported. Thus, when the exchange was at par, there were certain kinds of goods inEngland, which, after paying cost of carriage, could be sold abroad with a profit; there werecertain other kinds which, on account of their high price in England, could not be thus exported;some might thus be 1 per cent. too high to be exported, others 2 per cent. too high, others 3 percent., and so on. It is obvious that a premium of 1 per cent. on bills would enable the first kind tobe exported; a premium of 2 per cent. would enable the second; and a premium of 10 per cent. would enable two or three kinds to be exported, which could not have been exported before. Asthe counter operation would be of the same kind and the same power, viz. to prevent theimportation of foreign goods into England, exportation would be exceedingly increased,importation nearly prevented. The two operations together would be so powerful, that any greatdeviation from the real par of exchange could never be of long duration. A deviation equal to thecost of sending the precious metal, permanent circumstances might render permanent. IfEngland, for example, sent every year a large amount of the precious metal to India, andreceived it from Hamburgh, the exchange would be to the extent of the cost of sending themetals, permanently favourable with Hamburgh, unfavourable with India.
