An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (ebook reader with highlighter txt) 📖

of exchange shall be allowed to be

a sufficient indication of the ordinary state of debt and credit

between any two places, it would not from thence follow, that the

balance of trade was in favour of that place which had the

ordinary state of debt and credit in its favour. The ordinary

state of debt and credit between any two places is not always

entirely regulated by the ordinary course of their dealings with

one another, but is often influenced by that of the dealings of

either with many other places. If it is usual, for example, for

the merchants of England to pay for the goods which they buy of

Hamburg, Dantzic, Riga, etc. by bills upon Holland, the ordinary

state of debt and credit between England and Holland will not be

regulated entirely by the ordinary course of the dealings of

those two countries with one another, but will be influenced by

that of the dealings in England with those other places. England

may be obliged to send out every year money to Holland, though

its annual exports to that country may exceed very much the

annual value of its imports from thence, and though what is

called the balance of trade may be very much in favour of

England.

 

In the way, besides, in which the par of exchange has hitherto

been computed, the ordinary course of exchange can afford no

sufficient indication that the ordinary state of debt and credit

is in favour of that country which seems to have, or which is

supposed to have, the ordinary course of exchange in its favour ;

or, in other words, the real exchange may be, and in fact often

is, so very different from the computed one, that, from the

course of the latter, no certain conclusion can, upon many

occasions, be drawn concerning that of the former.

 

When for a sum or money paid in England, containing, according to

the standard of the English mint, a certain number of ounces of

pure silver, you receive a bill for a sum of money to be paid in

France, containing, according to the standard of the French mint,

an equal number of ounces of pure silver, exchange is said to be

at par between England and France. When you pay more, you are

supposed to give a premium, and exchange is said to be against

England, and in favour of France. When you pay less, you are

supposed to get a premium, and exchange is said to be against

France, and in favour of England.

 

But, first, We cannot always judge of the value of the current

money of different countries by the standard of their respective

mints. In some it is more, in others it is less worn, clipt, and

otherwise degenerated from that standard. But the value of the

current coin of every country, compared with that of any other

country, is in proportion, not to the quantity of pure silver

which it ought to contain, but to that which it actually does

contain. Before the reformation of the silver coin in King

William’s time, exchange between England and Holland, computed in

the usual manner, according to the standard of their respective

mints, was five-and twenty per cent. against England. But the

value of the current coin of England, as we learn from Mr

Lowndes, was at that time rather more than five-and-twenty per

cent. below its standard value. The real exchange, therefore, may

even at that time have been in favour of England, notwithstanding

the computed exchange was so much against it ; a smaller number

or ounces of pure silver, actually paid in England, may have

purchased a bill for a greater number of ounces of pure silver to

be paid in Holland, and the man who was supposed to give, may in

reality have got the premium. The French coin was, before the

late reformation of the English gold coin, much less wore than

the English, and was perhaps two or three per cent. nearer its

standard. If the computed exchange with France, therefore, was

not more than two or three per cent. against England, the real

exchange might have been in its favour. Since the reformation of

the gold coin, the exchange has been constantly in favour of

England, and against France.

 

Secondly, In some countries the expense of coinage is defrayed by

the government; in others, it is defrayed by the private people,

who carry their bullion to the mint, and the government even

derives some revenue from the coinage. In England it is defrayed

by the government; and if you carry a pound weight of standard

silver to the mint, you get back sixty-two shillings, containing

a pound weight of the like standard silver. In France a duty of

eight per cent. is deducted for the coinage, which not only

defrays the expense of it, but affords a small revenue to the

government. In England, as the coinage costs nothing, the current

coin can never be much more valuable than the quantity of bullion

which it actually contains. In France, the workmanship, as you

pay for it, adds to the value, in the same manner as to that of

wrought plate. A sum of French money, therefore, containing an

equal weight of pure silver, is more valuable than a sum of

English money containing an equal weight of pure silver, and must

require more bullion, or other commodities, to purchase it.

Though the current coin of the two countries, therefore, were

equally near the standards of their respective mints, a sum of

English money could not well purchase a sum of French money

containing an equal number of ounces of pure silver, nor,

consequently, a bill upon France for such a sum. If, for such a

bill, no more additional money was paid than what was sufficient

to compensate the expense of the French coinage, the real

exchange might be at par between the two countries; their debts

and credits might mutually compensate one another, while the

computed exchange was considerably in favour of France. If less

than this was paid, the real exchange might be in favour of

England, while the computed was in favour of France.

 

Thirdly, and lastly, In some places, as at Amsterdam, Hamburg,

Venice, etc. foreign bills of exchange are paid in what they call

bank money ; while in others, as at London, Lisbon, Antwerp,

Leghorn, etc. they are paid in the common currency of the

country. What is called bank money, is always of more value than

the same nominal sum of common currency. A thousand guilders in

the bank of Amsterdam, for example, are of more vallue than a

thousand guilders of Amsterdam currency. The difference between

them is called the agio of the bank, which at Amsterdam is

generally about five per cent. Supposing the current money of the

two countries equally near to the standard of their respective

mints, and that the one pays foreign bills in this common

currency, while the other pays them in bank money, it is evident

that the computed exchange may be in favour of that which pays in

bank money, though the real exchange should be in favour of that

which pays in current money; for the same reason that the

computed exchange may be in favour of that which pays in better

money, or in money nearer to its own standard, though the real

exchange should be in favour of that which pays in worse. The

computed exchange, before the late reformation of the gold coin,

was generally against London with Amsterdam, Hamburg, Venice,

and, I believe, with all other places which pay in what is called

bank money. It will by no means follow, however, that the real

exchange was against it. Since the reformation of the gold coin,

it has been in favour of London, even with those places. The

computed exchange has generally been in favour of London with

Lisbon, Antwerp, Leghorn, and, if you except France, I believe

with most other parts of Europe that pay in common currency ; and

it is not improbable that the real exchange was so too.

 

Digression concerning Banks of Deposit, particularly concerning

that of Amsterdam.

 

The currency of a great state, such as France or England,

generally consists almost entirely of its own coin. Should this

currency, therefore, be at any time worn, clipt, or otherwise

degraded below its standard value, the state, by a reformation of

its coin, can effectually re-establish its currency. But the

currency of a small state, such as Genoa or Hamburg, can seldom

consist altogether in its own coin, but must be made up, in a

great measure, of the coins of all the neighbouring states with

which its inhabitants have a continual intercourse. Such a state,

therefore, by reforming its coin, will not always be able to

reform its currency. If foreign bills of exchange are paid in

this currency, the uncertain value of any sum, of what is in its

own nature so uncertain, must render the exchange always very

much against such a state, its currency being in all foreign

states necessarily valued even below what it is worth.

 

In order to remedy the inconvenience to which this

disadvantageous exchange must have subjected their merchants,

such small states, when they began to attend to the interest of

trade, have frequently enacted that foreign bills of exchange of

a certain value should be paid, not in common currency, but by an

order upon, or by a transfer in the books of a certain bank,

established upon the credit, and under the protection of the

state, this bank being always obliged to pay, in good and true

money, exactly according to the standard of the state. The banks

of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg, seem to have

been all originally established with this view, though some of

them may have afterwards been made subservient to other purposes.

The money of such banks, being better than the common currency of

the country, necessarily bore an agio, which was greater or

smaller, according as the currency was supposed to be more or

less degraded below the standard of the state. The agio of the

bank of Hamburg, for example, which is said to be commonly about

fourteen per cent. is the supposed difference between the good

standard money of the state, and the clipt, worn, and diminished

currency, poured into it from all the neighbouring states.

 

Before 1609, the great quantity of clipt and worn foreign coin

which the extensive trade of Amsterdam brought from all parts of

Europe, reduced the value of its currency about nine per cent.

below that of good money fresh from the mint. Such money no

sooner appeared, than it was melted down or carried away, as it

always is in such circumstances. The merchants, with plenty of

currency, could not always find a sufficient quantity of good

money to pay their bills of exchange ; and the value of those

bills, in spite of several regulations which were made to prevent

it, became in a great measure uncertain.

 

In order to remedy these inconveniencies, a bank was established

in 1609, under the guarantee of the city. This bank received both

foreign coin, and the light and worn coin of the country, at its

real intrinsic value in the good standard money of the country,

deducting only so much as was neccssary for defraying the expense

of coinage and the other necessary expense of management. For the

value which remained after this small deduction was made, it gave

a credit in its books. This credit was called bank money, which,

as it represented money exactly according to the standard of the

mint, was always of the same real value, and intrinsically worth

more than current money. It was at the same time enacted, that

all bills drawn upon