171. Exchange Defined

The system by which one country discharges its debts to another is called foreign exchange. This indebtedness may arise from shipments of merchandise; from money loaned, or invested abroad, or from the interest on such funds; from payments by one country to another for freights, insurance, or the expenditures of its citizens travelling abroad.

The rate of exchange is best defined as the price of the money of one country reckoned in the money of any other country. In speaking of the rate of exchange current between Great Britain and the United States, for instance, 486 means that a pound sterling can be bought for $4.86. The price at which a pound sterling can be bought is continually fluctuating. The immovable par of exchange is the price of the gold unit of one country expressed in the money of some other country. The gold in a British sovereign, for instance, is worth $4.8665 at any United States assay office - the rate of $4.8665 is, therefore, the fixed par of exchange between Great Britain and the United States.

172. Pars Of Exchange

The three most important pars of exchange and the way in which they can be found are given as follows by the English writer, Clare, in his book "The A. B. C. of Foreign Exchange":

Asking by Chain Rule how many francs are equal to a sovereign, if £1 = 7.988 grammes standard, 12 = 11 grammes fine, 900 = 3100 francs; we obtain the result,

7.988 X 11 X 3100 = 25.2215 / 12 X 900

Again, according to German Mint law, 500 grammes fine gold are to be coined into 69} twenty-mark pieces, nine-tenths fine, which gives a ratio to the sovereign of,

£1 = 7.988 grammes standard, 12 = 11 grammes fine, 500 = 1395 reichsmark;

= 20.43 nearly. Lastly, the United States coin a ten-dollar piece out of 258 grains gold, nine-tenths fine, making the sovereign worth, £1 = 123.274 grains standard, 12 = 11 grains fine, 232.2 = 10 dollars,

= 4.86 2/3; equivalent to 49 5-16 pence for one dollar.

These are the three most important pars; and for ordinary business purposes are the only ones that need be retained in the memory. Why they should be of importance to business men is due to the fact that the course of the chief gold exchanges frequently influences the course of the money market, and that we can only tell whether a rate is for us or against us by knowing the par, which is the center about which it oscillates. It must be clearly understood, that a mint par only expresses the legal ratio. When we say that a sovereign is equal to f.25.22c, we mean that this amount of French currency expresses, according to French law, the same weight of gold as is contained in a sovereign, according to English law; but whether, if we were to put 2,000 ordinary sovereigns into one melting pot and 2,522 ordinary napoleons into another, we should obtain two lumps of gold of exactly equal value, is another question. It would depend upon the state of preservation in which the coins were. The sovereigns might be £10 short of the full weight, and still be within the legal allowance for wear; and so might the napoleons.

The mint par depends, in short, not on the coin itself, but on the legal definition of it; not on the sovereign de facto, but on the sovereign de jure; and if every gold coin in this country were debased and every gold coin in France sweated and multi-lated, the mint par would still remain the same. Unless and until the law is altered the mint par cannot alter.