1 . An "Exchange" in commerce is where a person pays his Creditor by transferring to him a Debt due to himself from someone else.

Thus the ordinary case of a person paying a debt by means of a Bank Note or Cheque, is an "exchange." It is what is called Novatio or Delgatio in Roman Law.

Two passengers are travelling in an omnibus. The fare is sixpence. One passenger pays the conductor a shilling. The conductor is then indebted to him in sixpence. The other passenger has a sixpence in his hand ready to pay his tare. The conductor, by a nod, tells him to give the sixpence to the first passenger. By this means the conductor's debt is paid without the trouble of the second passenger handing his sixpence to the conductor, and the conductor then handing it to the first passenger as payment of the Debt due to him. The whole transaction is an "Exchange."

Three parties and two Debts, are thus necessary to an exchange. We shall show presently that it is very common to have four parties. The "Exchanges" is that branch of Banking which treats of the remission and settlement of Debts between different places by Paper Documents, and the exchange of the money of one country for that of another. They are merely an exemplification of the Doctrines of Coinage and Credit which have already been explained.

2. When the coins of one country are carried to another their value is estimated solely by their weight and fineness as bullion. Though the natives of the country it belonged to, from long habit and association of ideas, see in it a certain denomination, and may receive it at its nominal value long after it has lost its legal weight, a foreigner sees in it nothing but so much bullion. When a person takes the coin of one country to another, and purchases the coin of that country with it, he is said to exchange it. Now suppose that the coinage of two countries is of the same metal and that both coinages are at their full weight and fineness: then if either of them be taken as the standard which may be called A, then the number of units, or parts of a unit of the coinage of the other, which may be called B, which contains precisely the same quantity of pure metal, is called the Par of Exchange between the country A and the country B. Thus if the legal standard of France and England were gold, and the Pound be taken as the standard unit of England, the number of the standard units of the French coinage which contain precisely as much pure gold as the English pound would be the Par of Exchange between England and France. There is as nearly as possible one-fourth more pure gold in a Sovereign than in a twenty franc piece, called a Napoleon. Therefore we might say that 1.25 is the gold Par of Exchange between England and France. The French Exchanges however are expressed in francs, which is a silver coin. Hence if the Sovereign contained exactly one-fourth more gold than the Napoleon, we should say that 25. was the Par of Exchange.

If the English coinage of sovereigns became worn, clipped, and degraded, they would not exchange for so many francs as they would do if they were of full weight: an English sovereign might perhaps only exchange for 22 francs: and this would be called a fall in the foreign exchanges: or if an English merchant were bound to pay his creditor in Paris 2,500 francs, he would have to give more than £100 to purchase them, and the exchange would be said to be so much per cent, against England, by the amount of that difference.

It is evident that this adverse state of the exchange would continue so long as the English coinage remained depreciated: but that if it were restored to its legal standard, that restoration would be itself sufficient to restore the exchange to its usual rate. Hence we see that if any country maintains its coinage of full weight and purity, a Depreciation of the Coinage of England necessarily produces an apparently adverse state of the Exchanges, and that a reform of the English Coinage is sufficient by itself to restore them to their proper state.

It is also evident that a Depreciation of the Coinage, by a debasement of its purity, will produce exactly the same effects. It is also clear that if the Coinage of both countries was equally degraded, the Rate of Exchange between them would not be altered, and that the Rate would vary just in proportion as one was more or less degraded than the other.

"When the Coinage of a country has become depreciated either from wear and tear, or a debasement of the standard, the consequence is said sometimes to be a fall in the Foreign Exchanges and sometimes a rise in the Foreign Exchanges, and it is well to fix clearly what these expressions mean, as it might seem that they are contradictory, when they are not so. They only refer to two different methods of estimating the Coinage.

When a Depreciated Coinage is said to produce a fall in the Foreign Exchanges, it means that a given amount of Home Coinage will purchase a less amount of Foreign Coin.

When a Depreciated Coinage is said to produce a rise in the Foreign Exchanges it means that a greater quantity of Home Coinage is required to purchase a given amount of Foreign Coin.

A clear understanding of these expressions will prevent any confusion arising when they are used indiscriminately, as they often are, in discussions on the Exchanges.

It is also evident that there can be no fixed Par of Exchange between two countries which do not employ the same metal as their legal standard : because their market values are constantly varying from causes quite beyond the reach of any law : and it is no more possible to have a fixed price of one in terms of the other, than to have a fixed legal price for wheat or any other commodity. The very same rule must also apply to two countries, one of which uses gold, and the other silver, as the measure of value. The only correct mode of expressing it is, therefore, to say that such is the usual Rate of Exchange between them.

Although when the Coinage is in a depreciated state, the exchange will be apparently adverse with these countries which maintain their Coinage in its standard state, it is quite clear that the exchange founded upon the commercial operations of the two countries may be above, below, or at Par: and it is very easy to discover its true state.

The Rate of Exchange which arises out of the state of the Coinage is called the Nominal Exchange; the Rate which arises out of the commercial operations of the country is called the Real Exchange.

To take an example. Suppose the Exchange on Paris is 2,521 francs for £100 in gold at the Mint Price: or when the Coinage is at its full legal weight. Then suppose that in consequence of the Depreciation of the Coinage, the Market Price of gold bullion rises to £4 3s. per oz.: then the Market Price of £100 is £106 l1s. 7 1/2d. Now suppose the Exchange on Paris is 23.80, or £100 will purchase 2,380francs, then £106 l1s. 7 1/2d. would be able to purchase 2,536.36 francs. But as the real Par at the Mint Price is 2,521, it is evident that the difference between these two sums is the extent to which the Real Exchange is in favour of London. "We can also see to what extent the Exchange is depressed, because £100 at the above exchange will purchase 2,380 francs, whereas they ought to purchase 2,536.63 if they were of full weight: and the difference between these two sums shows the extent by which the Nominal Exchange is depressed. Hence we have the following rule -

Find the Market Price of the sum in London compared to the Mint Price: multiply the Market Price so found by the Rate of Exchange: then if the result be equal to the Par of Exchange, the Exchange is at par: and if there be a difference, the Exchange is favourable or adverse, according as the difference is above or below the par.

And the depression of the Exchange caused by the Depreciation of the Coinage, is the difference between the sum so expressed in the Mint and Market Prices multiplied by the Rate of Exchange.

In the excellent state in which our Coinage now is, the question of the Nominal Exchange, so far as regards this country, is of little importance; but it is essential as regards several foreign countries which use an inconvertible and depreciated Paper Currency.