Exchange (finance)

“ The trader goes first, and after him the traveller and the tourist.
This claim can be made with perhaps even more certainty when we proceed to the realm of finance. If commerce is international and unifying, finance is perhaps even more so. Finance, of course, arises out of commerce and is an essential part of its machinery. By finance we mean the machinery of money—money-dealing and money-lending. Money becomes necessary as soon as the exchange of commodities, which is the meaning of trade, becomes fairly developed. ”

“ That in the exchange value between commodity money and all other property, credit money does not add anything—it facilitates—makes convenient the transaction of business. Just as your wheat certificates add nothing to the exchange value of wheat, or the things for which wheat are exchanged; yet they facilitate its exchange.
"This commodity money is the measure of values. Its quantity becomes the measure, and each dollar is a part of that measure. Credit money adds nothing to its value, it only facilitates the transaction of business based on that measure of values. ”

“ Whenever money rates become decidedly higher in one of the great markets than in the others, bankers at that point who have the requisite facilities and credit, arrange with bankers in other markets to allow them (the bankers at the point where money is high) to draw 60 or 90 days' sight bills. These bills can then be disposed of in the exchange market, dollars being realized on them, which can then be loaned out during the whole life of the bills. ”

“ The French buyer of a bill on London buys it, as a rule, because by sending it to his English correspondent he can discharge a debt to him in English money. What he really buys with his francs is so many English pounds, and the labyrinth of the foreign exchanges is much easier to thread if, before we complicate the question by talking about bills, we keep our eye on the comparatively simple problem which is the key to the puzzle, namely, the exchange of one country's money for another's. ”

“ If buying and selling are what count, if prices are forced up by the offer of money or credit for goods, and forced down as the amount of money and credit offered for goods is reduced, then one exchange must count for as much as any other of like magnitude in fixing prices. ”

“ These Exchanges thus made between man and man, are not contracted at the equal value of the moneys, according to their respective weights and fineness: First, because he that delivereth his money doth respect the venture of the debt, and the time of forbearance; but that which causeth an under or overvaluing of moneys by Exchange, is the plenty or scarcity thereof in those places where the Exchanges are made. ”

“ The extension of commerce creates a system of credit; the transmission of money from one part of the country to the other gives birth to the business of exchange. To keep the value of this medium and the rates of exchange equal and certain, was imperiously required by the necessities of the times when the bank was established. ”

“ But whenever banks borrow abroad, upon a permanent loan, and thereby acquire a fund to draw upon, the business of exchange falls naturally into their hands, and they may profit of it according to circumstances. ”

“ The matter of collateral, risk of exchange and, indeed, all the other detail, will be fully described in the succeeding chapters on how bankers make money out of exchange. For the time being it is merely necessary to note that every time a loan of foreign capital is made here—‌and there are days when millions of pounds are so loaned out—‌bankers' long bills for the full amount of the loans are created and find their way into the exchange market. ”

“ For that reason the money side of the equation is of course greater than the total amount of money in circulation.
II.19 The equation of exchange relates to all the purchases made by money in a certain community during a certain time. We shall continue to ignore checks or any circulating medium not money. We shall also ignore foreign trade and thus restrict ourselves to trade within a hypothetical community. ”

“ How the exchange market fluctuates in the meantime—‌what rate may have to be paid at the end of ninety days for the necessary demand draft—‌concerns the borrower not at all. He received dollars in the first place, and when the loan comes due he pays back dollars, plus four, five or six per cent., as the case may be. What rate has to be paid for the demand exchange affects the banker only, not the borrower. ”

“ And now for a vital theoretical conclusion from this lengthy analysis of bank loans. For the quantity theory, and the "equation of exchange," all exchanges stand on a par. If one exchange takes place, that lessens the money and credit available for another exchange. The more exchanges there are, the less money and credit there are per exchange, and the lower prices must be, as a consequence. Nothing could be more false. Exchanges are not on a [Pg 521] par. [545] Some classes of exchanges increase, rather than decrease the funds available for handling others. ”

“ Things which by barter would exchange for one another, will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. The relations of commodities to one another remain unaltered by money: the only new relation introduced, is their relation to money itself; how much or how little money they will exchange for; in other words, how the Exchange Value of money itself is determined. ”

“ Heavy purchasing movements of our own or foreign securities, on the other side, are the second great influence making for high exchange. There come times when, for one reason or another, the movement of securities is all one way, and when it happens that for any cause we are the ones who are doing the buying, the exchange market is likely to be sharply influenced upward by the demand for bills with which to make payments. ”

“ Every one must see that by thus acting he produces a greater effect on price, than if he limited his purchases to the money he has actually in hand. He creates a demand for the article to the full amount of his money and credit taken together, and raises the price proportionally to both. And this effect is produced, though none of the written instruments called substitutes for currency may be called into existence; though the transaction may give rise to no bill of exchange, nor to the issue of a single bank note. ”

“ The present purpose, therefore, is to inquire into this vital though neglected part of the subject; to call attention to the economic truths that money and credit fluctuate as much, and often more, than commodities; again to point out that continuing trade is, in substance, only its original form of barter; to show that an exchange of a commodity for money constitutes but a single step, the second and most vital step being the replacement of the commodity with the money thus obtained. ”

“ There is no reason why each should tie up twice as large a proportion of his income in a supply of the medium of exchange. If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the exchange value of money, a general bidding up of prices of goods. ”

“ In fact, it is evident that the method of maintaining par by selling exchange on other countries, and by exchanging currency directly for some commodity, such as gold, are at bottom much the same thing. ”

“ To take up the actual operation of loaning foreign money in the American market, suppose conditions to be such that an English bank's managers have made up their minds to loan out £100,000 in New York—‌not on joint account with the American correspondent, as is often done, but entirely independently. ”

“ Moreover, the loanable value of money varies under Supply and Demand just like other values; there are always those who want to borrow, and always those who want to lend; both parties must be assumed to know their own minds, and to be equally competent to make their own bargains; it is a case of mutual exchange for a mutual benefit, like all other trade; and the current rate of interest is determined at any one time by the actual free exchanges between borrowers and lenders. ”

“ When, therefore, the real exchange is at par, there will be a nominal exchange against the country, of as much per cent as the amount of the depreciation. If the currency is depreciated 10, 15, or 20 per cent, then in whatever way the real exchange, arising from the variations of international debts and credits, may vary, the quoted exchange will always differ 10, 15, or 20 per cent from it. ”

“ Money in the summer months is apt to be low and exchange high, affording a good basis on which to sell exchange. Then, if the expected crops materialize, large amounts of exchange drawn against exports will come into the market, forcing down rates and giving [Pg 341] the operator who has previously sold his long bills an excellent chance to cover them profitably as they come due. ”

“ In point of fact, the merchant who has the amount to pay will even then pay for it by a bill. When a person has a remittance to make to a foreign country, he does [pg 412] not himself search for some one who has money to receive from that country, and ask him for a bill of exchange. In this, as in other branches of business, there is a class of middle-men or brokers, who bring buyers and sellers together, or stand between them, buying bills from those who have money to receive, and selling bills to those who have money to pay. ”

“ The only real subjects of Exchange are mutual efforts, mutual services, as these are expressed in Commodities and Services and Credits, and money is the instrument merely that comes in between the real exchanges to facilitate them; and, therefore, it seems to be perfectly conclusive on this point to remark that the quantity of money needed in any country or the whole world is limited by the number of the services ready to be exchanged, to make easy the exchange of which is the good purpose and sole end of Money. ”

“ For this "floating" investment is very largely for account of bankers whose international connections and credit make it possible for them to carry stocks and bonds through the agency of the exchange market, and without having to put up any actual money. ”

“ Then, the dollar will represent constant value, and will thus become the true medium of exchange—domestic exchange. The difference between exchange and redemption is, in exchange gold is supplied at the market price, and in redemption it is supplied at a given price. When, however, the given price equals the market price, there is little redemption, because there is little demand ”

“ The carrying on of trade by the use of money does not change its essential character, but merely permits the various exchanges, of which trade is made up, to be divided into parts or steps, and thus more easily effected. When commodities are exchanged for money, but half a full exchange is completed. When a man sells a thing for money, it is to use the money in buying some other thing—and it is only as money has this power that anyone wants or will take it. ”

“ In that event the check and the promissory note and the bill of exchange, operating as orders to the book-keepers of banks and clearinghouses, would effect transfers of debits and credits the world over so that all Trade would be barter systematized—plain barter freed from the obstructions incident to barter in primitive Economic circumstances. Except for the use of “pocket cash,” Money pieces of every kind, whether metal or paper, would be like children’s toys to grown-ups. ”

“ The manner in which the wealth created by the toiling millions, passed through the channels of trade, into the possession of a few wealthy speculators, was illustrated by pictures and printed explanations, in almost endless variety, so that even the most obtuse observers, could not fail to get a clear idea of the practical workings of a system of commercial exchange, under the operation of which, interest, profit and rent were always added to the market price of the product, every time it changed hands. ”

“ The first use of money is to effect exchanges, and as a vast bulk of exchanges, are affected without money, should not this be deducted from the bulk of exchange before a normal amount of money can be considered? ”

“ For the present it is sufficient to say that exchange is a productive process, that exchange creates values, in as true a sense as manufacturing does, and that money facilitates exchange in as true a sense as coal facilitates manufacturing. There is, at any given time, a demand-curve for this money service, manifesting itself in the money market, a demand for the short time use of money as a tool of exchange, and the "prices" which come out of the interaction of demand and supply in the money market are the short time "money rates" including the "call rates." ”

“ Checks are orders upon these individual accounts or deposits, and by their means exchanges are made with great ease and little risk between individuals in the same neighborhood or even in distant cities or distant countries. The cost of storing, handling or transferring any form of currency is reduced to a minimum. So far-reaching is this comparatively modern machine of exchange that it is properly assumed to be the means of settling 90 per cent of all exchanges, domestic and foreign, with almost no use of money in any of its numerous forms. ”

“ While we have no definite figures that justify a positive statement, it is generally estimated that about 90 per cent of all the business of the country is done with some form of credit instrument, checks, drafts, or bills of exchange.
Mr. Merchant: Then all forms of exchange, promissory notes, checks, drafts and bills of exchange are really mediums of exchange in precisely the same sense that gold coin and currency are mediums of exchange. ”