How EXCHANGES ARE MADE.

England ships her manufactured goods largely to other countries, and imports in return foreign produce of as great or of a greater value. Trade has reached such huge dimensions that it would be impossible to settle these transactions by means of gold, specie, or bullion, as there is not enough gold in the world, and if there were the expense and risk of continually sending gold backwards and forwards would be a great obstacle to its use for making the payment of each debt due between one country and another. Therefore, as a convenient circulating medium for trade Bills of Exchange were invented, and they now form the current medium of exchange between one country and another. We have already explained the nature of and the principal laws governing these documents, and we will now endeavour to show how, by their means, the debts of mercantile transactions are settled between any two countries without gold being shipped for each payment.

A DIRECT EXCHANGE.

As an example, let us take the case of England and Portugal. We will suppose that Smith, an English merchant here, has shipped goods to Pinto, of Oporto, to the value of £500, and that about the same time, Jones, another English merchant, has bought wine, of Millo, of Oporto, of the same value. Smith wants to

get paid for his goods, and he has the choice of three ways of getting his money-he can tell Pinto to send him gold, which, as we said before, would entail great expense; he can draw a bill on Pinto; or he may tell Pinto to remit him a bill on London. In the usual

course of things he would draw a bill on Pinto, and we will assume that he does so. Smith having drawn his bill on Pinto, will take it to a bill broker, who, if he approves of the bill, will pay Smith the amount at once, at the current rate of exchange, less a brokerage for the accommodation.

Now Jones wants to pay Millo for his wine, and he also has the choice of three ways of doing so--he can either send gold, or tell Millo to draw a bill on him, or remit to Millo a bill on Oporto; he decides to remit a bill. He therefore buys Smith's bill on Pinto through a bill broker on 'Change, paying English money for it at the current rate of exchange, besides a small charge for brokerage. Jones sends this bill to Millo, who presents it to Pinto, and he pays Millo the amount in Portuguese coin.

Thus it will be seen that Smith gets paid for his goods on this side, and Millo for his wine on the other side, without any gold passing between the two countries.

BALANCE OF TRADE.

The balance of trade is the difference in the money value between the exports and imports of a country, and this, too, will cause variations in the rates of exchange. Now, if England sent regularly a certain value in goods to Portugal, and received in return produce of an equal value from there, the rate of exchange between the two countries would fluctuate very little, if at all. But the contrary happens, as the shipments from either country are spread unequally over the whole year, so that at one time our shipments to Portugal will exceed the value of our imports from

there, and at another time our imports from Portugal will exceed the value of our exports there. It is clear, therefore, that in the first position, where our shipments to Portugal exceed in value our imports from there, we shall have a surplus of bills on Portugal to dispose of, as they will owe us more money than we owe them, and the market value of these bills would fall, owing to the supply being greater than the demand. And in the other position, where the value of our imports from Portugal exceeds the value of our exports there, the supply of bills on Portugal would not be equal to the demand for them, and they would consequently rise in value, as bills of exchange, like cotton, sugar, and everything else dealt in, rise and fall in value according to supply and demand.

GOLD SHIPMENTS.

But however great the demand for bills may be, they will never rise in value beyond specie point, the price at which gold can be bought and shipped; so it often happens that when the balance of trade with any country is very much against us, we have to ship gold, and similarly, when the balance of trade is very much in our favour, gold comes in.

When an exporter wishes to make a shipment of gold to a foreign country he usually goes to the Bank of England and buys bar gold or specie, but while the latter always commands a premium, bar gold is less liable to loss from friction, and is more convenient for export than coins. Bar gold, therefore, forms an international currency, travelling backwards and forwards as a sort of make-weight to balance the difference of international trade.

HOW THE PRICE OF SILVER AFFECTS THE RATES OF EXCHANGE.

How the price of silver affects the rates of exchange between one country and another is, to some persons, a problem quite bewildering in its perplexity, yet the subject is not a difficult one to grasp when once its underlying principles are understood and remembered. As a purely imaginative case, therefore, let us suppose that the market price of silver is 2s. per ounce, and that a silver rupee weighs one ounce, thus making it worth exactly 2s. for the silver it contains, while, for exchange purposes with England, ten of them are reckoned to £1. If silver rises in the market to 2s. 1d. per ounce, our rupee, weight for weight, must be worth the same amount, and ten of them, for their weight value of silver, will fetch £1 Os. 10d. That is, while the rupee, as a coin at home, would only be worth, or would only have a purchasing power of 2s., its weight value as silver would be worth 2s. 1d. in the market, and to prevent our buying rupees for 2s. each, and selling them as silver for 2s. 1d., the exchange value of the rupee between India and England must be raised, until it shall not be profitable for us to buy as a coin and sell as silver, otherwise it would be a most profitable business for us to buy a large quantity of rupees for 2s. each, and after melting them down, sell the silver in the market at 2s. 1d. per ounce. Again, if silver fell to 1s. 11d. per ounce, there would be an inducement for coiners to buy silver and coin it into rupees of full weight, which have a purchasing power of 2s. each, and these in turn could be exchanged for gold, which would soon deplete the coinage of the country.