It is the rela­tive abun­dance and scar­city of the moneys of various coun­tries that makes up what we call the exchange.

The exchange is a set­ting of the cur­rent and tran­si­tory value of moneys.

Silver as a metal has a value like all other com­mo­di­ties, and it fur­ther has a value that comes from its abi­lity to serve as the sign for other com­mo­di­ties ; and if it were but a sim­ple com­mo­dity, there is lit­tle doubt that it would lose much of its price.

Silver as a money has a value which the prince can set in some res­pects, and has no way of set­ting in others.

The prince esta­bli­shes a pro­por­tion bet­ween a quan­tity of sil­ver as metal and the same quan­tity as money. Secondly, he sets the pro­por­tion among various metals used in coi­nage. Thirdly, he esta­bli­shes the weight and purity of each coin. Finally, he gives to each coin this ideal value, of which I have spo­ken. I shall call the value of the money in these four res­pects posi­tive value, because it can be set by law.

The moneys of each state have, in addi­tion, a rela­tive value, in the sense that they are com­pa­red with the moneys of other coun­tries : it is this rela­tive value which the exchange esta­bli­shes. It depends a great deal on the posi­tive value. It is set by the most gene­ral eva­lua­tion of tra­ders, and can­not be set by the prince’s decree, because it varies cons­tantly and depends on a thou­sand cir­cum­stan­ces.

To set the rela­tive value, the various nations will lar­gely be gui­ded by the one that has the most sil­ver. If it has as much sil­ver as all the others toge­ther, each will have lit­tle choice but to mea­sure itself against that one ; this will cause them to make adjust­ments among them­sel­ves more or less as they have mea­su­red them­sel­ves against the prin­ci­pal nation.

In the pre­sent state of the world, it is Holland1 which is the nation in ques­tion. Let us exa­mine the exchange with res­pect to her.

In Holland there is a money cal­led a flo­rin : the flo­rin is worth twenty sous or forty half-sous or groots.2 To sim­plify things, let us ima­gine there are no flo­rins in Holland, and that there are only groots : a man who has a thou­sand flo­rins will have forty thou­sand groots, and so forth. Now the exchange with Holland consists in kno­wing how many groots each coin of the other coun­tries will be worth ; and as in France we ordi­na­rily count by the three-livre crown,3 the exchange will ask how many groots a three-livre crown will be worth. If the exchange is at fifty-four, the three-livre crown will be worth fifty-four groots ; if it is at sixty, it will be worth sixty groots ; if sil­ver is scarce in France, the three-livre crown will be worth more groots ; if it is plen­ti­ful, it will be worth fewer groots.

This scar­city or this abun­dance which results in the muta­tion of the exchange is not the real scar­city or abun­dance, it is a rela­tive scar­city or abun­dance ; for exem­ple, when France has grea­ter need of funds in Holland than the Dutch have in France, sil­ver is cal­led com­mon in France and scarce in Holland, and vice versa.

Suppose the exchange with Holland were at fifty-four. If France and Holland cons­ti­tu­ted just one city, we would do what we do when we make change for a crown : the Frenchman would take three livres from his pocket, and the Dutchman would take fifty-four groots from his. But since there is some dis­tance bet­ween Paris and Amsterdam, the per­son who gives me the fifty-four groots he has in Holland for my crown gives me a fifty-four-groot let­ter of exchange on Holland. We are no lon­ger dea­ling with fifty-four groots, but with a fifty-four-groot let­ter ; thus, in order to gauge the scar­city or abun­dance of sil­ver, one must know whe­ther there are in France more fifty-four-groot let­ters des­ti­ned for France than there are crowns des­ti­ned for Holland.4 If there are many let­ters offe­red by the Dutch and few crowns offe­red by the French, sil­ver is scarce in France and com­mon in Holland, and the exchange must rise, and for my crown I must be given more than fifty-four groots, or else I would not offer it, and vice versa.

It can be seen that the various ope­ra­tions of the exchange make up an account of cre­dit and debit that must always be set­tled ; and that a deb­tor state no more dischar­ges its debt with the others through the exchange than an indi­vi­dual pays a debt by chan­ging money.

Suppose there are only three sta­tes in the world : France, Spain, and Holland ; that various Spanish indi­vi­duals owe in France the value of one hun­dred thou­sand sil­ver marks, and that various French indi­vi­duals owe one hun­dred ten thou­sand marks in Spain ; and that some cir­cum­stance made eve­ryone in Spain and in France sud­denly wished to with­draw their money : what would the exchange ope­ra­tions do ? They would reci­pro­cally acquit these two nations of the sum of one hun­dred thou­sand marks ; but France would still owe ten thou­sand marks in Spain, and the Spanish would still have let­ters on France for ten thou­sand marks, and France would have none at all on Spain.

Now if Holland were in an oppo­site situa­tion with France, and owed her 10,000 marks, France could pay Spain in two ways : either by giving to her cre­di­tors in Spain let­ters on her Dutch deb­tors for 10,000 marks, or else by sen­ding 10,000 sil­ver marks in spe­cie to Spain.

It fol­lows from this that when a state needs to remit a sum of money in ano­ther coun­try, it is indif­fe­rent by the nature of the thing whe­ther sil­ver is car­ted there or whe­ther they take let­ters of exchange. The advan­tage of these two means of paying depends solely on the pre­sent cir­cum­stan­ces : you have to see what at this moment will yield the most groots in Holland, of sil­ver car­ried there in spe­cie5 or a let­ter on Holland in the same amount.

When the same purity and same weight of sil­ver in France give me back the same weight and purity of sil­ver in Holland, we say that the exchange is at par. In the pre­sent state of the monies, par is about fifty-four groots per crown6 ; when the exchange goes over fifty-four groots, we will say it is high ; when it is below we will say it is low.

To know whe­ther the state gains or loses in a cer­tain exchange situa­tion, we have to consi­der it as deb­tor, as cre­di­tor, as sel­ler, and as buyer. When the exchange is below par, it loses as deb­tor, gains as cre­di­tor, loses as buyer, and gains as sel­ler. It is clear that it loses as deb­tor : for exam­ple, France owing Holland a cer­tain num­ber of groots, the less its crown is worth in groots, the more crowns it will take her to pay ; contra­ri­wise, if France is owed a cer­tain num­ber of groots, the less each crown is worth in groots, the more crowns she will receive. The state again loses as buyer, for it still takes the same num­ber of groots to buy the same quan­tity of mer­chan­dise, and when the rate drops, each French crown yields fewer groots. For the same rea­son, the state gains as sel­ler : I sell my mer­chan­dise in Holland for the same num­ber of groots as I had been sel­ling it ; I will the­re­fore have more French crowns in France when I obtain a crown with fifty groots than when I have to have fifty-four to get the same crown ; for the other state, all of this will be rever­sed. If Holland owes a cer­tain num­ber of crowns, she will gain, and if we owe them to her, she will lose ; if she sells, she will lose ; if she buys, she will gain.

Yet we must pur­sue this. When the exchange is above par, for exam­ple if it is at fifty ins­tead of being at fifty-four, it should hap­pen that France, sen­ding through the exchange fifty-four thou­sand crowns to Holland, would buy only fifty thou­sand worth of mer­chan­dise ; and that on the other hand Holland, sen­ding the value of fifty thou­sand crowns to France, would buy fifty-four thou­sand worth, which would make a dif­fe­rence of eight fifty-fourths, or more than a one-seventh loss for France : so one-seventh more would have to be sent to Holland in sil­ver or in mer­chan­dise than we did when the exchange was at par ; and with the pro­blem cons­tantly increa­sing, since such a debt would make the exchange fall fur­ther, France would ulti­ma­tely be rui­ned. It seems, I say, that this should hap­pen : and it does not, because of the prin­ci­ple I have already esta­bli­shed elsew­here,7 which is that sta­tes always tend to balance their accounts and pro­cure their libe­ra­tion ; thus they bor­row only in pro­por­tion to what they can pay, and buy only as they sell ; and taking the above exam­ple, if the exchange falls in France from fifty-four to fifty, the Dutchman who was buying French mer­chan­dise for a thou­sand crowns and was paying fifty-four thou­sand groots for them, would now pay only fifty thou­sand if the Frenchman would consent to that ; but the French mer­chan­dise will rise imper­cep­ti­bly, and the pro­fit will be sha­red bet­ween the Frenchman and the Dutchman : for when a dea­ler can gain, he rea­dily sha­res his pro­fit ; there will thus be a com­mu­ni­ca­tion of pro­fit bet­ween the Frenchman and the Dutchman. In the same way, the Frenchman who was buying mer­chan­dise from Holland for fifty-four thou­sand groots, and was paying for them with a thou­sand crowns when the rate was fifty-four, would be requi­red to add one-seventh more French crowns to buy the same mer­chan­dise ; but the French mer­chant who will be aware of the loss he would sus­tain will wish to pay less for the mer­chan­dise from Holland ; there will the­re­fore be a com­mu­ni­ca­tion of loss bet­ween the French mer­chant and the Dutch mer­chant, the state will step imper­cep­ti­bly into the balance, and the drop in the exchange rate will not have all the disad­van­ta­ges that might have been fore­seen.

When the rate is below par, a dea­ler can remit his funds in foreign coun­tries without dimi­ni­shing his for­tune, because when he recalls them he gets back what he has lost ; but a prince who sends to foreign coun­tries nothing but sil­ver that is never to return always loses.

When dea­lers do a great deal of busi­ness in a coun­try, the rate inva­ria­bly rises. That is because they contract many enga­ge­ments and buy consi­de­ra­ble mer­chan­dise, and they draw on the foreign coun­try to pay for them.

If a prince accu­mu­la­tes large quan­ti­ties of sil­ver in his state, sil­ver may be scarce there in rea­lity, and com­mon rela­ti­vely : for exam­ple, if at the same time this state had to pay for consi­de­ra­ble mer­chan­dise in the foreign coun­try, the rate would fall, even though sil­ver was scarce.

The exchange in all mar­ket­pla­ces always tends to set­tle at a cer­tain pro­por­tion, and this is in the nature of the thing itself. If the exchange from Ireland to England is below par, and that of England to Holland also below par, that of Ireland to Holland will be even lower, in other words in com­pound ratio of Ireland to England and England to Holland ; for a Dutchman who can send for his funds indi­rectly from Ireland through England will be unwilling to pay more to send for them directly. That, I say, is how it should be ; yet it is not exactly that way : there are always cir­cum­stan­ces which make things vary, and the dif­fe­rence bet­ween the pro­fit that can be got from one mar­ket or from ano­ther is the art and par­ti­cu­lar skill of ban­kers, which are not at issue here.

When a state ups its coin, for exam­ple when it calls six livres or two crowns what it was cal­ling only three livres or one crown, this new deno­mi­na­tion, which adds nothing real to the crown, should not obtain a sin­gle addi­tio­nal groots through the exchange. For the two new crowns one should receive only the same quan­tity of groots as the for­mer one crown brought ; and if that is not the case, it is not the effect of the naming itself, but the effect it pro­du­ces as new and the effect it has as sud­den. The exchange holds to busi­ness in course, and only makes an adjust­ment after a cer­tain time.

Whenever a state, ins­tead of sim­ply upping its money by law, mints new coi­nage in order to make a strong money into a wea­ker money, it hap­pens that while the ope­ra­tion is under way there are two kinds of money : the strong one which is the old one, and the weak one which is the new ; and as the strong one is ban­ned, and accep­ted only at the mint, and let­ters of exchange must conse­quently be paid in new spe­cie, it seems the exchange ought to be set in terms of the new spe­cie. If, for ins­tance, the depre­cia­tion in France were by half, and the for­mer three-livre crown yiel­ded sixty groots in Holland, the new crown ought to yield only thirty groots ; in ano­ther way, it seems that exchange ought to be deter­mi­ned by the value of the old spe­cie, because the ban­ker who has money and who accepts let­ters is obli­ged to carry old spe­cie to the mint to get new spe­cie for it, on which he loses ; the exchange will the­re­fore assume a value bet­ween the value of the new spe­cie and that of the old ; the value of the old spe­cie is fal­ling, so to speak, both because there is already some new spe­cie in cir­cu­la­tion and because the ban­ker can­not insist, it being in his inte­rest to get the old money qui­ckly out of his till so he can put it to work, and even being for­ced to do it to make his pay­ments ; on the other hand, the value of the new spe­cie rises, so to speak, because the ban­ker with some of the new spe­cie finds him­self in a cir­cum­stance where, as we shall show, he can obtain some of the old spe­cie at great advan­tage ; the exchange will the­re­fore set­tle, as I have said, bet­ween the new spe­cie and the old. At that point, ban­kers bene­fit by get­ting the old spe­cie out of the state, because in that way they obtain the same advan­tage that an exchange deter­mi­ned by the old spe­cie would yield, in other words, many groots in Holland ; and they have a return at a rate set bet­ween the new spe­cie and the old spe­cie, which is to say, lower, which pro­cu­res many crowns in France.

I shall assume that three livres of old spe­cie yield at the pre­sent rate forty-five groots, and that by car­rying this same crown to Holland you get sixty ; but with a forty-five-groot let­ter you will obtain a three-livre crown in France, which, taken in old spe­cie to Holland, would also yield sixty groots ; all of the old spe­cie will the­re­fore leave the state that is remin­ting, and the pro­fit will go to the ban­kers.

Correcting this will make a new ope­ra­tion man­da­tory. The state which is remin­ting will itself send a large quan­tity of old spe­cie into the nation that regu­la­tes the exchange ; and thus obtai­ning a cre­dit, it will make the rate rise to the point where very nearly as many groots will be obtai­ned by exchan­ging a three-livre crown as would have been by sen­ding one of three livres in old spe­cie out­side the coun­try. I say very nearly because, when the pro­fit is modest, no one will be temp­ted to send spe­cie out, because of the trans­por­ta­tion costs and the risks of confis­ca­tion.

It will be help­ful to give a very clear idea of this. Mr. Bernard,8 or any other ban­ker whom the state wishes to use, pro­po­ses his let­ters on Holland, and offers them at one, two, or three groots higher than the cur­rent rate of exchange ; he has made a pro­vi­sion in foreign coun­tries by means of old spe­cie which he conti­nually had trans­por­ted ; he has thus brought the rate up to the point we have just said ; meanw­hile, by dint of issuing his let­ters, he grabs up all the new spe­cie, and for­ces the other ban­kers who have pay­ments to make to take their old spe­cie to the mint ; and moreo­ver, as he has quietly taken all the sil­ver, he obli­ges the other ban­kers in their turn to give him let­ters at a very high exchange rate : the pro­fit in the end com­pen­sa­tes him in large part for his loss at the begin­ning.

It will be clear that during this whole ope­ra­tion the state must suf­fer a vio­lent cri­sis. Silver will become very scarce, first because most of it must be ban­ned ; second, because part of it must be trans­por­ted to foreign coun­tries ; third, because eve­ryone will hoard it, no one wan­ting to leave to the prince a pro­fit they hope to have them­sel­ves. It is dan­ge­rous to do it slowly ; it is dan­ge­rous to do it swiftly. If the gain anti­ci­pa­ted is immo­de­rate, the draw­backs increase in pro­por­tion.

We have seen above that when the exchange was lower than the spe­cie, there was a pro­fit in sen­ding money away ; for the same rea­son, when it is higher than the spe­cie, there is a pro­fit in brin­ging it back.

But there is one case where a pro­fit is had by sen­ding spe­cie awau even though the exchange is at par : that is when it is sent abroad to be rela­bel­led or mel­ted down. When it has retur­ned, the pro­fit from the money is rea­li­zed whe­ther by using it in that coun­try, or by taking let­ters of exchange for use abroad.

If it hap­pe­ned that a com­pany was set up in a state with a very consi­de­ra­ble num­ber of sha­res, and these sha­res had been made in a few months to rise twenty or twenty-five times beyond their ini­tial repur­chase value, and this same state had esta­bli­shed a bank the bills of which had to func­tion as cur­rency, and the nume­ri­cal value of these bills was pro­di­gious in order to to cor­res­pond to the pro­di­gious money value of the sha­res (this is Mr. Law’s System), it would fol­low from the nature of the thing that these sha­res and bills vanish in the same way they had esta­bli­shed them­sel­ves. The sha­res could not have been made to rise all of a sud­den to twenty or twenty-five times their ori­gi­nal value without pro­vi­ding many peo­ple with the means of obtai­ning immense riches on paper : eve­ryone would seek to assure his for­tune ; and since the exchange offers the easiest path for liqui­fying it or sen­ding it whe­re­ver one wishes, one would cons­tantly be remit­ting a part of one’s hol­dings to the nation that regu­la­tes the exchange. A conti­nual pro­ject of remit­ting to foreign coun­tries would cause the exchange to drop. Let us sup­pose that at the time of the System, in the rela­tion­ship bet­ween the purity and the weight of sil­ver money, the rate of exchange were forty groots per crown : when limit­less paper had become money, no one would have been willing to offer more than thirty-nine groots per crown, then thirty-eight, thirty-seven, and so on. That went so far that the offer was down to eight groots, and finally there was no more exchange at all.

It was the exchange which in this case was sup­po­sed to set the pro­por­tion of sil­ver to paper in France. Supposing that, by the weight and purity of the sil­ver, the paper three-livre crown was worth forty groots, and that, the exchange taking place in paper, the paper crown of three livres was worth but eight groots, the dif­fe­rence was four-fifths. The paper three-livre crown was the­re­fore worth four-fifths less than the three-livre crown in sil­ver.

The Dutch determine the exchange for almost all of Europe by a sort of deliberation amongst themselves, as it suits their interests.

[Gros : “In terms of trading, in Amsterdam, Antwerp, Cologne, etc., the livre de gros is worth six livres, the shilling is worth six sous, and the sou 12 deniers ; and it is on this basis that the merchants keep their books, and in this sense it is an accounting currency like francs, German florins, and English sterlings.” (Trévoux.)]

[The écu.]

There is plenty of silver in one place when there is more silver than paper ; there is little when there is more paper than silver.

The costs of cartage and insurance deducted.

In 1744.

See book XX, ch. xxi.

[Samuel Bernard (1651–1739) was a financier famous for providing signicant financing for an increasingly indebted state under Louis XIV.]