appear that there are circumstances essential to the existence of that commerce, which involve the necessity of maintaining a favourable balance with the Continent of Europe. The great trade with the East Indies enjoyed by this country, almost to the total exclusion of the rest of Europe, creates a vast annual demand for silver, which must be supplied by those countries where silver is produced, or by those to which it is forced by colonial laws and restrictions. The exportation of silver is the most lucrative branch of the Indian commerce, because it is the commodity which, with the smallest cost in Europe, will purchase the greatest quantity of labour in China and the East Indies. It is the extraordinary profit attending this branch of export trade which constitutes the principal advantage of a commercial intercourse with those countries, and which must have chiefly contributed to enrich the nations which have successively enjoyed this commerce.

It is, therefore, a necessary part of the system of that country which possesses the greatest share of this branch of trade to draw from the rest of the Western world that supply of the precious metals which is annually consigned to the East. The direct commerce with Spain and Portugal, the countries immediately connected with the American mines, is inadequate to this purpose, because those nations have not a sufficient demand for the manufactures of Great Britain; and recourse must therefore be had to the different nations of the Continent, among whom the annual produce of the mines is distributed by the commercial intercourse of Spain and Portugal with the other parts of Europe. It is the immediate consequence of this demand to produce a balance of trade and a favourable exchange with the Continent, which must necessarily continue till the equilibrium of the precious metals is restored between the East and West, and till silver shall no longer represent a greater quantity of exchangeable commodities in India than in Europe.

'So long as Great Britain continues to be the greatest manufacturing country in Europe, and to enjoy the monopoly of the Indian trade, the balance must continue in her favour with the Continent, unless some great revolution should remove the restraints on the commerce of the Spanish colonies in America. If that event should ever take place, and a direct intercourse should be established by Great Britain with Peru and Mexico, the balance of trade will be brought to a level, and the average state of the exchange will be at par between England and the continent of Europe. But with the continent of America the exchange will then be as much in our favour as the whole amount of the expense of conveying the precious metals from thence to this country.' *

The passage which we have just quoted occasioned a controversy between Lord King and this Journal. In our Article upon his Tract, which appeared in the Number for July 1803, we maintained, that the exportation or importation of bullion will not affect the exchange in a different way from the exportation or importation of any other commodity.

* P. 89.

The real course of exchange,' we said, 'between two countries, depends upon the state of their reciprocal credits and debits. When the real difference is in favour of this country, it must be occasioned by the demand abroad for bills being greater than the supply; and that difference is no other than the premium which is paid for bills in consequence of the competition. The balance due to us, and which cannot be liquidated by means of bills, may either be discharged by sending bullion to this country, or may be allowed to remain for a time unpaid. So long as it remains a permanent debt, the price of bills will continue high-that is, the course of exchange will continue in our favour. If the balance be discharged by an actual transference of bullion, the supply of bills abroad will then become equal to the demand, and exchange will be at par. But even when it has the effect of liquidating such a balance, bullion is only sent to this country because there is an effectual demand for it, which allows the importation; and it liquidates that balance in no other way than an equal import of any other commodity for which there had been a demand, would have done. The state of exchange, therefore, does not depend upon the bullion trade, more than upon that of any other commodity; it depends entirely on the balance of debts. Provided the whole exports are no more than equal, during a given period of time, to the whole imports, the exchange will be at par, although a great part, the greater part, or even the whole of those imports, may have consisted of bullion. Let it be supposed, for example, that the commerce between Britain and Portugal had consisted wholly of woollen cloths exported from Britain, and of nothing but bullion directly imported from Portugal, provided the whole quantity of woollen cloth exported was no more than equal in value, annually, to the whole quantity of bullion imported, and that the reciprocal purchases were made upon the same terms, in respect of the length of credit, the real exchange would have remained steadily at par, though we imported nothing but bullion; and if, on the other hand, our import of bullion had exceeded our export of woollen cloth, or if the Portuguese merchant had granted a more indulgent credit than he received from Britain, the course of exchange would then have been permanently against this country, although we imported nothing but bullion. The real difference of exchange in our favour, and which therefore indicated a balance of debts in our favour, was owing to that credit which the merchants of England are enabled by their great capitals and skill, to extend to the traders of almost all foreign countries.'*

Lord King did us the honour of answering us, in an Appendix to the second edition of his Tract. To the argument, that the real difference of exchange in our favour was owing to our habit of giving long credits, he replied that

The credit which is given by the English merchants occasions a small advance on the price of the goods, and therefore increases the value of the exports. But such an increase, when regular and uniform,

* Edinburgh Review, vol. ii. p. 219.

is always paid for by an additional amount of imports, and cannot, upon any intelligible principles, permanently affect the exchange. Long credit is always given by a rich country, where the rate of interest and profits of trade are low, to a poor country, where they are very high. The goods are sold at an advanced price, it being an accommodation to the poorer nation to pay an advance of perhaps ten per cent on a whole year's credit, rather than a smaller sum at a shorter date, because the merchants of the latter country, in consequence of the high profits of trade, can employ their capital to greater advantage. But that such a course of dealing will not produce any permanent balance in favour of the country which grants the accommodation, is evident from the example of the trade with Ireland, in which long credit has always been given; yet, prior to the restriction of 1797, the exchange, upon an average, was at par between the two countries. For the same reasons, in the North American trade, very long credit is allowed; yet the exchange is not supposed, on the whole, to be much in favour of London.*

To the statement, that the export or import of bullion cannot affect the exchange in a different way from the export or import of any other commodity, he answered, first, that the export and import of bullion is a peculiar trade; in which only a few persons in each country, and those making it their exclusive business, engage; and secondly, that bullion differs from all other commodities in this respect that it will any where pay a debt, which other goods will not.

On the first point, we now feel ourselves bound to own that Lord King's answer was complete. The rate of exchange is influenced, not by the state of credit between two places, but by the amount of money which at that instant is passing from one to another. Long credit shows itself, as Lord King has well remarked, not in the exchange but in price. On the second point, his reasoning is not conclusive. There is no connexion between his premises and his conclusion, that bullion cannot pass unless the exchange be unfavourable to the country which exports it. That conclusion we, however, believe to be true; but Lord King, though he perceived its truth, did not clearly see why it is true. This we will endeavour to explain.

The peculiarity of bullion is, that it is a commodity in which every person in every civilized nation deals. Whenever two nations have commercial relations, some of the inhabitants of each have at the same time to send money to some of the inhabitants of the other. This exists with respect with no other commodity. In a state of perfect commercial freedom, persons in London might sometimes wish to export wheat to Paris, and persons in Paris wheat to London,

* P. 154.

but these transactions could not be going on simultaneously. Macclesfield is now sending silks to Paris, and Lyons silks to London, but they are siks of different kinds. But there is not

a day in the year in which it does not happen that many thousand persons in London wish to send gold to Paris, and many thousand persons in Paris wish to send gold to London; the gold being in each case one identical commodity. Of course, it is convenient for both parties to save this double transmission; and the commodity being in all cases the same, the saving is effected by the London debtor paying the London creditor, and the Parisian debtor the Parisian creditor. If the sums to be transmitted from each side are equal, no money need actually pass, and the exchange therefore is at par. Under such a state of things a given amount of money in each country is, as respects the other, of precisely the same value, and possesses therefore a sort of ubiquity. A man whose money is in Paris may purchase with it a London house as easily as if his money were in London.

Now this, we repeat, is a state of things peculiar to money. Every other commodity has a peculiar local value. It rises or falls the instant that it is moved. It moves, therefore, always in the same direction, from its place of production where it is cheapest, to its place of consumption where it is dearest. London never owes wheat to Dantzig or deals to Memel: but it always owes gold or silver to every country in Europe, and every country in Europe owes gold to London. This state of things-a' state, we repeat, peculiar to the precious metals, and belonging to them only because they serve as money-enables the exchange between two countries, whose debts immediately payable are precisely equal, to be at par, and while it is at par, no bullion can be transmitted from the one to the other, since the whole cost of its transmission would be a pure loss. The instant the debts due from one country to another exceed its credits on that country, the exchange becomes unfavourable to the indebted country, and immediately, as between those two countries, bullion loses its ubiquity. It falls into the general bulk of commodities, and acquires a local value-that is to say, it becomes of more value in the creditor than in the debtor country-and then, and then only, it can be sent from the one to the other.

The case formerly put by us, of England sending nothing but woollens to Portugal, and Portugal nothing but gold to England, and yet the credits between the two countries being equal, and the exchange at par, is, we fear, an impossible supposition. The exchange being at par-that is to say, the value of gold being no greater in England than in Portugal-every Portuguese exporter of gold would lose the whole cost of the transaction. The real

state of trade and of exchange between the two countries would be this: The importation of woollens would bring Portugal into debt to England; the exchange would be unfavourable to her, and she must pay the debt in gold. The transmission of that gold would make the credits equal; but the next importation of woollens would again bring her into debt; and, if the trade were active, she would in fact be always in debt, and always exporting gold. The relation between the two countries would resemble that which generally exists between a landlord and tenant in Ireland. The tenant is always paying to his landlord, but as he does not pay one half-year's rent till another has become due, he is always in debt to him. It may be supposed, however, that such a trade, if extensive, could not be permanent, since the accumulation of money in the country exporting manufactures, and its abstraction from the country exporting gold, would so raise prices in the one, and sink them in the other, as to stop their commercial intercourse. And this would be true, unless we suppose the exporting country to have its supply of gold constantly replenished, and the importing country to have a constant drain for its surplus. Lord King had the merit of perceiving that, when he wrote, this was actually the case, England being commercially interposed between the continents of Europe and Asia, and receiving bullion from the one to be transmitted to the other. And he had the merit of predicting, that this state of things must cease to be permanent, as respects Europe, as soon as we established a direct intercourse with the mining countries;-a prediction which has been since. accomplished.

But though Lord King's general views were sound, and in some respects original, the inference which he drew, in the case before him, was manifestly unwarranted. The reader will recollect, that, when he wrote, the exchange on Hamburg was 35s. 4,. and on Paris 25s. 2. But 25s. 2. was higher than it had ever been since the autumn of 1790, and 35s. 4. was higher than that of 1792, which averaged little above 34s., and higher still than that of 1795, which was below 33s. As there could have been no depreciation before the Restriction Act, the comparison of the exchanges of 1804 with those of 1791, 1792, and 1795, though it may not exclude the possibility of depreciation, is certainly unfavourable to it.

The last evidence of depreciation mentioned by Lord King, is 'the general increase of prices, and diminution of the value of " money.* He does not dwell on it, but rather alludes to it as a

* Page 127.