commercial places, and where the want of sellers of bills to receive the equivalent in specie was anticipated, whereby the bills might be bought up below the specie point. Another cause for the fluctuation of exchange will be the transfer of a large amount of capital from one country to another, where a high rate of interest is to be obtained. An advance in the Bank of England rate of discount is invariably followed by a turn of the exchanges in favour of England; and a fall in the rate immediately produces an opposite effect. The reason of this is easily to be accounted for. The high rate of interest ruling in London would cause a demand for bills on that city, with a view of using the proceeds of those bills in obtaining that high rate of interest. Speculative purchasers of bills are sure to ascertain the difference of rate in the country where the bill is drawn and the country where it is made payable, as this may enable them to obtain more for a bill on a country where the rate either has risen or is likely to rise. Hence we see the great importance which is attached to the changes of the rate of discount. There are many Continental cities which hold large amounts in bills on London, and, if the rate of interest here falls below the Continental

rate, those bills will be immediately sent to England, and the gold returned to be invested in the higher rate of interest ruling on the Continent. A rise in the price of bills on England is sure to be accompanied by a fall in the price of foreign bills in England. We find that the fluctuations in exchange also arise from a depreciation of one or both currencies, or the transfer of any quantity of bullion or specie from one country to another, either of which will produce an effect in proportion to the magnitude of the cause. We will endeavour to give two examples illustrative of these two causes of fluctuation. First, a depreciation of the currency is due to the rise of the market price of gold above the mint price, allowing a margin for the metal being changed from one form to another, and the foreign exchange falling lower than the limit of the real exchange; thus: the nominal exchange between London and Amsterdam fell more than 20 per cent. against England in 1694, on account of the depreciation of her currency, at the same time the real exchange was in her favour. Secondly, to illustrate the fluctuation of exchange as caused by transmission of bullion, suppose England is driven to the American market for corn, on account of the failure of the harvest, and

that a large quantity of corn is shipped to England without America having made equal purchases from England, the balance of trade must be against England, to meet which bullion must be remitted; bills on New York will immediately be at a premium; the exchange will be adverse to England; and, if the premium on bills rises beyond a certain point, an efflux of bullion must be the inevitable result. These are the two prime causes of the fluctuation in exchange; and the fundamental principle upon which the price of bills rests is the balance of indebtedness.'

CHAPTER VIII.

OF CURRENCY.

A CHAPTER on currency cannot, perhaps, be better opened than by quoting two paragraphs from the writings of the patriarch of political economy, Adam Smith. In chapter iv. of The Wealth of Nations,' upon the subject Of the Origin and Use of Money,' he begins thus:

'When the division of labour has been once thoroughly established, it is but a very small part of a man's wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant; and the society itself grows to be what is properly a commercial society.

'But, when the division of labour first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former, consequently, would be glad to dispose of, and the latter to purchase, a part of this superfluity. But, if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it; but they have nothing to offer in exchange except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can in this case be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconvenience of such situations, every prudent man, in every period of society after the first establishment of the division of labour, must naturally have endeavoured to manage his