CHAPTER XXIII.

FOREIGN BILLS OF EXCHANGE.

IN early times foreign trade consisted in the direct exchange of commodities. A caravan set out with a variety of manufactured articles, across the deserts of Arabia or Sahara, and came back with the ivory, spices, and other valuable raw produce obtained by barter. In later times the merchant loaded his own ship and sent her forth on an adventure, trusting that his shipmaster would sell the cargo to advantage, and, with the proceeds, bring back another cargo to be sold to great profit at home. Trade was thus evidently reciprocal, and what was sent out paid for what was brought back, so that little or no money was kept idle in the mean time.

Wherever this direct reciprocal exchange did not exist it was necessary either to transmit metallic money, or to devise some mode of transferring debts. Now the transmission of money not only causes the loss of interest during the interval of transit, but leads to the expense of guarding it, and the liability of total loss. Many centuries ago, accordingly, it was discovered that the

use of paper documents would economize, if not altogether render needless, the use of metallic money in foreign trade.

Origin and Nature of Bills of Exchange.

Even the Romans appear to have been acquainted in a slight degree with the system of foreign bills of exchange; but it is to the early Italian, and especially the Jewish merchants, that we owe the development of the practice. The history of the subject is buried in much obscurity, but there is evidence that, as early as the fourteenth century, the use of bills of exchange was fully established. The forms of the bills, and the laws and customs relating to them, were then much the same as in the present day.

A bill is nothing but an order to pay money addressed by the drawer to the drawee, or person on whom it is drawn, specifying the amount to be paid, the time of payment, and the person to whom it is to be paid. Whenever a bill is drawn, it is to be presumed that a debt is due from the drawee to the drawer. When presented to the drawee and accepted by him, this acceptance is an acknowledgment of the existence of the debt. The bill, although drawn in favour of a particular person, is transferable by endorsement, and thus represents a negotiable claim to receive money at a future date in a distant country. Hence it is capable of being transmitted in discharge of another debt of equal amount.

England buys every year from America a great

quantity of cotton, corn, pork, and many other articles. America at the same time buys from England iron, linen, silk, and other manufactured goods. It would be obviously absurd that a double current of specie should be passing across the Atlantic Ocean in payment for these goods, when the intervention of a few paper acknowledgments of debt will enable the goods passing in one direction to pay for those going in the opposite direction. The American merchant who has shipped cotton to England can draw a bill upon the consignee to an amount not exceeding the value of the cotton. Selling this bill in New York to a party who has imported iron from England to an equivalent amount, it will be transmitted by post to the English creditor, presented for acceptance to the English debtor, and one payment of cash on maturity will close the whole circle of transactions. Money intervenes twice over, indeed, once when the bill is sold in New York, once when it is finally cancelled in England; but it is evident that payment between two parties in one town is substituted for payment across the whole breadth of the Atlantic. Moreover, the payments may be effected by the use of cheques, or the bills when due may themselves be presented through the Clearing House, and balanced off against other bills and cheques. Thus the use of metallic money seems to be rendered almost superfluous, and, so long as there is no great disturbance in the balance of exports and imports, foreign trade is restored to a system of perfected barter.

Trade in Foreign Bills.

It is an unnatural supposition that every importer of goods will meet with an exporter of goods to the same amount, so that two transactions will exactly balance each other. But there are many merchants in Liverpool indebted to American merchants, and many American merchants indebted to others in Liverpool. Hence there will be a continual supply of bills of various amounts, and a continual demand, and it becomes a profitable business for certain houses to deal in the bills, purchasing bills from those who can draw and selling to those who wish to remit.

Large firms of merchants often have houses both in America and in England, or a firm in one country has agents or correspondents in the other with whom they keep a running account. Not uncommonly, the very same firm may be both importing and exporting, so that a direct balancing of their accounts will be so far effected. The remaining balance need only be paid from time to time as opportunity offers. Thus, in foreign as in home trade, book credit serves in a great degree to economize the use of money. Only when there is a derangement of the balance of trade, and one country owes to another a preponderating debt of large amount, need specie be transmitted.

It is out of the question that I should, in this small treatise, attempt to enter into the intricacies of the Foreign Exchanges, which have been so admirably treated by Mr. Goschen, in his "Theory of the Foreign

Exchanges." The general principle of the subject is, that bills of exchange drawn on any particular place constitute a new kind of article, subject to the laws of supply and demand. Any circumstance diminishing the supply, or increasing the demand, raises the price of such bills, and vice versa. The price being raised, there is additional profit on any transaction which allows a new supply of bills to be drawn. The export of any kind of goods in greater quantities tends to restore the balance, but, if requisite, coin or bullion can be sent at a certain cost, and bills drawn against it. Thus the cost of transmitting specie is the limit to the premium on bills. Gold and silver being everywhere considered a desirable possession, and being also very portable, form, as remarked at the outset, the natural currency between nation and nation. If a country were to be absolutely denuded of specie, and had foreign debts to pay, forced exportation and sale of the next most generally desirable and portable commodity would be the only resource, and the premium on bills might vary to almost any extent from par. Thus it is seen that, in an economical point of view, gold and silver differ from other merchandise not in kind but in degree.

The World's Clearing House.

It might seem that in the use of cheques internally, and of bills of exchange in foreign trade, we have reached the climax in the economy of metallic money; but there is yet one further step to make. We found