I.: Bills of exchange, what.

AS the accounts of particular persons living in remote places, are frequently liquidated and discharged by bills of exchange, without the intervention of money; and this being a subject of importance, and not generally understood, excepting by particular merchants, it may not be amiss in this place to give a brief account of the nature and use of exchanges.

55. It hath been before observed, that the chief end or object of commerce betwixt nations, is a mutual exchange of commodities one with another; and this may be, and frequently is, carried to a great extent without the intervention of money. But nevertheless the accounts are every where kept and stated in money; and it is almost unavoidable, but that in all great trading towns, there will be merchants, some having bullion owing to them in one place, some in another; some or other again that are indebted to all those places, or to some other place which is indebted to some one of those; and so, by a kind of chain, all trading countries become in some sort accomptants with each other.

To avoid the charge, trouble and hazard of transporting bullion backwards and forwards, for the supplying of these different occasions; the method of discharging debts, by bills of exchange was introduced. This was an excellent invention; these bills being as subservient in foreign commerce, as coins are in home traffic; for by shifting of debts and credits from one place to another, they so far answer all the purposes of money. Bills drawn betwixt places in the same country, are called Inland bills; as those drawn between different countries, are called Foreign bills of exchange.

In all countries there are peculiar laws and customs, relating to this business of exchanges, which merchants and others immediately concerned should be well versed in. It is not my design here to meddle with the practical part of this useful commerce, but to explain its theory or principles as briefly as I can. A part of what I here propose is so very well done to my hands in the British Merchant, that I cannot do better in this place, than giving the following extract from that useful work.

“Suppose the tenant in Wiltshire is to pay for rent 100l. to his landlord in London; and the woollen-draper in London is to pay the like sum to his clothier in Wiltshire: Both these debts may be paid, without transmitting one farthing from the one place to the other, by bills of exchange, or by exchanging one debtor for the other, thus: That is, the tenant may receive his landlord’s order to pay 100l. to the clothier in the country; and the woollen-draper may receive his clothier’s order to pay the like sum to the landlord in town. These two orders are properly call’d bills of exchange; the debts are exchanged by them, that is, the woollen-draper in town, instead of the tenant in the country, is become debtor to the landlord; and the tenant in the country, instead of the woollen-draper in town, is become debtor to the clothier: And when these orders are comply’d with, the two debts between London and the country are discharged, without sending one shilling in specie from the one to the other.”

“In like manner, the warehouse-man in London is indebted in 100l. for stuffs, to the weaver in Norwich; and the linen-draper in Norwich is indebted in the like sum to the Hamborough merchant in London; both these debts may be paid by bills of exchange, or by the exchange of one debtor for the other, by placing one debtor in the other’s stead; that is, the warehouse-man may receive the order of his weaver, to pay 100l. to the Hamborough merchant; and the linen-draper may rereceive the order of the Hamborough merchant to pay the like sum to the weaver. These orders are bills of exchange; the debtor in one place, is changed for the debtor in the other; and thus both debts may be paid, without sending one single shilling in specie from the one city to the other.”

“If the debts reciprocally due between London and Norwich, are equal; whether they are 100l. or 10,000l. they may be all discharged in this manner by bills of exchange, without sending any money in specie from the one to the other.”

“But if the debts due from both places are not equal, then only the same quantity of debts on both sides, can be paid by bills of exchange. The ballance must be sent in money from the city, from whence the greatest sums are due. For example: If by the trade between London and Norwich, the former owes 10,000l. to the latter, and the latter no more than 9000l. to the former, it is manifest, that only the debts of 9000l. on each side can be discharg’d by bills of exchange; the ballance of 1000l. must be sent either from London or some other place indebted to London, to even the accompt between both the cities.”

“Let us suppose then, that to send and insure 1000l. in specie to Norwich, would cost 5l. or 10s. per Cent. which of the debtors in London would be willing to be at this charge? It is natural to believe that every one will endeavour to shift it off from himself, that every one will endeavour to pay his money by a bill of exchange; it is natural to believe that every one, rather than stand the cost and hazard of sending 100l. in specie, would pay 100l. 5s. in London for a debtor in Norwich, upon condition that the Norwich debtor should pay 100l. for him in that city. By which means the Norwich debtor would pay his debt of 100l. in London with less than that sum, while the London debtor would be obliged to give more than that sum for the payment of 100l. in Norwich. And if such for years together were the course of exchange between London and Norwich, there could be no question to which of the two cities a sum must be sent in specie to pay the ballance; that city undoubtedly pays the ballance that gives more than the par, that undoubtedly receives the ballance that gives less than the par for the bills of exchange. The course of exchange in this case would sufficiently decide, that the ballance of trade is on the side of that city that procures bills of exchange upon the most easy terms.”