An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) / Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes

by Sir James Steuart

Let me suppose the trade of France favourable upon the whole, by great commissions from Cadiz, and bullion at the same time to be carried to the mint at 8 per cent. below the price of coin.

Let me suppose, that upon all the trade of England with France, there shall be, at that time, a balance of 2 per cent. sent from France to England in bullion; and upon the trade with Germany a balance of 1 per cent.

I say, that the par of exchange between England and France is 8 per cent. against England; and that the par of exchange between Germany and France is 7 per cent. I state it at this rate; because the balance being supposed favourable for the three nations, the value of their coin with respect to their bullion ought to be in proportion to the mint price.

The course of exchange, therefore, if it be a rule to judge by, ought to mark 6 per cent. against England; which I say is 2 per cent. in her favour: and the exchange with Germany ought to mark 6 per cent. against Germany; which I call 1 per cent. in her favour.

An example will make this plain.

Suppose English guineas, German carolins, and French Louis, to be all of the same weight and fineness; I say, the real par in the example we have stated is, between Paris and London, 100 Louis are equal to 108 guineas; because the 100 Louis are worth 100 guineas in London, and 108 guineas are worth no more than 100 Louis in Paris. Again, between Paris and Francfort, 100 Louis are equal to 107 carolins; because 108 carolins are worth at Paris 100 Louis; and 101 Louis at Francfort are worth 100 carolins; consequently, the difference between 7 and 8 is the real par, to wit, 100 Louis for 101 carolins. Next, as to the par between London and Francfort, here 100 carolins equal 101 guineas; because 100 carolins in London are worth 100 guineas; and 101 guineas at Francfort are worth no more than 100 carolins.

Now in the ordinary way of reckoning the real par, the 100 Louis, 100 carolins, and 100 guineas, are all supposed to be of the same value, in the three markets; and the difference between this supposed value, and what is paid for it, is supposed to be a loss upon trade. In this light, the nation’s loss resembles the loss incurred by him, who, when he goes to the bank, and pays ten pounds sterling in coin, for a bank-note, says, that he has given ten pounds for a bit of paper, not worth one farthing; reckoning the value of the note, at the real par of the paper it is writ upon.

The general rule, therefore, as I apprehend, is, to settle the real par of different coins, not according to the bullion they contain, but according to the bullion they can buy with them in their own market at the time.

If 1000 pounds weight of guineas can purchase at London 1000 pounds weight of standard bullion; and that 1000 pounds of the same weight of Louis can buy at Paris 1080 pounds weight of the same standard bullion; then the 1000 pounds weight of guineas is at the real par with 925⁶⁄₁₀₀₀ pounds weight of the Louis, and not worth 1000, as is commonly supposed.

If the doctrine laid down in this chapter be found solid; if no essential circumstance has been overlooked, which ought to have entred into our combinations, (points left to the reader to determine) then we may conclude,