This section is from the "The Science Of Wealth" book, by Amasa Walker.
By the rate of exchange is meant merely the price or cost of transporting money from one point to another; say, from Cincinnati to New York. If the time, freight, insurance, and other charges are equal to one per cent, then that is the natural rate of exchange. We have shown that only a small amount of coin, in the course of trade, is likely to be transported from one place to another. As there is a mutual trade, as Cincinnati buys of New York and New York of Cincinnati, it is only necessary to buy bills of exchange between these places. But on these bills there will be a premium or discount, as the case may be. If New York has purchased more largely in the mutual trade, there will be an excess of demand in that city for bills on Cincinnati. Reverse the supposition, and there will be an excess of demand in Cincinnati for bills on New York. The consequence, in either case, will be a rate of exchange equal to the transportation of specie, as above indicated. The rate of exchange will fluctuate from time to time (other things equal) precisely according to the transactions between the two cities. It becomes, then, in point of fact, the barometer of trade; indicating, with perfect accuracy, the state of trade between any two points, at home or abroad. With a sound currency, the rate of exchange may always be relied upon, and is always watched with great interest by every intelligent merchant and banker.
If this be so, we see that perfect freedom of exchange is of great importance, and that no extraneous influence should be brought to disturb this barometer, to which all ought to look with entire confidence.
If, for example, there existed a national bank, having the right to inflate the currency at pleasure, and with branches so distributed over the country that it could bring its whole power to bear upon any given point whenever it chose, it is easy to see that such an institution might control the exchanges, and thus do a great injury to the community; not only by charging excessive premiums, but by disturbing the normal indications of the exchange market. This, it has been charged, the United-States Bank, whose charter expired in 1836, actually did; at any rate, it certainly had the power and the motive to do it.
The Bank of England has never been permitted to deal in exchange.