This section is from the "The Science Of Wealth" book, by Amasa Walker.
It is well known, that the ordinary rate of exchange between this country and England is from nine to ten and a half per cent against the United States; but the explanation of this is not generally understood. The transportation of specie between the two countries, all charges and time included, costs only about one and one-quarter per cent. Why, then, this difference?
When the American government was first formed, the old Spanish milled dollar was in use; and $4.44 were equal to the British gold coin called a sovereign, or pound sterling. And Congress enacted that $4.44 should be the rate at which the pound sterling must be computed at our customhouses.
Since that time, important changes have taken place; the relative value of gold and silver have changed. The latter has advanced, or the former declined. The American dollar, too, has been altered, so that it has a less quantity of silver; and our gold coins, also, proportionately. It therefore now takes $4.86.6, in American coin, to be equal to a pound sterling. Thus the —
Actual value of the pound sterling is.......$4.86,6
which, it will be seen, is equal to very nearly nine and one-half per cent; so that, when exchange is quoted at nine and one-half per cent, it is really at actual par.
Now, if this is the actual par value of the two currencies, it will happen, that, whenever the market rate of exchange rises so far above nine and one-half per cent as to be sufficient to pay the expenses of sending specie and a trifle more, then the specie will go forward.
What these expenses are will be seen by a statement of an actual transaction between Boston and London, February, 1865.
Insurance, one-half per cent......$250.00
Freight to Liverpool, three-eighths per cent . 187.50
Fourteen days' time lost, at six per cent . . 83.33
These expenses are equal to about one and one-sixth per cent.
There is always some risk that the specie sent forward may not hold out full weight; that is, that, owing to abrasion in use, it might fall short a trifle: so that, probably, instead of one and one-sixth, the exporter of gold might as well have bought a bill of exchange, at one and one-quarter per cent.
Then, if the difference in the par value of the two currencies is equal to.............. 9.5
And the expenses of remitting gold equal to.....1.25
Real par value of exchange, total.....10.75
it will follow that gold will not ordinarily be exported until the market rate of exchange is about ten and one-half to ten and three-quarters per cent.
The same general principle applies to French exchange, which usually stands at about five per cent against this country. It is only the difference between the value of the coins of the respective countries, as computed here.
The late Secretary of the United-States Treasury, Mr. Chase, tried to induce Congress to rectify the great difference between the nominal and the real value of our coins, as compared with foreign coins; but the proposal was not sustained by legislative action. This measure would have added some ten per cent to the valuation of British imports, and, of course, the same per cent to the revenue derived from them; while it would have removed an absurd and cumbersome mode of computation at our customhouses.
A change so desirable and expedient cannot be long delayed.