Transactions between two or more countries are settled either by specie payments or by bills of exchange; as a rule the latter are employed. The price which is paid in the money of one country for that of another is called the 'rate of exchange.' The fluctuations in the rates of exchange are caused by a great variety of circumstances, which are often unseen and unthought of by those whose daily occupation is buying and selling bills of exchange.

Our first inquiry upon entering this subject is : What gives rise to bills of exchange?

Legitimate bills of exchange are brought into existence, in by far the greatest proportion, through the necessity which different countries are under of settling their relative indebtedness incurred by the importation of each other's produce.

A corn merchant at New York ships a cargo to London, and instead of receiving gold or silver, or a cargo of English goods in return, draws a bill upon the consignee, and sells it upon the New York exchange. The purchaser of the bill has a payment to make in London for a cargo of English goods, and instead of sending gold or silver or a cargo of corn, he remits the bill to his creditor, who gets it accepted and obtains the proceeds at maturity.* It will thus be seen that at these two places, London and New York, the price of bills must depend upon the importations and exportations. These fluctuations, however, have a limit, within which they are confined, except when influenced by abnormal and temporary causes.

* The purchaser here alluded to may also be drawn upon from London, and the bill be used in the same way by a person who has to remit a sum of money to New York. This will depend upon agreement.

If two countries are using the same standard of value a certain number of units or parts of a unit of the one coinage will contain the same quantity of 'pure metal' as an unit of the other coinage. This number is called the 'Mint Par' or the 'intrinsic par' of exchange. It is fixed by law, and, as long as the law remains the same, unalterable. Between a country with a silver standard and one with a gold standard the 'intrinsic par' cannot be fixed, but will depend upon the relative values of these metals.

If the importations and exportations between two countries balance each other, the exchanges between them will be at the Mint par; if they do not, the exchanges will turn in favour of the exporting and against the importing country. Both importers and exporters, on all occasions, endeavour, as far as possible, to avoid the transmission of bullion, whereby they escape the expense of freight and insurance, and the loss of interest besides. Exporters who may be competing with each other will sell their bills below the Mint par-that is, at a discount-to avoid bullion transmission; and on the other side importers who have debts to liquidate in foreign countries, will pay a premium for bills rather than transmit bullion. In fact, merchants, rather than incur the necessity of sending bullion, will offer premiums to drawers of bills, although that premium may rise to the cost of the bullion or specie remittance, which forcibly proves the immense advantage of this instrument in commercial transactions. Beyond this point-that is, the cost of bullion or specie remittance -the premium the importer must pay cannot rise, and the discount the exporter must sacrifice cannot fall. These points are called the 'specie or bullion points;' they remain fixed between countries of the same standard of value, and are variable between countries of different standards. If one of the countries has a depreciated paper currency, the real exchange between such a country and one using a metallic standard is found by allowing for the depreciation of the paper. This is either quoted as so much discount against specie, or it may be calculated by comparing the market price of bullion and its Mint price. If we allow for this depreciation we can find the real exchange, on the specie basis, between the two countries.

This is the theory of the foreign exchanges as illustrated by the most simple example, viz. between two countries having only a mutual export and import trade. But in practice the influences which have to be taken into account are much more numerous and complex, and we shall now consider the most important among them.

In the first place it often happens that a nation exports a great deal to another nation without buying of it, and in return at the same time importing largely from a third country to which it sends little. The indebtedness stands in this case as follows : A. has claims on B. and is indebted to C. This is what is called a 'triangular trade,' and the indebtedness is settled byB. remitting to C.for account of A. As an example of such an indebtedness we may quote the trade between America, England, and the East. America exports to England more than she imports from England, but buys more of the East than she sells to the East, and the claims are settled through London, by means of the claims of England on the East.

Another item which largely affects the course of exchanges nowadays is the shifting of loanable capital from one country to another. The mere merchandise which passes from one country to another is not the sole cause of the favorable or unfavorable state of exchanges. A foreign loan will influence the exchanges against the country lending and in favour of that borrowing, for it is equal to an import to the former and an export from the latter. It is true the loan will have, some time or other, to be repaid, but leaving aside the question of possible repudiation, at the time the loan is effected this will not come into question, and the loan acts upon the exchanges simply as the importation of the securities of the country contracting the loan into that advancing the money, exactly in the same way as if it were merchandise. It is for this reason that a foreign loan has sometimes been resorted to as a means of checking an unfavorable state of the ex-changes.