This section is from the "The Science Of Wealth" book, by Amasa Walker.
This consists of orders; that is, bills of exchange, drawn upon each other by the merchants and bankers of different countries. They differ little in form from domestic bills, but are usually drawn in sets of three; called, respectively, the first, second, and third of exchange, in something like the following form: —
£1000. Boston, June 28, 1859.
At sixty days' sight of this first of exchange (second and third unpaid), pay to the order of A. Brown & Co. one thousand pounds sterling, value received, which place to account.
Brydone Brothers & Co. George Peabody & Co., London. *
The party to whom the bill is payable takes these, and forwards the first to London, where it is accepted and paid. But an accident might occur by which the bill would be destroyed or lost while on its way to London; and, in that case, the owner would forward the second, which would be paid. The third bill is also held, for the same precautionary reasons.
These bills arise in a great variety of ways. Persons wishing to purchase merchandise or other articles abroad go directly to bankers in New York, Boston, &c, and buy a bill of the required amount. So with persons wishing to travel abroad. But the principal amount,of course, is drawn in payment for importations of foreign merchandise. In general, the trade between England and this country is carried on by bills drawn on this side the water, upon cotton and other produce shipped abroad, mostly to Liverpool.
To illustrate the ramifications of this kind of intercourse, we will suppose that A, in Boston, buys merchandise of B, in Liverpool; C, in Boston, sells goods to D, in New Orleans; E, in Boston, buys cotton of F, in New Orleans and ships the same to G, in Liverpool. Each transaction, we will suppose, amounts to five thousand dollars.
How are all these settled without the transfer of money? A gets the draft of E upon G, and sends it to B, in Liverpool; E gets the draft of C upon D, and remits it to F, at New Orleans, who receives the amount of D.*
Thus four debts of five thousand dollars, in all twenty thousand dollars, have been paid, and no money has been transferred from one place to another.
Observe, now, the saving of time and interest: —
To have transported $5000 from Boston to Liverpool
would have ordinarily required........ 14 days.
The same amount from Liverpool to Boston .... 14 days.
The transport from Boston to New Orleans..... 6 days.
The same from New Orleans to Boston....... 6 days.
Saving of interest on $5000 for forty days, at six per cent, is $33.33. From this view of the matter, we see what an immense saving is made in the use of money, the expenses of transporting it, and the interest on the same, upon the thousands of millions of dollars required in the trade of the world.
In 1857, the United States imported.....$362,000,000
And exported cotton, breadstuffs, &c., $293,000,000;
gold, $69,000,000.......... 360,000,000
Leaving a nominal balance of . . . $2,000,000
Another thing in regard to exchange may be noticed; viz., England received that year of us (the United States) fifty-four millions more than we bought of her. The same year we bought of
Brazil more than sold to her........ $16,000,000
Spain, Cuba, &c. . ......... . . 29,000,000
* These transactions go through banking houses, as in the case of domestic exchanges.
These balances were mainly adjusted by drafts on England, by which our balances against England were discharged.
From facts like these, we can readily believe that at least nine-tenths of ail the trade of the world is carried on by bills of exchange. Such is the estimate made in England and this country, and there is reason to believe that it is approximately correct.