7. Exchange operations consist in buying, selling, importing and exporting bullion, called "Bullion Operations," and buying and selling Bills, called "Banking Operations."

The calculations necessary to ascertain the profit and loss on such operations are given at length in various technical works on the subject, to which we must refer any of our readers who are practically concerned in such matters. Our object only is to examine the general causes which produce these movements of bullion which so sorely vex the banking and commercial world.

Exchange operations of both sorts may be either direct or indirect: that is they may take place directly between the two countries, or the final operations may be effected through the medium of one or more intermediate countries.

We have observed that for bills payable at sight the limits of the variations of the Exchanges cannot exceed the cost of transmitting bullion, which are called the specie points, because when they are reached, bullion may be expected to flow in or out.

When the bills however have a considerable time, such as three months or more, to run, before they are payable, causes may operate which may produce temporary fluctuations of the exchange considerably beyond these limits. These are chiefly -

1. The necessity that the holders of these long dated bills may have to realise them, even at a considerable sacrifice, to maintain their own position.

2. The doubtful position of the acceptors, or the general discredit of the place they are drawn upon.

3. The differing relative values of the precious metals which are the standards of payment at each place.

4. The respective Rates of Discount at each place. Now it may very often happen that from these combined causes, it may be considerably more profitable to possess bullion at one place than at another. Whenever this is the case, Exchange operators export bullion from one place to another for the sake of the profit. They create bills upon such a place. They draw upon their correspondents, discount their bills, and remit the proceeds to meet their drafts when due.

It used to be the dogma of many commercial writers that bullion is only exported to discharge a previous state of indebtedness, and that, consequently, a drain of bullion comes to a natural end when the indebtedness is discharged. But this is a most grievous error. The sufficient difference of profit in possessing bullion at two places will cause a fabrication of bills for the purpose of exporting bullion, without any previous indebtedness: and of course this will continue as long as this possibility of profit exists. Consequently unless this profit is destroyed, the drain of bullion will not cease. The effectual way of annihilating this profit is by raising the Rate of Discount.

It is manifest that in such operations, the difference of profit between the two places must exceed twice the cost of transmitting bullion, because in such cases, the cost of transmitting bullion both ways will fall on those who originate them.

Between countries in which there are no restraints on trade, the exchanges will never vary much except on some sudden emergency: but there are countries with which, owing to the prohibitive laws which infest their commercial codes, the exchanges are permanently unfavourable, because they will take nothing but bullion for their commodities. Russia is one of these countries, and hence if not modified by other circumstances, bills upon Russia would always be at a premium: but here again the effect of trafficking steps in, which always has a tendency to equalise prices. The merchant (as we may call him) who deals in bills acts upon the same principles as the dealer in any other commodities: he buys them where they are cheapest, and sells them where they are dearest. Hence he will try to buy up Russian bills cheaper in other exchanges, or debt markets, and sell them in the London debt market. On the other hand from the course of trade between England and Italy, the debt which Italy owes to England is usually greater than the contrary: hence Italian bills will usually be at a discount, or cheap, in the

London debt market. So the bill merchant buys them up cheap here, and sends them to some other market - Paris for instance - where they may be at a premium. By these means the price of bills is raised where they are cheapest and depressed where they are dearest: and the general result will be to melt all the differences between separate countries into one general result, so that the exchanges will not be favourable with one country and adverse with another, but they will be generally adverse or favourable with all the rest of the world.

Supposing, however, a merchant has to remit money to Paris, while the exchange with Paris is unfavourable to England, he may possibly discover a more advantageous way of remitting it than by buying a bill on Paris directly. Thus for instance, while bills on Paris are at a premium in London, those on Hamburg may be at a discount, and bills on Paris may be at a discount in Hamburg. So if the merchant buys a bill on Hamburg and sends it to his agent there, and directs him to purchase a bill on Paris with the proceeds, he may be able to discharge his debt in Paris at a less sum than he would have to pay for a bill on Paris in London. This circuitous way of settling his debt involves additional charges for brokerage, commission, postage, etc, but the effect of it is still further to equalise the exchanges between London and all other countries. This circuitous method is called the Arbitration of Exchanges, and the sum which is given in London for the ultimate price it realises in Paris is called its Arbitrated Price. When only three places are used in such an operation it is called Simple Arbitration. When more than three are employed, it is called Compound Arbitration. The practical rules for working out these results will be found in any technical book on the subject. But it is very evident that the quicker, safer, and cheaper the communication between countries becomes, the less room will there be for such operations, because the Limits of the variations of the real exchanges, which are the margin which renders such transactions possible, will constantly diminish.

The scale on which these indirect operations of exchange is carried on is immense, and peculiarly affects the London exchange. There is no exchange between places to and from which remittances have not constantly to be made. Hence, when such places trade, their accounts must be settled by means of drafts upon some third recognised centre. London is the banking centre of the world. From the enormous exports of England to all quarters of the globe, remittances have to be made to London from every part of the world. There is, therefore, a constant demand for bills upon London to discharge the debts incurred for these commodities. Hence although the exporters may send their goods to different countries, yet if they can draw upon London, their bills will be sure to find some purchasers somewhere to be remitted to England. Hence bills upon London bear a higher price, and meet with a readier sale than those upon other places.

One country A may import from another B less than she exports, and consequently a debt is due from A to B. Also B exports to another country C more than she imports: and consequently a debt is due from C to B, and A may discharge its debt to B by transferring to it its claim against C.

As many countries trade with one another between which there is no exchange, their claims are mutually adjusted by drafts upon London, the commercial centre. Hence the London exchange is the most important in the world, and requires the greatest attention to be paid to it.

There are Arbitrated prices of bullion in the same way as there are Arbitrated rates of exchange, but we need not enter into them here.