8. We must now consider the Real or Commercial Exchange, which arises out of the transactions between this and other countries. As the British Islands do not produce the precious metals to any extent worth considering, they are only to be obtained in this country by importation, and we must now consider the various sources from which they come, and the different causes that produce an inflow or outflow of them. They are to be treated in every other respect like any other foreign commodity, and are obtained by the same means as any other one which we require for domestic consumption, which is not a native product.

The trade in bullion may be divided into two distinct branches: the one where it is carried on directly with the countries in which gold and silver are native products, and the other with those countries which do not produce it, but which, like our own, have no means of supplying themselves with it except by foreign commerce.

I. With bullion-producing countries. - Before the discoveries in California and Australia the chief bullion-producing countries were Mexico and Peru. We need not specify others because the same principle applies to them all, and to describe them all would rather belong to a work on commerce generally. British merchants have establishments, or correspondents, in these countries, to whom they consign their goods, and their agents exchange them for bullion brought down by the natives, and which is collected in large quantities, and in former times, before the invention of steam navigation, used to be brought home by men-of-war for the sake of security. In these countries bullion is treated exactly like any other commodity, such as tea, or wool, or wine, or timber, and British goods of all kinds are exported to them for the express purpose of being exchanged for bullion to be remitted home. The limits of this exportation are precisely similar to the limits of the exportation of goods to any other country. It is clear that by the time the bullion reaches this country, it ought to be sufficient to cover the original price of the goods, and all the charges on them on their way out, as well as the agent's commission there, the charges for freight, insurance, and commission for bringing it home, and a fair mercantile profit over and above all these expenses. Unless it does that, the commerce is not profitable. The purchase of bullion then in these countries is a very simple affair, and requires no further notice.

II. With countries which do not produce bullion. The causes which produce an inflow or outflow of bullion, between this and other countries like it which do not produce bullion, are much more intricate. Taking this country as the centre, we may consider that the transmission of bullion to or from it is influenced by the seven following causes -

1. The balance of payments to be made to or by it.

2. By the state of the Foreign Exchanges.

3. By the state of the Currency.

4. By remittances made to this country, as the commercial centre of the world, to meet payments due to other countries.

5. By the political security of this and neighbouring countries.

6. By the state of the Money Market, or the comparative Rates of Interest in this and neighbouring countries.

7. By the free or prohibitive commercial tariffs of this and foreign countries, as they permit or forbid our manufactures to be imported into them.

There are, then, seven different causes which act upon the movements of bullion, and we see at once what a complicated subject the Foreign Exchanges is, because these seven different causes may be acting in all sorts of different ways, in conjunction or opposition; and of course it requires an intimate knowledge of commercial affairs at any particular time to know how they do operate. The inveterate error of mercantile opinion for a long time was, that there is only one cause which causes an export of bullion, namely a balance of payments to be made.

It appears that the simplest way of arriving at an accurate knowledge of the subject is to consider that the dealings between nation and nation are only made up of the aggregate of dealings between individuals of the nations, and we have only to consider the variety of methods in which an individual merchant may trade to have a comprehensive idea of the commerce of the nation.

Suppose a merchant of London sends £1,000 of goods to Bordeaux: by the time they arrive there the mere addition of freight, insurance, and other charges, would probably have raised their cost of production, or the expense of placing them there to £1,050. But as the merchant would never have sent them to that market, unless he expected to realise a good profit, we may assume that the market is favourable and that they sell for £1,500, and he would probably draw against his agent for £1,000. His correspondent at Bordeaux, instead of remitting the money to London, would prefer in ordinary circumstances to invest the proceeds of the goods in some native product, which would fetch a good price in London. The chief native product of that country is wine: so the agent would invest the proceeds of the goods, after deducting all charges for freight, commission, etc, in Bordeaux wine, and send it to England. This wine would probably be sold at a considerable profit in the English market, - say it would fetch £2,000: and after deducting all the charges of every description on the cargoes both ways, the difference would be the merchant's profit. In this case it is quite clear that no bullion would pass between the countries, and therefore there would be no question of exchanges.

The London merchant's agent at Bordeaux would be governed by several considerations as to whether he would remit specie or wine to London, and he would be guided chiefly by the state of the wine markets both at Bordeaux and London. For supposing the goods to be sold at a good profit at Bordeaux, he must next consider the price of the wine at Bordeaux, and also what it might be expected to fetch in London. If some great disaster had happened to the vines so that there was a failure of the crops, the price of wine at Bordeaux might rule excessively high; but at the same time there might be a large stock of wine in London, and the price might not be unusually high: so that if he were to purchase wine at Bordeaux, and send it to London, it might be a loss. In such a case as this, if there were no other native product to send, he would find it more advantageous to remit specie, whatever the goods would sell for, and then the exchange would be in favour of London: but before the London merchant could reckon his profits he would have to deduct the freight, insurance, etc, on the specie.