The basis of all exchanges between countries is the so-called par of exchange, by which is meant the relative amounts of pure metal contained in their respective units of value. For example, the par of exchange between the United States and England is $4.866565 to one pound, since our dollar contains 23.22 grains of pure gold, and the English sovereign or pound sterling 113.0016 grains. Our par of exchange with Germany is 23.82 cents to one mark, the German mark containing 5.5312 grains of pure gold, and our par of exchange with France is 19.294 cents to one franc, there being 4.4802 grains of pure gold in the French unit. The par of exchange thus gives us the exact equivalence of one currency in terms of another, and is the basis upon which international contracts are made and the value of bills of exchange reckoned. We may illustrate its significance as follows: -

A New York commission merchant is directed to sell a cargo of wheat in Liverpool, and his principal informs him that he must receive at least one dollar a bushel net for it. How much in pounds sterling must he charge the English purchaser in order to realize that price in New York? Manifestly he must base his calculation upon the par of exchange between the two countries, though he will be obliged to take other matters into consideration as well. A New York importer orders woollens from London and agrees to pay therefor one thousand pounds. How much does that mean in the money of the United States, the medium with which he must purchase his London bill and in which he will be paid for these goods by those who buy them? Here again the par of exchange must be the starting point in the calculation, though the discount or premium on London bills will also need to be taken into consideration. In the previous chapter we explained the influence of the cost of transporting the precious metals and of demand and supply upon the value of bills of exchange. We must now note the fact that the price of a foreign bill is said to be at par when it brings the exact equivalent of its value as determined by the par of exchange with the country upon which it is drawn. If it brings less than this amount, it is said to be at a discount; if more, it is said to be at a premium.

In the case of transactions between countries having different standards of value, no par of exchange in the proper sense of that term can exist, because their units are defined in terms of different metals. For example, in exchanges between the United States and Mexico it is necessary to determine how much silver is the equivalent of a given amount of American gold, since silver is the standard in Mexico and gold in the United States.

The basis of exchange calculations in such a case must be the relative value of the two metals at the date in question, as well as the weight of the units as defined by law. If one of the countries has an inconvertible paper currency, calculations based upon the regular par of exchange must be modified to the extent that the paper is depreciated