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Given an invoice amounting to $473 64 cents in gold, to find the value in sterling of.
or ninety-seven pounds six shillings and sixpence and three sixteenths of a penny.
Real par of exchange is the actual existing proportion between supply and demand, and this is regulated by the state of trade between the two countries.
When the value of imports from England, in a given period, is equal to the value of exports from America in the same period, trade is balanced and bills drawn in each country upon the other would be equal in amount, or in other words at Par.
Bills of exchange facilitate the settlement of debts between persons residing at a distance from each other, and avoid the risk as also the expense of remitting actual coin. This may be explained as follows:—
Smith in New York owes Brown in London for merchandize, and Jones in Liverpool owes Robinson in New York for corn. Brown in London draws on Smith in New York, sells his bill to Jones in Liverpool for cash, who transmits it to Robinson in New York, who receives the cash from Smith, thus dispensing with a shipment of money.
If, however, imports in America exceed the exports to England there would be more money payable at the time by persons in America to others in England than there would be payable by those in England to those in America, hence a demand would arise for bills of exchange on England, and, being scarce, those who want them would have to pay a premium for the accommodation. Exchange would, therefore, be against America.
In England, on the other hand, there would be more people ready to draw such bills of exchange than customers in want of them, and those who dispose of them would have to do so at a discount. Exchange, therefore, would be in favour of England.
A bad harvest in England would necessitate our importing wheat to a large amount from America, our imports of that commodity would then exceed our exports of merchandize, bills of exchange would at once become scarce in England, and in America would be at a discount, and any overplus would have to be remitted to America in actual coin at a risk which is inconvenient, hazardous, and expensive, as it would cost fully 1 per cent. to 2 per cent. to an ordinary shipper to pay for transmission, insurance, &c. of specie.
Thus it will be seen that the accommodation of a remittance in the form of a bill of exchange actually means a saving of some 2 per cent. independent of the trouble of shipping. It will also be observed that the fluctuation in the price of bills of exchange seldom exceed this margin of 2 per cent. above or below par of $4·86·65, unless under very extraordinary circumstances.
To ship gold to England to yield a profit equal to the cost of freight, &c., exchange would have to advance to about 11 per cent. == 4.95 50, being 2 per cent. above par. When exchange is at 9 per cent. it is at par value; if higher, at a premium; if lower, at a discount. It is always calculated on a gold basis, and is now generally quoted in our daily newspapers in dollars instead of, as hitherto, by the premium.
About 9 per cent. premium on $4 44 4, and about 4s. 1d. to a dollar. This is some half per cent. below par, which may be attributed to the necessity of England importing more wheat than she is exporting merchandize, at the present moment.
The object of the following table is to approximate calculations of exchange to such price as may be found useful for business purposes ::
9% Premium on old par of 4444 is $4.86·65 to £1 stg. or 4135% to $1.00 (This is the Custom House and legal value of a Sovereign in the United States.)
To facilitate general calculations the dollar may be taken at the value of 4s. 2d. or 8 per cent. premium on old par, this is about gths of a penny above its actual value as quoted in the "Times," 28th February 1876, and referred to also as a basis of calculations on page 77 of this work.
SUBJECT INDEX OF CONTRIBUTIONS BY BRITISH EXHIBITORS TO THE PHILADELPHIA INTERNATIONAL EXHIBITION OF 1876, TOGETHER WITH THE NAMES AND ADDRESSES OF THE MANUFACTURERS AND PRODUCERS.