EXCHANGE.

1. Exchange is the mutual and voluntary transfer of the right of property

held by different persons. This implies, (_a_) the existence of the

_right of property_; (_b_) that the transfer must be _mutual_, otherwise

there is no exchange; (_c_) that it be _voluntary_, otherwise it would be

robbery.

2. The principles that form the basis of exchange are the same as

those implied in the great law of association and individuality;

namely, those which give rise to the combination and division of labor.

There is usually some one kind of labor, or at most a few kinds, for

which each individual is competent. But the variety of occupations so

nearly corresponds with the variety of aptitudes in every well-ordered

community, that each may, with little effort, find the calling to which

he is suited.

But while each individual is thus limited in his productive capabilities,

his claims and wants are nearly limitless. He is in need of a thousand

commodities, only a very few of which he can produce. He depends for

the remainder of these upon his fellow-men. On the other hand, he can

produce a thousand times as much of the few kinds of commodities to

which he devotes himself, as he himself needs. These he transfers to his

fellow-men, taking in return the surplus of their several products. This

is exchange, or commerce. It is implied in the very constitution of man.

Association is an imperative condition of humanity.

3. A distinction is sometimes made between _commerce_ and _trade_—a wise

distinction, as it seems to me, though observed by but few writers. The

former is the _object_ to be accomplished; the latter is the _agency_

through which it is accomplished. Thus, a farmer has wheat, butter,

eggs, poultry, wool, etc., which he wishes to exchange for cloth, sugar,

agricultural implements, boots and shoes, and a hundred other articles.

He can not go to the several producers of these, carrying his own

products to exchange for them, except at immense disadvantage. Hence

arises the necessity for the trader, or merchant. Trade and commerce

have sometimes been represented as mutually antagonistic. This is true

only to a certain extent. The great economical point to be guarded is

to have no more traders than are necessary to make the exchanges. When

the industrial and commercial conditions of a country are such that the

producers and consumers, who are the real exchangers, are placed and kept

at a great distance from each other, so that they can not combine with

each other except through the agency of a great number of middle-men, the

conditions are highly detrimental to the interests of the parties chiefly

concerned. Beyond a certain point, the greater the power of trade, the

worse it is for commerce. It is nevertheless true that there are certain

natural obstacles to direct commerce which can be surmounted only by some

kind of intermediate agency; and this makes the trader necessary. In this

respect, and to this extent, trade is an aid to commerce. Yet commerce

should be as direct as possible. To this end it is desirable that the

greatest number of commodities for which productive facilities exist,

should be produced in the same community.

4. The general law of exchange is _value for value_. This will be obvious

if we recur to one of our statements concerning the nature of value,

namely, that is the quantity of one commodity that may be equitably

exchanged for a given quantity of another. It will be still more obvious

if we recall the complete definition: value is our estimate of the

sacrifice requisite to secure possession of a desired object. Thus, if it

require the labor of one day to produce a pair of shoes, and the labor

also of a day to produce three bushels of oats, then the rule of exchange

would be three bushels of oats for a pair of shoes, because the required

labor in the one case is precisely equal to that in the other.

This is the fundamental law, but it is modified in its operation by

certain other facts and principles. Chief among these is the law of

_supply and demand_. By supply is meant the quantity of any commodity

which is in the market. Demand signifies the quantity which is desired at

a given price. The definitions are sometimes erroneously given of supply

as the quantity which exists, and demand as the quantity desired. But a

man may offer for sale a load of wheat, provided the price is a dollar a

bushel, but withdraw it from the market if the price is but ninety cents.

A thousand people in a certain town may desire diamond necklaces, but not

half a dozen may be able to purchase them. Hence supply is all that is

offered in the market; and demand is desire with ability to purchase.

Demand and supply affect prices in this way. Suppose a community has been

exclusively using wood for fuel, and their wood can be had at a certain

price. After a time a coal mine is discovered in the vicinity, and coal

can be furnished much cheaper than wood. This would lessen the demand for

wood. As there would be the same amount for sale as before, the seller

would be in competition, and the price would fall. So if for any reason

before the discovery of the coal the supply of wood had been diminished

one half, the demand being the same, the price would rise. Thus we have

the general principle that other things being equal, the greater the

supply, the less the price; the smaller the supply, the greater the

price; the greater the demand, the greater the price; and the smaller the

demand, the less the price. In other words, the price varies directly as

the demand, and inversely as the supply. In general price varies as the

cost of production plus or minus the effect of supply and demand. These

principles are affected again in many ways which we can not here explain.

Yet the variations are always temporary, and the price or market value

always tends to seek the level of cost of production.

5. Trade has been spoken of as an agent of exchange. An _instrument_ also

is needed. The primitive method of exchange was by barter. That is, by

giving the commodity one produces for that which one desires to possess.

But this was early found inconvenient. The man who made shoes and wished

to exchange some of them for a coat, would not readily find a coat-maker

in want of shoes; or if he should, the latter very likely would not want

just so many pairs of shoes as would be equal in value to the coat. All

other exchanges might be at a similar disadvantage. What is needed is a

commodity which will be a _medium_ of exchange—which every one will be

willing to receive for any commodity which he has for sale, and which

will command anything which he wishes to buy. Such a commodity is usually

the main element in the machinery of exchange, and is what constitutes

_money_.

This instrument in order to meet the want, it is generally believed,

must have the following characteristics: 1. Value in the material of

which it is made. 2. Uniformity of value throughout the world. 3. Much

value in small bulk. 4. Approximate constancy of value. 5. Not readily

destructible. 6. Divisibility into small portions which are capable of

being reunited. 7. Of universal use. 8. Capable of receiving stamps and

marks. Most of these properties are found in gold and silver, if not to

such an extent as has been claimed for them, at least so far that they

have been the basis of the money of the civilized world.

6. But supplementing in a certain way, and representing these, the

instrument of exchange comprises also the large element of _credit_.

This consists chiefly of book accounts, promissory notes, bank notes,

government notes, bank deposits, checks, drafts, bills of exchange,

stocks and bonds. One of the great agencies in modern commerce by which

credit is made effectual as a part of the mechanism of exchange is

that of _banks_. Banks are institutions which serve to abbreviate and

facilitate the business of exchange and to extend and render available

the credit of the community.

There are four kinds of banks, namely: savings banks, banks of deposit,

banks of circulation and issue, and banks of discount. In our modern

banking system the last three are generally found in combination, that

is, each bank exercises all the functions implied.

A savings bank is an institution in which small sums of money are

deposited from time to time as they accumulate in the hands of persons

of moderate incomes. The depositors are credited with these amounts,

and receive a certain, usually not very large, rate of interest in any

case, and an additional amount contingently. The bank loans the money

thus deposited in large sums to trustworthy persons who can furnish good

security, the rate of interest being somewhat higher than that paid to

the depositor.

The benefit of such an institution is two fold. In the first place there

are many persons who have small sums of money which they desire to be

earning something in some safe place. The amount is too small to be

loaned to advantage. Such persons are not likely to know how, even if

the sums at their disposal were sufficient, to find the best investment,

or to determine concerning the security offered. But put into the hands

of men who make this their business, under rules devised by the best

financial talent of the community, and who can combine these small

sums and invest them to the best advantage, it is made both safe and

profitable for the small capitalists.

In the second place there are many persons who wish to unite their labor

and skill with capital in some productive enterprise, and having no

capital of their own, desire to borrow. They do not know the persons who

have money to loan. The savings bank affords them an opportunity and

gives them an advantage which they would not otherwise have. It is a

benefit first to those who have some surplus, but are unable to loan it

to advantage; secondly to those who are in want of capital, but do not

know where to find it.

A _bank of deposit_ grows out of the necessities of commerce in a

community where much business is transacted. All persons engaged in trade

will find from time to time large or smaller accumulations of money in

their hands which it is not safe without considerable expense, to keep by

them. Hence the custom of depositing these for safe keeping in the bank.

Usually no interest is paid as the money may be withdrawn any time at the

will of the depositor. It was early found that only a small proportion

of these deposits were likely to be withdrawn at any one time; hence a

considerable proportion of them could be loaned on short time, and thus

the bank would in this way receive compensation for its care, without

expense to the depositors. In this way, too, the capital of the community

could be kept more fully employed.

But the credit factor in the deposit system soon came to have a much

wider scope than is here indicated. Instead of each depositor going to

the bank and drawing his money as he needs it, he now gives an order or

_check_ on the bank to any man to whom he may have occasion to make a

payment. In many cases the receiver of such a check also has deposits at

the same bank. In such a case he sends in the check to be deposited with

his cash for the day. The amount is debited to the drawer of the check,

and credited to the depositor of it, and thus by a simple _transfer_ of

_credit_ much business is done without the intervention of any money.

This expands into a great and complicated system of exchange between

individuals doing business at different banks, by banks in different

cities, and by traders in remote nations. Goods are sold in one locality

and paid for in the goods of another locality by means of drafts, bills

of exchange, etc., meeting and canceling one another, so that very little

money is transferred from point to point.

The function of _discount and loan_, as has been intimated, is in

modern banking usually combined with that of _deposit_, as also that of

_circulation or issue_. When the capital of a bank is paid in by the

stockholders, and the officers elected, it is then ready for business

under regulations imposed by its charter. There are two ways in which

the public is accommodated. First, when a wholesale city merchant sells

a bill of goods to a country retail merchant, it is frequently the case

that the former makes out his bill, which the latter accepts, promising

to pay in thirty, sixty or ninety days. This accepted bill the wholesale

merchant carries to his bank, where it is received with his endorsement,

and the cash, less the interest for the given time, is paid him or placed

to his credit. This is _discounting_ a bill. A loan is sometimes made by

a borrower’s giving his own note endorsed by some reliable person, and

payable in some brief time as above. Sometimes the note is discounted; at

other times the interest is paid when the note is taken up.

The function of _circulation_ is exercised by the issuing of bank-notes

to be circulated as money. When a bank is instituted the stockholders are

required to pay in their respective shares in metallic or lawful money.

But as the borrower would find coin most inconvenient to carry about, the

device arose of substituting notes of the bank, payable on demand, thus

leaving the specie in the bank. It was further soon observed that only

a very small proportion of these notes were likely to be called for at

any one time. Hence a large part of the specie could be used for other

purposes instead of being kept idle in the vaults. Under the national

bank system now in operation the capital of the bank may be largely

invested in United States bonds which are retained in the government

treasury, but on which the bank draws the usual interest. The bills of

the bank are then guaranteed by the government, so that there is never

any loss to the holder of the bills, even if the bank fails.