5. Supposing that while the Exchange between any two places - say London and Paris - is in a state of equilibrium, that is, when the demand and supply of bills in each city is exactly equal, so that they would each have to receive and send the same sum, it should happen that from any cause whatever, no matter what, there should be a desire on any particular day to send more money from one side than it has to receive. Suppose more money has to be sent from London than it has to receive: then those merchants who want to remit money from London will strive to buy bills on Paris in the London market. But as the demand is greater than the supply, a competition will spring up to buy the bills which are in the market, and hence the price of them will rise. It is their duty to place the bullion in Paris at their own expense and risk, and consequently, they would rather give somewhat more for a bill than its par price, to save themselves that expense. But they will not give more than the cost of transmitting the bullion itself, because, if the price rose higher than that, they would send the money. Thus when the Exchange in London rises against London, or in the case of Paris, falls below par, it shows that London wishes to send to Paris more than it has to receive, and the exchange is said to be against London: but it is clear that it cannot continue at a greater rate against London than the cost of transmitting bullion. Hence this is manifestly a superior limit to the variation of the Real Exchange.

But the reverse case may also happen. The supply of bills in London on Paris may exceed the demand. The price of them will therefore manifestly fall. But for similar reasons, the cost of transmitting bullion will be an inferior limit below which the price will not fall.

We thus see that the state of the Exchanges arising out of the cross remittances of money is a simple example of the general law of supply and demand: with the limitation that the variation in the Rates of Exchange cannot exceed a certain definite sum, namely, twice the cost of sending bullion from one place to the other.

These Limits of the Rate of Exchange are called specie points, because when the Exchanges reach them, bullion may be expected to flow in, or out, as the case may be.

It is to be observed, however, that these limits of the variations of the Exchange, or Specie points only apply to bills payable at once, and to long periods. During short periods, and for bills which have some time to run, temporary causes may produce fluctuations in the Exchanges greatly exceeding these limits.