3. We will now show how the example of the nature of an "Exchange" we began with is exemplified in practice. Suppose two cities, London and Edinburgh. Suppose a trader A in London is debtor to a trader B in Edinburgh for a certain sum: suppose also that a trader B' in Edinburgh is debtor to A' in London for an equal sum. Then, in order to pay their debts, A would have to send the money to B: and B' would have to send an equal sum to A', thus causing two separate transmissions of bullion between London and Edinburgh, at some expense for freight and insurance.

Now this settlement of debts may be greatly facilitated if A in London goes and pays his debt to A', and buys from A' the debt due to him from B', and sends this debt by post to B in Edinburgh. B then goes to B' and demands payment from him of his debt due to A. Thus it is clear that the whole business has been settled by the transmission of the debt, instead of by the transmission of twice the amount in bullion, and each debtor has paid the debt to the creditor in the same town.

The whole transaction is called an "Exchange;" and it is clear that there must be a debtor and a creditor in each city. In the case given there are four parties: but it may be done by three parties. Suppose A in London has a debt due to him from B in Edinburgh, but at the same time owes B' an equal sum. To pay his debt to B' he has only to give him an order on B, and the accounts between the parties are adjusted without any transmission of bullion.

"When the debts between London and Edinburgh are equal, they may all be discharged by means of such an exchange, without sending any specie. The exchanges are then said to be at Par.

Supposing, however, that the debts are unequal, and Edinburgh wishes to send more money to London than it has to receive, it is clear that the demand for bills is greater than the supply: and as every one would rather send a bill than cash, as it is cheaper to do so, those who had to send money would bid against each other for the bills in the market as for any merchandise, and the price of them would rise, as a premium would have to be paid for a bill on London.

London is the great centre of commerce. It is the seat of Government to which the revenue is remitted from all parts of the country: the great families from all parts of the country go to reside there, and their incomes must be remitted to them there: hence there is always a much greater quantity of money seeking to flow from the country to London than the contrary: consequently the demand for bills on London in the country is greater than the supply; and, therefore, inland bills upon London are always at a premium.

This premium is computed by time. If a person wants a bill at sight on London he must pay 1s. per cent., or four days' interest. This is called the Time Par of Exchange, between Edinburgh and London. There is a similar premium on bills, or par of Exchange between all other towns in the country on London. This is called Inland exchange.

The exchange of the country upon London is said to be in favour of London, and against the country. But it must be observed that it is only unfavourable to the buyers of bills, or those who wish to send money. It is equally favourable to the sellers of bills or those who have to receive money.

It appears from this that when in any place the demand for bills is greater than the supply, the Exchanges are adverse to that place, because it has more money to pay than to receive: when the supply is greater than the demand, the Exchanges are favourable to it, because it has more money to receive than to pay.