The Price of Foreign Exchange

During the seventeenth and eighteenth centuries setting exchange rates, and particularly setting the price of ‘forward exchange’ contracts, was an inexact science, if not a capricious matter, based on subjective judgements about a range of relevant factors. It was also a very opaque business that threatened to ramp up charges upon remitters. Even in the present day The Economist magazine, referring to foreign remitting, stated baldly that ‘Margins are so fat because pricing is far from transparent.’1 Given that bankers 300 years ago operated under far less scrutiny and regulation from the state, and the single most important determiners of prevailing exchange rates were the secretive currency brokers with their unrivalled knowledge of financial flows, it is hardly surprising that exchange prices could be extortionate and that margins for Louis XIV’s bankers were at times morbidly obese. A lot of the margin was necessary to provide protection against severe risks or as compensation for losses — supposed losses, at any rate. But large profits do seem to have been made. Despite the limited evidence still available, the pages ahead will try to explain why foreign remitting cost the Sun King so much during the War of the Spanish Succession. Many places in Europe published exchange rates, in some cities on a daily basis, but what really mattered for remitters — and for the French state — was not the published trading price of currencies but the settlement price that was agreed upon and often raised in the course of the remitting process.