_My dear Sir:_
_Will you kindly pay to the messenger from the ---- Bank who will call to-morrow the sum of three hundred and ninety-seven dollars and charge to my account?_
_Yours, very truly,_ _David Grieve._
[Illustration: A sight draft developed from the above letter.]
Commercial usage, however, recognises a particular form in which this letter is to be written, and the address of the person for whom it is intended is usually written at the lower left-hand corner instead of on an envelope. Commercial drafts usually reach the persons upon whom they are drawn through the medium of the banks rather than directly by mail. Let us illustrate. Suppose that A of Chicago owes B of Buffalo $200, and B desires to collect the amount by means of a draft. He fills in a blank draft, signs it, and addresses it on the lower left-hand corner to A. Instead of sending it by mail he takes it to his bank--that is, deposits it for collection. It will reach a Chicago bank in about the same way that cheques for collection go from one place to another. A messenger from the Chicago bank will carry the draft to A's office and present it for payment or for acceptance. If it is a _sight_ draft--that is, a draft payable when A sees it--he may give cash for it at once and take the draft as his receipt. If he has not the money convenient he may write across the face "Accepted, payable at (his) Bank," as in the illustration. It will then reach his bank and be paid as his personal cheque would be, and should be entered in his cheque-book. Banks usually give one day upon sight drafts. The draft will not be presented a second time, but will be held at the bank until the close of the banking hours the next day, where A can call to pay if he chooses. Leniency in the matter of time will depend largely upon B's instructions and the bank's attitude toward A. If the draft is a time draft--that is, if B gives A time, a certain number of days, in which to pay it--A, if he wishes to pay the draft, _accepts_ it. He does this by writing the word _accepted_ with the date and his signature across the face of the draft. He may make it payable at his bank as he would a note, if he so desires. He then returns the draft to the messenger, and if the time is long the draft is returned to B; if only a few days, the bank holds it for collection.
[Illustration: No. 1. A sight draft.]
[Illustration: No. 2. An accepted ten-day sight draft.]
[Illustration: No. 3. An accepted sight draft.]
[Illustration: No. 4. A time draft.]
An accepted draft is really a promissory note, though it is more often called an _acceptance_. When a man pays or accepts a draft he is said to _honour_ it. In the foregoing illustration A is not obliged either to pay or to accept the draft. It is not binding upon him any more than a letter would be. He can refuse payment just as easily and as readily as he could decline to pay a collector who calls for payment of a bill. Of course, if a man habitually refuses to honour legitimate drafts it may injure his credit with banks and business houses.
It is a very common thing to collect distant accounts by means of commercial drafts. A debtor is more likely to meet--that is, _to pay_--a draft than he is to reply to a letter and inclose his cheque.
It is really more convenient, and safer, too, for there is some risk in sending personal cheques through the mail. There are some houses that make all their payments by cheques, while there are others which prefer to have their creditors at a distance draw on them for the amounts due.
If a business man who has been accustomed to honour drafts continues for a period to dishonour them, the banks through which the drafts pass naturally conclude that he is unable to meet his liabilities.
Some houses deposit their drafts for collection in their home banks, while others have a custom of sending them direct to some bank in or near the place where the debtor resides. If the place is a very small one the collection is sometimes made through one of the express companies.
When goods are sold for distinct periods of credit, and it is generally understood that maturing accounts are subject to sight drafts, there should be no need of notifying the debtor in advance.
Some houses, however, make a general custom of sending notices ten days in advance, stating that a draft will be drawn if cheque is not received in the meantime.
Notice the illustrations. The protest notice at the left of Nos. 1, 2, and 4 is intended for the bank presenting the draft for payment. The reason for this will be fully explained in our lesson on protested paper. (See LESSON XIII.) No. 2 shows an accepted draft payable to the order of a bank in the city upon which it is drawn. No. 1 is payable to the order of a bank in the city of the drawer. No. 3 is a sight draft payable to the order of a bank and accepted payable at a bank.
No. 4 is a time draft payable to "_ourselves_"--that is, the Pennsylvania Steel Company.
Drafts are often discounted at banks before acceptance where the credit of the drawer is good. In such cases the drafts which are dishonoured are charged up against the drawer's account.
X. FOREIGN EXCHANGE
It is quite in order that we should follow lessons on the clearing-house and commercial drafts with a lesson on foreign exchange.
We learned in the last lesson that commercial drafts are made use of to facilitate the collection of accounts. They are simply formal demands for the payment of legitimate debts. When these formal demands are made upon foreign debtors they are called bills of exchange; and the process of buying and selling these drafts, the drafts themselves, and the fluctuations in price, all are included in the general name _exchange_.
[Illustration: Foreign exchange.]
To illustrate the principles of exchange let us suppose that the following transactions have occurred:
1. C of Boston has sold goods, 2000, to H of Hamburg.
2. D of Chicago has sold goods, 5000, to F of Glasgow.
3. M of Chicago has sold goods, 3000, to K of London.
4. E of Philadelphia has sold goods, 6000, to R of Paris.
5. P of New York has sold goods, 1000, to G of Paris.
C draws on H for 2000, sells the draft to a banking-house in Boston; they send to Bank A of New York, and the New York bank to their London correspondent, say Bank B, with instructions to collect from Hamburg.
D draws in a similar way on F. E draws on R, and P on G. Suppose that M instead of drawing on K receives a draft drawn by Bank B of London on Bank A of New York, payable to M's order.
AMERICA has sold goods worth 17,000 to EUROPE.
EUROPE . . . . . . owes 17,000 to . . . . . . AMERICA But B has paid A 3000.
--------------- B . . . . . . therefore owes 14,000 to . . . . . . A
Now it will cost B a considerable sum of money to ship 14,000 in gold to A, for all exchanges between Europe and America are payable in gold. Suppose that S of New York owes T of London 14,000, and T draws on S and takes the draft to Bank B in London and offers it for sale.
Will B offer more or less than 14,000 for the bill of exchange or draft? He will offer more. It will be cheaper for him to pay a premium for the draft than to ship gold, for he can send this draft to Bank A to pay his indebtedness, and A can collect from S.
In the money market in New York there is a constant supply of exchanges (drafts) on London, and in London a constant supply of exchanges on New York.
Experience has shown that at all times the number of persons in Europe indebted to American business houses is about (though of course not actually) the same as the number of persons in America indebted to European houses. Hence when A of New York wishes to make a payment to B of London he does not send the actual money, but goes into the market--that is, to a banker doing a foreign business--and buys a draft, called a bill of exchange, which is in reality the banker's order on his London correspondent, asking the latter to pay the money to the person named. It may be that about the same time some London merchant who owes money in New York goes to the very same London banker and buys a draft on the New York bank. In this way the one draft cancels the other, and when there is a difference at the end of the week or month the actual gold is sent across to balance the account.
These exchanges have a sort of commodity value, and like all commodities, depend upon the law of supply and demand. When gold is being shipped abroad we say that the balance of trade is against us--that is, we are buying more from Europe than Europe is buying from us, and the gold is shipped to pay the balance or difference.
The _par_ of the currency of any two countries means, among merchants, the equivalency of a certain amount of the (coin) currency of the one in the (coin) currency of the other, supposing the currencies of both to be of the precise weight and purity fixed by the respective mints.
The par of exchange between Great Britain and the United States is 4.86-2/3; that is, 1 sterling is worth $4.86-2/3. Exchange is quoted daily in New York and other city papers at 4.87, 4.88, 4.88-1/2, etc., for sight bills and at a higher rate for sixty-day bills. Business men who are accustomed to watching fluctuations in exchange rates use the quotations as a sort of barometer to foretell trade conditions. The imports and exports of bullion (uncoined gold) are the real test of exchange. If bullion is stationary, flowing neither into nor out of a country, its exchanges may be truly said to be at par; and on the other hand, if bullion is being exported from a country, it is a proof that the exchange is against it; and conversely if there be large importations.
The cost of conveying bullion from one country to another forms the limit within which the rise and fall of the _real_ exchange between them must be confined. If, for illustration, a New York merchant owes a debt in London and exchange costs him, say, two per cent., and the cost of shipping the gold is only one per cent., it will be to his advantage to pay the debt by sending the actual coin across. A favourable _real_ exchange operates as a duty on exportation and as a bounty on importation.
[Illustration: A bill of exchange (private).]
It is to the interest of merchants or bankers who deal in foreign bills to buy them where they are the cheapest and to sell them where they are the dearest. For this reason it might often be an advantage for a New York merchant to buy a bill on London to pay a debt in Paris.
[Illustration: A bill of exchange (banker's).]
Two illustrations of bills of exchange are given in this lesson. Each is drawn in duplicate. The original is sold or sent abroad, while the duplicate is preserved as a safeguard against the loss of the original. When one is paid the other is of no value. Notice the similarity between bills of exchange as shown here and commercial drafts as shown in our last lesson.
The first form shows a draft made by a coal company upon a steamship company to pay for coal supplied to a particular steamer. Suppose that the steamship company has a contract with Robert Hare Powel & Co. of Philadelphia to supply coal to their steamers. The steamer _Cardiff_, when in port at Philadelphia, is supplied; the bill is certified to by the engineer; the master (captain) of the vessel signs Powel & Co.'s draft (and in doing this really makes it the captain's draft); the bill is receipted. Now Powel & Co. sell this exchange (draft) on London to a broker or banker doing a foreign business. It is forwarded to London and presented in due time at the office of the Wales Navigation Company for payment.
The second form shows a bill of exchange drawn by a Philadelphia banking house upon a London banking house and payable to the order of the firm buying the draft. C. H. Bannerman & Co. will send this bill (the original) to pay an account in Europe. The first form bears the same relation to a commercial draft that the second does to a cashier's cheque.
[Illustration: First page of a letter of credit.]
XI. LETTERS OF CREDIT
The usual instruments of credit by means of which travellers abroad draw upon their deposits at home are known as CIRCULAR LETTERS OF CREDIT. These forms of credit are of such common use that every one should be familiar with their form. We reproduce here a facsimile of the first and second pages of a circular letter for 1000, copied with slight change of names from an actual instrument. The first page shows the credit proper authorising the various correspondents of the bank issuing it to pay the holder, whose signature is given on its face, money to the extent of 1000. The names of the banks who are authorised to advance money upon the letter are usually printed upon the third and fourth pages, though letters issued by well-known banking houses are usually recognised by any banking house to which they are presented.
The second illustration shows how the holder of a particular letter availed himself of its advantages. It gives the names of the banks to which he presented his letter, and the amounts paid by each.