BILL OF EXCHANGE, IN PRACTICE. Stripped of its legal technicalities, a bill is an unconditional order in writing, signed by the person giving it (the drawer), requiring the person to whom it is addressed (the drawee) to pay on demand or at some fixed time a given sum of money to, or to the order of, a named person (the payee), or to bearer.
A cheque is a particular, though very common, form of bill. The bank is, and must be, the drawee, and it must be payable on demand, and without needing the acceptance of the bank. Otherwise, it has all the functions of a bill.
The first step in the bill's life is for Mr. Robinson to get Mr. Smith to accept it. This is done by presenting it to Mr. Smith, who writes across it the words shown in the example, not only accepting it, but also "domiciling" it, that is, saying where the bill must be presented for payment—in this case at Mr. Smith's bankers. The date of the draft is important, for it is from this that the three months run. In this instance, the bill would become payable on April 13, 1928, as allowance must be made for the three traditional and customary "days of grace." Henceforward Mr. Smith is called "the acceptor." Mr. Robinson now gets the bill back, and he can do one of three things. He can keep it until "maturity," i.e., April 13, and then endorse it, take it round to Mr. Smith's bank, present it, and get his cash. Or he can endorse it in blank (i.e., sign his name across the back, thereby making it payable to bearer) and hand it to his own bank, say Lloyds Bank, "for collection." Then his bank does the rest, and credits him with the II oo, so soon as it receives it. In both these cases, Mr. Smith has to wait for his money until April 13, so he may adopt the third alternative, and discount the bill, i.e., sell it at his bank.
In this case he endorses it "to the order of Lloyds Bank," and sells it to Lloyds Bank for what he can get. Naturally he will not get f i oo, for the bank will charge him a sum corresponding : (a) to the time they are out of their money, and (b) to the risk they are running of the bill not being met. Say first-class bills at that time are subject to a discount rate of The bank might add another 2%, to allow for the fact that Messrs. Smith and Robinson are not so sound or so wealthy as Messrs. Rothschild or Baring, making in all. f6 os. od. per cent. per annum equals Li i os. 7d. per cent. for the 93 days from Jan. i i to April 13. So, for his bill for f i oo, the bank will only pay him f 98 9s. Sd.
The bill is now the property of Lloyds Bank, and before pre senting it, they must endorse it in their turn. Theoretically, they too could sell it before maturity, but British banks make a practice of never selling their own bills. Foreign banks, however, do sell bills out of their portfolio, and it is not uncommon for a bill, on maturity, to be found to have half -a-dozen endorsements on it, showing the people who have bought and sold it in the meantime.
Now to see the uses of a bill.
(I) From the drawer's standpoint, it enables him to get a definite dated promise to pay out of the drawee, and also to give the drawee the credit he needs and at the same time be able to get spot cash himself, if he wants it.
(2) From the drawee's or acceptor's standpoint, it enables him to get credit, even though the drawer wants spot cash.
(3) From the banker's standpoint, it provides him with an ideal means of employing his liquid funds. We have seen a bill can be transferred by endorsement, and so is as good as currency. In many ways, it is better than currency. It earns interest ; it matures at a definite and early date; and the more endorsements it acquires, the safer it becomes.
The reason for this is that if the acceptor cannot pay, the "holder," i.e., the man actually presenting it, can come down on each endorser in turn and finally on the drawer. Everyone whose name is on the bill may find himself liable, and so the more names there are on it, the better the security.
This is the simple case of the inland bill, which, by 1928, was nearly as dead as the dodo.
The obvious problem arises from the fact that the exporter wants to be paid on shipping the goods, while the importer does not want to pay until he receives the goods. To bridge the interval, the 6o or 90 days' bill is the obvious medium, while, in the days of sailing ships and slow voyages, a six months' bill was often required.
Now, when a cargo arrives, the importer has to establish his title to it. He does that by presenting the set of documents, such as the invoice, the bill of lading, insurance policy, certificate of origin, etc., etc., which together authorize the ship's captain to hand over the goods. This the exporter knows, so that, if he is not sure of his man, he does not send him the documents direct, but stamps his bill (D.A.) and forwards the documents with the bill to his collecting agent, probably his bank. His bank sends all these papers to its correspondent in the importer's town, and he, knowing that (D.A.) means "documents against acceptance," makes the importer accept the bill, before handing over the documents. So the importer must accept the bill before he can get the goods.
The bill can be stamped D.P. Then the importer must pay the bill before the documents are handed over. Of course, he can pay all or part of the bill before maturity, and if so, he is allowed a rebate, as he has paid before the due date.
Above is an example of a bill. The drawer has arranged with his bank to discount it for him, and so, to save an endorse ment, has drawn it to the order of his bank. The bank credits the drawee at once, endorses the bill, sends it with the documents to its correspondent for acceptance, and instructs its correspondent either to hold it until maturity, or to discount it.
To avoid the risk of loss in transmission, bills and documents are often prepared in triplicate, each set of papers being sent separately. This explains the term "First of Exchange." The actual cargo to which the transaction relates is stated on the bill. This shows everyone concerned that it is a genuine transaction, and that, if things go wrong, the holder may be landed with a cargo of steel sheets to dispose of.
Bills to which documents are attached are called "documentary hills." When the documents are detached and handed to the importer, they become "clean bills." Accepting Houses.—The next device described was evolved to meet the case of an importer who was not known to the ex porter. Here he can arrange with some bank or "accepting house," of world-wide repute, to accept the bill for him. Thus Smith, Jones & Co., may be quite a sound concern, but not known in London, or to Mr. W. Robinson. Their own bank, the Indian Chartered Bank, with offices in Bombay and London. or perhaps a big London accepting house, such as Lazards or Barings, may know all about Smith, Jones & Co., and be perfectly satisfied with them, So Smith, Jones pay their bank a small commissi,on, say -1-%, to accept or endorse the bill on their behalf. The bank may insist upon having the documents or allow them to go direct to Smith, Jones, but in any case, Mr. Robinson is now able to draw a first-class bill, which he can discount at the finest or lowest rate.
Every bank carries in its balance sheet an item "acceptances, and endorsements on behalf of customers," which represents its engagements in this respect.
Banker's Credits.—This introduces the next device, namely that of banker's credits. This is a very technical question and can be dealt with only briefly. If an importer arranges for his bank to open a credit on his behalf, it means that the bank will accept the bills drawn on the importer up to the limit and in accordance with the terms of the credit. Credits take many forms, some of which are sketched below.
Confirmed Banker's Credit.—This is the form of credit described above. Once granted, it cannot be revoked either by the importer or the bank.
Unconfirmed Banker's Credit.—This is less binding. The banker says only that he may accept the bills, and while, in general, he does so, he is not absolutely bound.
Documentary Credit. —Here the bank engages to advance the money on the bills, and the importer is left to accept them himself. The documents are retained by the bank as security, and the bill, though accepted by the importer, is paid direct by the bank.
A credit may be opened in respect of a definite shipment, and expires when the transaction is completed. On the other hand, many credits are continuous. When the first bill is duly paid, the bank will agree to accept a second, and so on, provided that the total of bills outstanding at any one time does not exceed the limit of the credit. Such credits are called Revolving Credits. For further information, see W. F. Spalding, Bankers' Credits and Foreign Exchange and Foreign Bills (Sir Isaac Pitman and Sons).
The London Money Market.—Next it is necessary to con sider bills drawn on London, and the London money market. A bill is not necessarily drawn on the importer, or even on a bank in the importer's or exporter's country. The two may agree that the importer have a credit opened by a London bank, against which the exporter can draw. The importer either does this direct, or through his own bank. This is a common practice, because London is the chief bill market of the world, and so there is a ready demand for bills. Hence the exporter can be sure of selling his bill at the best rate.
Demand for bills in London comes from many sources. All the London banks, and many foreign banks, are seeking for bills maturing at various specified dates, while, in 1927, foreign Central banks were buying up bills as backing for their note-issues and deposits. In many ways, bills are ideal backing for currency. They have only a definite life, and their decease automatically contracts the currency issue, as the issuing bank can have the bill paid in its own notes, which it can then retire. The chief operator in the London money market is the bill-broker. He buys bills from the foreign banks and other sources, sorts them into maturities, and sells to the British banks bills maturing at such dates as they require. He finances his stock of bills by short loans from the London banks (see MONEY MARKET) and the London market deals in clean bills only.
So far, trade bills have been considered. Other important bills are : Finance bills, drawn by one banker on another to effect a temporary transfer of funds. Finance bills are a means of anticipating and making provision for a coming demand for money in a particular quarter, such as the demand for money to pay for crops. (2) Treasury bills, drawn on H.M. Treasury and usually maturing in three months. These are sold each week by tender, and enable the Treasury to borrow money for a period of three months. Every week, so many bills mature, and so many fresh ones are sold. (3) Corporation bills, drawn on the big British provincial cities, to enable them to borrow money for the term of the bill.
Some confusion of ten arises from the rate of discount of a bill. The price of the bill is the difference between the face value of the bill and the discount thereon. Hence the important rule that dear money means high discount rates and cheap bills. "Market rate" is the discount rate on three months' bank bills, that is, bills accepted or endorsed by a London bank or accepting house. It is the finest (or lowest) rate current in London, and so three months' bank bills command the best price. A six months' bill will be cheaper, because bankers are loth to tie up their money so long. A bill without a bank name will be cheaper, because the security is less. At the bottom of the scale come bills drawn by one impecunious person upon another, with the object of discount ing the bill somewhere, and the drawer and acceptor sharing the proceeds. Often each will draw simultaneously upon the other, and discount the two bills in different places. This is the theory of the game. In practice, bankers and the market term such bills "pig upon pork," and refuse to look at them. (N. E. C.)