In case, however, Ee needs funds at any time between the dates of acceptance and maturity, he may sell the acceptance in the open discount market in London for what he can get. The buyer, De, may be any person, firm, bank, or discount house in London, the provinces, or abroad, who has idle funds seeking temporary investment. It is plain that Ba has the use of $4,893 until his account in London is written off; that Be has advanced no funds of his own until the maturity of the acceptance, and meanwhile Ba has presumably put Be in funds to meet the obligation; and that the real creditor is Ee, provided he did not sell the acceptance, or De if Ee did sell it before maturity. This acceptance, being drawn on a banker, is called a "banker's ac ceptance," and because of the high credit rating of the drawee coramands a good price from De.
It appears, therefore, that importers in the position of Ia are in need of bills of exchange, from either American exporters or bankers. The greater the value of the imports, the greater the demand for bills of exchange in New York on London. At those seasons of the year when importations are heaviest the demand for exchange on London may be expected to increase.
Exactly the same series of operations and considerations takes place when for any reason other than importation of mer chandise an American has occasion to make payments in England. Such occasions would be to purchase securities in London, to loan funds on the discount market, to increase a balance abroad, to pay- interest or dividends to security holders in England, to pay for marine insurance or freight-carrying by English mer chantmen, to provide funds in England for travel or sojourn there, to remit funds to relatives or friends in England, and the like. Every such transaction augments the demand side of the market for bills of exchange in New York, and the sum of these individual demands constitutes the market demand for exchange in London.
The Supply of Bills of Exchange Suppose Ea sells to Ie a bill of goods for Er,000 and wishes to be paid. Until the Great War was well on its way the custom of trade between America and England, in practically all cases, was for the American importer to take the initiative in making payments to his English creditor, and also for the American ex porter to take the initiative in getting his pay from his English debtor. Ea would write out a bill of exchange ordering Ie to pay at sight, on demand, or after a certain time, according to the terms of sale of the goods, to the order of some American, say Ba, and to charge same to his account, and then sell this bill to his bank (Ba). The bill might be " clean " or "documentary."
Ba would prefer that it be documentary in this case, for it has not yet been accepted by Ie, and Ba has possibly no evidence that Ea is authorized to draw on Ie, and the bill when presented may be dishonored; it then is a single-name paper and its value depends upon the credit of Ea. If, however, documents are attached— consisting of the bill of lading, insurance certificates, etc.—which in case of non-acceptance or payment give Ba title to the goods represented, Ba holds a single-name paper with collateral secu rity, and will therefore, other things being equal, pay a higher price for the documentary bill than for the clean bill.
In such a case, where Ea has ,Er,000 due him in England, the question arises: Is it more economical for him to sell such bill for a price to Ba, or to cable Ie to ship the £r,000 gold at Ea's 'ex pense? If the expense of such shipment is, say, $29.5o, the pro ceeds of the importation of gold would be $4,837. Hence, if Ea can sell his bill for more than $4,837, it would be better than to import the gold. The price $4,837 is called the "gold import point." Ba, having bought this bill for, say, $4,84o, will send it to Be, who will present it at once to Ie for payment if it is a sight or demand bill. If paid by Ie, he writes off £r,000 of his debt to Ea.
The documents may be delivered to Ie at the time of ac ceptance if it is a documentary acceptance bill, or at the time of payment if it is a documentary payment bill. Upon receipt of documents Ie can get possession of the goods. To deliver the documents upon acceptance leaves Ba (or his agent Be) with an unsecured double-name paper, and is dangerous unless Ie or Ea, or both, are good credit risks.
But an acceptance the documents of which have been removed can be readily sold in the discount market since it is not encum bered by documents, whereas a documentary payment acceptance can be sold only with difficulty since it is necessary that Ie know where the bill can be found if he decides to take it up before ma turity. Documentary payment bills are usually taken up before maturity if they cover perishable goods or if the market becomes very favorable for the goods. Interest is usually rebated to Ie, in England at r per cent less than the bank rate, and on the con tinent at the bank rate. This quality of ready marketability of documentary acceptance bills increases their value, and Ea tends, so far as this reason holds, to get a higher price for documentary acceptance bills than for payment bills.