Cables command the highest price of all exchange. Their quick transmission renders them a very useful means of covering sight or time bills on the day of their maturity. In times of suddenly tight money, Wall Street banks may sell their demand bills on London much in excess of their balances in London and with the money received relieve the stringency and get good interest on their loans. About ten days later and just previous to the presentation of their demand bills abroad for payment, the banks will buy cables to cover the demand bills. Or again, if for any reason the price of cables and demand bills gets out of line, that is, if the demand for demand bills on occasion becomes exceptionally strong and raises their price unduly, relative to the price of cables, the bankers will sell their demand bills short, with the expectation of being able to buy cables to cover at approxi mately the same price at which they sold their demand bills, and during this interim they will have had the use of the funds for nothing.
Sight, Short, and Long Bills The terms " check" (sometimes spelled " cheque "), "sight draft " (or "bill"), and " demand draft " (or "bill") are used almost interchangeably to mean orders to pay money upon pre sentation of such orders. They are by far the most common form of bill and the one for which the exchange rate is most commonly quoted. The American recipient of a demand bill can get face value for his bill credited to his account abroad after such time as is required to present it to the drawee, depending upon the speed of the mails and of the collecting agent ; in peace times a demand bill on London can be remitted and collected inside seven to nine days. Any New York bank to which a holder offered such a de mand bill would, therefore, discount it for that number of days. If the holder was an exporter who drew on his foreign customer and offered the bill for sale, he would have to bear this discount unless he included the interest for these days in the price of the goods sold. The difference between the cable rate and the demand rate, therefore, is the discount for these days. Any New Yorker owing a sum due in London in, say, eight days has the option of buying a demand bill today and giving the bank the use of the funds for the eight days, or waiting until the day of maturity and buying a cable transfer and using the funds for the eight days. It has been shown above that if these two rates differ by more than the interest, some bankers will sell their demand bills short and cover with cables, bringing the rates into line again.
Short bills are bills with not more than 3o days to run, and long bills are bills running over 3o days. The bills may have definite maturities fixed by some such clause as "6o days from date," or the date may be indefinite and be fixed by the date of acceptance, as " 6o days after sight," and it is then important that the bill be presented as early as possible for acceptance.
Prompt presentment for acceptance not only fixes an early ma turity, but also satisfies the legal requirement that due diligence be exercised in the presentment for acceptance, so as to protect drawer and indorsers, if any. The period of the bills is called the "usance " and varies with the custom of trade. The usance for bills representing goods which are highly perishable or subject to the whims of fashion is short. Certain countries allow longer usance than others, and the more distant the country the longer the usance. In general, the usance allowed by the exporter suffices to get the goods to the importer and to permit the importer to sell them and make remittance.
The rates for 3o, 4o, so, 6o, 9o, and r 20 day bills differ from the cable rate by the amounts of the discounts for those days. The importer having bought goods due in 6o days has the option of buying today a 6o-day bill and remitting it to his creditor, or waiting till the day of maturity and buying a cable transfer. In the former case he would be deprived of the use of his funds 6o days, and the banker would have the use of them. He would, therefore, be unwilling to pay more than the discounted value of the cable rate, and the banker would ask no more. If any of these rates differed from the cable rate by more than the interest, it would pay some banker to sell the time bills short and cover by buying cables; this operation would bring the rates into line again. The rates for the various bills all move together and depend upon the cable rate.
Effect of Discount Rates on Marketing of Bills In the calculation of the prices of time bills the question arises whether to use the rate of discount prevailing in the drawing or in the drawee country. In general it may be said that compet,i tion among banks tends to force the use of the lower discount rate, that is, to force banks to pay the higher price for bills. If the discount rate is higher in the drawing country than in the drawee country, and the drawing exporter offered his long bill for dis count in the drawing country, the price, if discounted at the drawing country's rate, would be lower than the price at which the bill would sell in the drawee country; banks in the drawing country would thus realize the difference by buying at the draw ing country's low price, remitting the bill to the drawee cotmtry, and selling there at the high price. Competition, therefore, among them as purchasers would incline them to pay more than the price if discounted at the higher rate of the drawing country, and to pay approximately the price if discounted at the low rate of the drawee country.