DISCOUNTING A BILL. When trade bills are brought to a banker to be dis counted, there are many points which re quire to be carefully of served, in order that a banker may avoid having his case filled with bills which are unmarketable, or bills which may eventually produce endless trouble and probably disaster.
If a bill drawn by Jones on Brown is brought to be discounted, a banker will con sider the position of the acceptor Brown. If Brown's account is at another bank, what sort of a banker's opinion is held regarding him, is the opinion a recent one, and how many other bills accepted by Brown are in the bill case. Have any of Brown's accept ances ever been dishonoured ? If Jones is the person who wants the bill discounted, the banker will note the total amount of bills already discounted for him and the quality of them. A certain number of the bills may be dishonoured at maturity, and the question arises, will Jones' account admit of the bills, on which there is a risk, being debited to it, if they are returned unpaid ? It is also necessary for the banker to remember that he may hold in his case bills accepted by Jones which he has discounted for other customers.
If the parties to the bill are quite satisfac tory, other points will arise in the banker's mind. Is the bill a genuine trade bill, that is a bill accepted by Brown because he has received value for it from Jones, or has Brown accepted it merely for the accommo dation of Jones, on the understanding that Jones himself must meet it at maturity ? The banker may be informed that it is an accommodation bill when it is offered to him, or he may be left to find out that fact for himself. A scrutiny of Jones' account may show, perhaps, that a bill for practically the same amount appears regularly every three or six months, suggesting that it is the same bill which is being renewed time after time. Is there any cross drawing between Brown and Jones, that is does Brown accept bills for Jones, and Jones accept them for Brown ? Is the business between the two parties such as would justify Jones drawing on Brown ? If Jones is an iron merchant, for example, and Brown a grocer, it is not very likely that the bill would arise out of the ordinary course of business between an iron merchant and a grocer, and the nker is put on inquiry.
In the words of George Rae in his "Country Banker " : " It is not the province of banking to discount bills, the proceeds of which are to provide the acceptors with fixed capital. A man may properly be drawn upon against goods, produce, or commodities which he is turning over in his business from day to day ; but not against his buildings or machinery. These are not floating capital." Again : " A ship-owner, or ship's husband, may properly be drawn upon for sails, or cor dage, or stores supplied to ships, because there is a tangible fund in his incoming fre ghts to meet this class of marine paper but when he accepts against the hull of a ship, he passes the recogni ed limits of negotiable value, and his paper becomes discredited in the estimation of the bill market." A bill which is payable to John Brown only should not be discounted, as the bill is not a negotiable instrument, and the banker could not, if necessary, sue upon it.
A banker who discounts a bill is a " holder for value " (q.v.), and at maturity he obtains the full proceeds.
The person for whom a bill is discounted must indorse it, as by indorsement he be comes one of the parties to the bill and liable thereon if the acceptor fails to pay it. If not indorsed, he is not liable on the bill, unless the bill proves to be a forgery.
When an advance is made upon the deposit of a bill as security, the banker is a " holder for value ". only to the extent of the sum he has lent upon it.
The discounter of a bill may, if he wish, re-discount it. Bill brokers frequently re discount bills with bankers, and instead of indorsing each bill they usually give a guarantee to cover all the bills re discounted.
In the money market, Treasury Bills (q.v.) and bills or drafts which bear the names of houses of the highest standing, arc classed as first-class bills, or first-class paper. Where the names arc not so well known, or financially strong, the bills are called second or third class paper, as the case may be.