FINANCE BILLS 1. Definition of a finance long bill of ex change drawn by a banker or financial house in one country on a banker in another against securities in the hands of the latter is generally called a "finance bill." The privilege of drawing such bills enables bankers to anticipate a change in the rate of exchange and also to tide over a period of high exchange which otherwise would necessitate a shipment of gold. When properly used it is an important factor in in ternational exchange and serves not only as a cheap and efficient corrective to high rate, but aids in the development of the production and trade of the world by rendering credit more fluid and leveling money rates.
There is a wide diversity in the definitions which are given of a finance bill. Franklin Esther defines it as "an unsecured long bill of exchange drawn by a banker in one country on a banker in another coun try and sold for the purpose of raising money." Other authorities are inclined to include all long bills originating between bankers, whether secured or not. The latter is perhaps the more general understanding of the term and I would suggest the following defi nition as comprehensive: A finance bill is a long bill of exchange, secured or other wise drawn by a banker in one country on a banker in another, the funds for the payment of which at maturity must be provided by the drawer.
When a New York banker has a satisfactory draw ing arrangement with his London correspondents he is more or less independent of market conditions, and even if there is a scarcity of commercial bills on the market, he is in a position to create a supply of bills at a stated price. He is reasonably sure that he will be able to buy exchange at a lower figure to meet his obligations before their maturity, as a high rate of exchange brings out a large supply of finance bills resulting in a lowering of the rate. Mr. George Clare in his book on "Foreign Exchange" says, "The bidding need only be raised a centime or two to tap an almost inexhaustible source of supply—that of bankers' drafts." In other words, if the remitter cannot obtain a ready-made bill, he need only pay a little more and have one made to order.
2. Finance bill for New York account.—The most common occasion for the use of finance bills is to an ticipate a fall in the exchange rates. For instance, under normal conditions, during the summer months, the rate of exchange for sterling is generally high in New York. It drops gradually until the fall, when large shipments of cotton and wheat result in heavy offerings of sterling exchange. Before draw ing a finance bill, it is necessary for the New York banker to make arrangements with the accepting bank in London as to the amount, terms, etc., of the accommodations. Such arrangements are general, applying to a series of transactions, or specific, apply ing to a single transaction only. Suppose the rate at the end of August is 4.88 for demand bills, and a banker, A, desirous of anticipating the probable drop in exchange in the fall, arranges with his London correspondent, B, against securities deposited with him, for a credit of E. 10,000 by way of a sixty-days draft on London. A immediately draws a draft on B at sixty days for ,E 10,000, which he can either (1) sell in New York at the sixty-days rate for bills or else (2) send to London to be discounted and placed to his credit there, and then sell his own sight drafts against this credit. In either case, he will have the use of the proceeds in New York until the maturity of the bill, when he must be prepared to place funds with B to meet it.
3. Method of using finance will be noticed that B does not advance any money ; lie simply lends his name to A and the London discount market pro vides the funds. The advantages and disadvantages of this procedure may be summed up in illustrations : 1. A will sell his sixty-days bill in New York if he can obtain $4.85R3 per pound sterling or better. This rate is arrived at as follows: There is, of course, the risk that exchange might not fall at the end of October as anticipated, or that the interest rates in New York might not be maintained above 3 per cent.