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draft to the messenger, and if the time is long the draft is returned to B; if only a few days, the bank holds it for collection.
[Illustration: No. 1. A sight draft.]
[Illustration: No. 2. An accepted ten-day sight draft.]
[Illustration: No. 3. An accepted sight draft.]
[Illustration: No. 4. A time draft.]
An accepted draft is really a promissory note, though it is more often called an acceptance. When a man pays or accepts a draft he is said to honour it. In the foregoing illustration A is not obliged either to pay or to accept the draft. It is not binding upon him any more than a letter would be. He can refuse payment just as easily and as readily as he could decline to pay a collector who calls for payment of a bill. Of course, if a man habitually refuses to honour legitimate drafts it may injure his credit with banks and business houses.
It is a very common thing to collect distant accounts by means of commercial drafts. A debtor is more likely to meet--that is, to pay--a draft than he is to reply to a letter and inclose his cheque. It is really more convenient, and safer, too, for there is some risk in sending personal cheques through the mail. There are some houses that make all their payments by cheques, while there are others which prefer to have their creditors at a distance draw on them for the amounts due.
If a business man who has been accustomed to honour drafts continues for a period to dishonour them, the banks through which the drafts pass naturally conclude that he is unable to meet his liabilities.
Some houses deposit their drafts for collection in their home banks, while others have a custom of sending them direct to some bank in or near the place where the debtor resides. If the place is a very small one the collection is sometimes made through one of the express companies.
When goods are sold for distinct periods of credit, and it is generally understood that maturing accounts are subject to sight drafts, there should be no need of notifying the debtor in advance. Some houses, however, make a general custom of sending notices ten days in advance, stating that a draft will be drawn if cheque is not received in the meantime.
Notice the illustrations. The protest notice at the left of Nos. 1, 2, and 4 is intended for the bank presenting the draft for payment. The reason for this will be fully explained in our lesson on protested paper. (See LESSON XIII.) No. 2 shows an accepted draft payable to the order of a bank in the city upon which it is drawn. No. 1 is payable to the order of a bank in the city of the drawer. No. 3 is a sight draft payable to the order of a bank and accepted payable at a bank. No. 4 is a time draft payable to "ourselves"--that is, the Pennsylvania Steel Company.
Drafts are often discounted at banks before acceptance where the credit of the drawer is good. In such cases the drafts which are dishonoured are charged up against the drawer's account.
X. FOREIGN EXCHANGE
It is quite in order that we should follow lessons on the clearing-house and commercial drafts with a lesson on foreign exchange.
We learned in the last lesson that commercial drafts are made use of to facilitate the collection of accounts. They are simply formal demands for the payment of legitimate debts. When these formal demands are made upon foreign debtors they are called bills of exchange; and the process of buying and selling these drafts, the drafts themselves, and the fluctuations in price, all are included in the general name exchange.
[Illustration: Foreign exchange.]
To illustrate the principles of exchange let us suppose that the following transactions have occurred:
1. C of Boston has sold goods, ￡2000, to H of Hamburg.
2. D of Chicago has sold goods, ￡5000, to F of Glasgow.
3. M of Chicago has sold goods, ￡3000, to K of London.
4. E of Philadelphia has sold goods, ￡6000, to R of Paris.
5. P of New York has sold goods, ￡1000, to G of Paris.
C draws on H for ￡2000, sells the draft to a banking-house in Boston; they send to Bank A of New York, and the New York bank to their London correspondent, say Bank B, with instructions to collect from Hamburg.
D draws in a similar way on F. E draws on R, and P on G. Suppose that M instead of drawing on K receives a draft drawn by Bank B of London on Bank A of New York, payable to M's order.
AMERICA has sold goods worth ￡17,000 to EUROPE.
EUROPE . . . . . . owes ￡17,000 to . . . . . . AMERICA But B has paid