Bills of exchange are of two kinds-foreign, and domestic or inland. A foreign bill is legally defined as one the drawer and drawee of which live in different countries or different states, while a domestic bill is one both parties to which live within the same state. Business

A FOREIGN BILL OF EXCHANGE

Nutformad Bank Notty Amening No.

days after Tight of this FIRST OF EXCHANGE (Second unpaid) please pay to the order of Richard Roe

One Thousand pounds

Value received and charge to account of

To The Union of London

and Smithe Bank Ltd.
2 Grinees St. Mansion House

London 6.C

custom, however, warrants our using the term domestic bill for all bills when both parties live in the United States, regardless of state lines. There is likely to be some confusion as to when to use the term draft. Draft and bill of exchange are often used interchangeably.

For instance, we speak of drafts on London and bills of exchange on London, and we say New York exchange and drafts on New York. In the business world, however, there is a growing custom of using the term draft when speaking of domestic transactions, while one more frequently hears the term bill of exchange in connection with foreign transactions.

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Bills of exchange may be classified according to whether or not the parties to the order are bankers. A banker's draft is an order drawn by one bank and payable by another. It is not necessary, however, that the party to whom it is payable be a bank. In the case of individual or trade bills of exchange the payee may be the drawer himself as well as a third party. The payee may also be a bank. The second party, the drawee, may likewise be a bank, in which case the bill of exchange is in the form of the familiar check drawn by a person against his deposit account in a bank.

Bills may be classified according to whether or not they arise out of actual commercial transactions. Hence we have bankers' or finance bills, trade or commercial bills, and accommodation bills.

Bankers' bills are used merely as a means of making payments and transferring balances and are secured by the reputation of the bank that draws them. A commercial bill arises out of an actual sale of goods, and is secured, not only by the general responsibility of the drawer, but also by the goods which have been exchanged for the purpose of sale. Accommodation bills are bills which do not arise out of any business transaction already concluded, though there may be an intention to purchase goods with the funds procured.

In order to illustrate the use of these instruments, suppose that X has bought a bill of goods from Y. X may pay in one of several ways: (1) He may “pay cash," and this may be in bank notes, United States notes, gold certificates, etc. (2) He may give Y a check on his (X's) bank. (3) He may draw and deliver a bill of exchange on Z payable to Y or Y's order. In such a case Z is presumably a debtor to X. (4) He may give Y a promissory note. This will merely defer actual

payment. (5) He may "accept" a bill of exchange which Y has drawn upon him. This also merely defers actual payment. (6) He may transfer to Y some check or promissory note or bill of exchange which some other person (say V) has drawn to X's order or to bearer. (7) He may buy from his banker a banker's draft drawn (on some other banker) in favor of Y. (8) He may buy from his banker a cashier's check.

125. THE INCREASING USE OF COMMERCIAL CREDIT

INSTRUMENTS1

1. The volume of business that can be done by credit paper depends on several circumstances. Obviously, in the first place, it depends upon the banking facilities of the country. If the banks are widely distributed, if they are willing to deal in transactions small enough to be within the reach of large numbers of people, many more transactions will be settled through them than would otherwise be the case. This fact undoubtedly explains in large measure the development of what may be called the "banking habit” among the people of the United States. Undoubtedly our people pay by check much more commonly and much more largely than people of any other country.

In the next place, the density of population is, of course, an important factor in the growth of credit exchanges. A larger volume of business is settled by bank paper in a commercial center than in an agricultural community, even though the proportion of total business thus settled may not be larger.

Finally, the general education and intelligence of the mass of the people is an important factor. Men do not use banks unless they have confidence in them, and they have come to be regarded as a settled part of the ordinary commercial mechanism of the community.

2. It is very clear that a large proportion of the business of the country, even in the retail trade, is done by means of credit instruments. We are justified in concluding that 50 or 60 per cent of the retail trade of the country is settled in this way. Over 90 per cent of the wholesale trade of the country is done with checks and other credit documents. We may therefore safely accept an average of So to 85 per cent as the probable percentage of business of this country transacted by check.

Adapted from David Kinley, Use of Credit Instruments in Payments in the United States, passim. National Monetary Commission, 1910.

3. The amount of money released by our credit transactions is not equal in amount to the volume of credit instruments, for there must always be enough to settle the uncanceled balances called for in money from day to day. The amount of money displaced is the difference between the amount that would be needed in a purely money régime and the amount needed to pay the uncanceled balances

DIAGRAM OF THE PERCENTAGE OF CHECKS IN RETAIL DEPOSITS BY CLASSES OF BANKS,

DIAGRAM OF THE PERCENTAGE OF CHECKS IN AGGREGATE DEPOSITS BY CLASSES OF BANKS.
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of the credit transactions. It is important to note that an increase in the volume of credit transactions does not necessarily mean that we must get a proportionate increase in our reserve of money. Every refinement of the credit mechanism makes it possible to do a larger volume of business on the same reserve.

4. The fact that so large a proportion of business is done with credit paper may or may not be a good thing. Whether it is or not depends on circumstances. If any part of the country is compelled to use checks because of the lack of currency, when it would prefer the latter, the situation is an evil.

In the next place, the settlement of a very large proportion of exchanges by means of credit paper introduces a delicacy of character into the trading mechanism of a community which may cause it to be more easily upset. The larger the volume of credit settlements in proportion to the volume of money settlements, the greater the panic when confidence breaks down and the balance of canceled credit transactions thereby is made larger. A breakdown of confidence means an increase in the amount of transactions that must be settled by ready money. Therefore it is not a safe condition for the country to have the amount of actual money so small for its retail transactions that, when confidence fails, the strain on it will be severely felt. It would be better for the country to have a smaller volume of credit transactions and a larger volume of direct money payments. If the habits of the people preclude this, then there ought to be some means of supplying additional currency when credit as a means of payment diminishes. This currency ought to be as safe and as uniform as the ordinary currency and it should be capable of being quickly emitted and recalled. That is, it should possess elasticity.

5. Such evidence as there is seems to indicate that payment by check has shown an increase during the past few years:

a) In the first place, the returns of our reports show a larger percentage in retail trade.

b) The prosperity of the farmers in the Central West has enabled many to have bank accounts who fifteen years ago could not carry balances.

c) The third evidence is found in the growth of the number of small banks, especially in the country districts. Since national banks have been permitted to establish themselves with a capital of $25,000 their number has increased.

d) The appearance of a considerable proportion of checks in the deposits of mutual savings banks is also, to some degree, significant. Of course the credit documents received in the deposits of these banks may be to a considerable extent money orders. Nevertheless their deposits show a certain use of credit paper by the patrons of these banks.