A bill of exchange is an unconditional written order, signed by X (the person giving the order-the drawer), ordering Z (the drawee) to pay, either on demand or at a definite future date, a sum of money to Y (the payee) or to Y's order or to bearer. The drawee may indicate his willingness to honor it by signing his name to the word "accepted" written across the face of the bill.

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 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.

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.

EXCHANGE FOR

£1000 Sty
Sixty

Chicago, USA. April 1, 1916.

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 Smiths Back Ltd.
2 Princes St, Moncian House
London 6.

Sterling

NATIONAL BANK NORTH AMERICA, CHICAGO

By

John Doe

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.

14. ORIGIN AND DEVELOPMENT OF MERCANTILE

INSTRUMENTS1

BY WILLIAM GREEN HALE

The law governing negotiable instruments had its inception in the customs of the mercantile world-indeed, these instruments were born of the necessities and needs of merchants. Bills, notes, and checks are thus frequently referred to as commercial paper, or mercantile specialties, and the law pertaining to such instruments as the Law Merchant.

Adapted from Law of Negotiable Instruments, pp. 1-2. (Blackstone Institute, 1915.)

There is much doubt as to the exact time and place of the origin of commercial paper. This much seems quite certain: that bills of exchange were used to some extent by the merchants of Italy as early as the thirteenth century and, not a great while thereafter, found their way into England, where they were first used by the English merchants in their dealings with the merchants on the continent of Europe. Thus the foreign bill of exchange was the first mercantile specialty to become known to the English law.

The inland bill of exchange and promissory note followed rapidly in the wake of the foreign bill of exchange. And by the first of the seventeenth century all three of these instruments were well known to the merchants of England, and were coming to be made the subjects of litigation. It was about this time also, it is said, that the custom of making such instruments payable to order or bearer, and thus negotiable in form, took its rise. Down to the time of Lord Mansfield, in 1756, however, the rules that governed in the controversies which arose over bills and notes were in a more or less chaotic condition. He it was-since termed the "father of the Law Merchant"-who voiced and molded into the form of definite rules of law the numerous customs of the merchants with reference to such paper and made the Law Merchant a real part and parcel of the great body of the English Law.

15. THE DEVELOPMENT OF CREDIT INSTRUMENTS IN THE UNITED STATES'

BY JOSEPH J. KLEIN

The use of commercial drafts played a very important rôle in the history of the American colonies. The draft was used when the drawer had a balance to his credit with some merchant, residing either in England or the colonies. There is no evidence, however, to show that the promissory note was used during the colonial period. Bank checks appear to have been unknown in colonial times, and there is no evidence to show that the few banks of the time did any discounting of bills of exchange. Checks were unknown to the colonists until the time of the Revolution.

In the period between 1789 and the Civil War we find the development of an extensive use of both drafts and promissory notes in mer

Adapted from an unpublished thesis on The Development of Mercantile Instruments of Credit in the United States.

cantile transactions. During this period also banking became well developed and differentiated into banks of discount and banks of circulation. The use of the check became quite generally known in the cities, although it was not until after the Civil War that deposit currency came to be the most important instrument of exchange that we possess.

16. THE USE OF CHECKS IN THE UNITED STATES'

BY DAVID KINLEY

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 80 to 85 per cent as the probable percentage of business of this country transacted by check.

I

Adapted from The Use of Credit Instruments in the United States. (National Monetary Commission, 1910.)