II. COMMERCIAL CREDIT INSTRUMENTS Commercial credit instruments-promissory notes and bills of exchange are the written evidences of the commercial borrowing operations discussed in the preceding chapter. Because of the nature of the uses to which funds borrowed for workingcapital purposes are devoted, these instruments run for short periods of time only. Especial importance is attached to them because of the prevalent use of certain forms of bills of exchange as a substitute for money, a phenomenon made possible, as we shall see, by the principle of negotiability. Book accounts. Many credit operations are evidenced merely by entries in the account books of business men"accounts receivable" in the books of the seller (or lender), and "accounts payable" in the books of the buyer (or borrower). While such informal credit extension is quite as significant as any other, it does not concern us here for the reason that it does not give rise to tangible legal instruments. The promissory note. A promissory note is an unconditional written promise by X, the maker, to pay at a definite future date a sum of money to Y, the payee. It may or may not designate the place at which payment is to be made. Promissory notes may be issued by banking and other institutions and governments as well as by individuals, and as a result of noncommercial as well as of commercial obligations. An illustration of a promissory note will be found on page 163 below. The draft or bill of exchange. A bill of exchange, or draft, is an unconditional written order signed by X (the drawer) ordering Y (the drawee) to pay at a definite date a definite sum of money to Z (the payee). The payee may be the same person as the drawer. Before a time draft is good, the drawee must indicate his willingness to honor it by signing his name below the word "Accepted" written across the face of the bill. Bills of exchange may be classified from several points of view. In the first place, we have (1) foreign and (2) domestic, or inland, bills. A foreign bill is legally defined as one, the drawer and drawee of which live in different countries or different states of the United States; while a domestic bill is one, both parties to which live within the same state. This classification is of importance from the legal point of view, but from the standpoint of commercial and banking practice the distinction is without significance. We have thus far been using the terms "bill of exchange" and "draft" indiscriminately. The two terms are, in fact, commonly used interchangeably; for instance, we speak of drafts on London and bills of exchange on London, and we say New York exchange or drafts on New York. The term "draft," however, is by many people employed when they mean a particular type of draft, such as a banker's draft or a draft drawn PROMISSORY NOTE $500.0 after date for value received the undersigned promise to pay to the order of THE NATIONAL CITY BANK OF CHICAGO Fuss hundred and more DOLLARS at its Banking House in Chicago Illinois, with interest AFTER MATURITY at the rate of seven per cent per annum until paid and with costs of collection and a reasonable attorney fee if not paid at maturity. Presentment and demand for payment, notice of non-payment, protest and notice of protest are each and all hereby waived by the makers, endorsers and guarantors jointly and severally. Any indebtedness owing from said bank or legal holder hereof to the undersigned or to any endorser or guarantor may be appropriated and applied by said bank or legal holder on this note at any time either before or after maturity of this note and without demand upon or notice to any one. Дос John Doc by one individual on another as a reminder that a debt is due and payable. In order to give precision to our terminology it will be well for us to use the term "draft"-and this appears to be a growing custom-when speaking of domestic operations, whether or not they cross state lines; and the term "bill of exchange" when speaking of international credit instruments. These instruments may also be classified according to whether the parties to the order are bankers. A banker's draft is an order drawn by one bank on another bank, although it is not necessary that the party to whom it is payable be a bank. A bill drawn by one individual against another would be called an individual draft. Finally, bills may be classified in accordance with the nature of the operation giving rise to the draft. 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 between banks. A trade draft, or a "trade acceptance," to use the more common term, is an order drawn by a seller of goods against the buyer of the goods and accepted by the latter. Accommodation drafts are drafts which do not arise out of any business transaction already concluded; and there may or may not be an intention to purchase goods with the funds procured; it is a "non-trade" draft. "Accommodation" is a term that has been handed down from English commercial practice and is not frequently employed in the United States at the present time. The accompanying forms on pages 165, 166, and 167, are specimens of the various types of drafts. Checks, bank notes, and bank drafts are not really credit instruments. Bills of exchange are also sometimes classified as demand and time bills: a demand bill being one payable "at sight," that is, immediately upon presentation, and a time bill one payable at some definite date in the future. It is these demand instruments, particularly bank notes, cashiers' checks, bank drafts, and personal checks drawn against bank-deposit accounts, that serve extensively as media of exchange. While these demand notes and bills have commonly been called credit instruments, they are strictly not credit instruments at all, for they are not evidences of postponed payments, the essential characteristic of credit operations. A few words of explanation will serve to clarify matters. A check is a credit instrument in the sense that it must be honored by the bank before it is the equivalent of cash, just as credit is involved in a business operation when one receives goods a second or so before he passes the money over to the seller; there is a brief interval during which the seller is waiting to be paid. But no one really regards such a business transaction as a credit operation, the essence of which is a postponed or future payment. A cashier's check, a certified check, and even an uncertified check in the vast majority of instances are in practice precisely as satisfactory means of payment as Trade ACCEPTANCE FORM APPROVED BY THE AMERICAN TRADE ACCEPTANCE COUNCIL EMBRACING COMMITTERS OF THE CHAMBER OF COMMERCE OF THE UNITED STATES AMERICAN BANKERS ASSOCIATION NATIONAL ASSOCIATION OF CREDIT MEN THE OBLIGATION OF THE ACCEPTOR-HEREOF ARISES OUT OF THE PURCHASE OF GOODS FROM THE DRAWER. THE DRAWEE MAY TO. (NAME OF DRAWER) ACCEPTED (STREET ADDRESS) DATE PAYABLE AT LOCATION OF BANK (SIGNATURE OF BY. BY (SIGNATURE OF DRAWER) (CITY OF DRAWEE) |