137 



BILL OF EXCHANGE. 



BILL OF EXCHANGE. 



138 



other country iu which the standard was maintained. Taking, as 

 before, the instance of France, the par would vary, other things 

 remaining constant, from 25 francs to somewhere about 19 francs, or 

 1000/. in a Bank of England note would buy a bill on Paris, not for 

 25,200 francs, but for about 19,000 francs only. But it is evident that 

 the same cause might be operating in a greater or less degree in France 

 also, in which case the calculation would be still further complicated 

 by a eemfaruom of the depreciation in the one country with that in the 

 other. The variation here taken for an example is of course an 

 extreme case, but fluctuations the same in kind, though less in degree, 

 are still of continual occurrence, and must be carefully taken into 

 account in all calculations as to the price of bills. 



But besides these monetary influences on the nominal par, there are 

 other causes in operation which materially affect the rate of exchange, 

 and by consequence the price of bills. The accommodation of a remit- 

 tance in the form of a, bill of exchange is worth a calculable sum, the 

 maximum being the compound of the labour, expense, and risk of 

 the transmission of money in specie. Suppose this maximum to be 

 one per cent., it is evident that it is worth the while of the remitter to 

 pay any sum short of Ul. for the purchase of a bill equivalent to 10001. 

 Now the market price of bills, like that of every other commodity, is 

 mainly dependent on the relation of the supply to the demand, and 

 this again is primarily regulated by the state of trade between two 

 L'iveii countries. When the value of the exports to any country in a 

 given period is equal to the value of the imports from the same country 

 in the same period, the trade is said to be balanced ; the bills drawn in 

 each country upon the other will be equal in amount, and this equili- 

 brium constitutes what is called the real par of exchange. But it is 

 obvious that this state of things can never actually exist, that it is the 

 point on each side of which the exchanges will continually oscillate, 

 and at which they will never rest. Even where, upon the average of 

 years or months, the trade is nearly even, there will be disturbing cir- 

 cumstances which will have a temporary effect upon the exchanges. 

 There will consequently be occasional scarcity and occasional abun- 

 dance of foreign bills in the market. When scarce, their price of course 

 i higher, or, as it is ordinarily expressed, they bear a jtremivm. At 

 such time^ the imports exceed the exports, and the exchanges are said 

 to be aijainat u*. Suppose that, in the trade between England and 

 France, the value of our imports from Trance exceeds that of our 

 exports to France by about three-fourths. The effect of this, if matters 

 were left to themselves, would be, that of the remittances to France 

 three-fourths must be made in specie, and that the bills in which the 

 1 1 m. lining one-fourth was made would be at the maximum price ; that 

 is to say, taking the scale before adopted, would bear a premium of all 

 but one per cent. But it is a fact, incontestably established, that in 

 every trailing community the value of the whole of the exports taken 

 together is, upon an average, very nearly balanced by the value of the 

 whole of the imports, or, in other words, that ultimately all commo- 

 dities imported are paid for directly or indirectly in commodities 

 exported. Necessarily, therefore, the bills drawn in England upon 

 foreign countries, say in one year, nearly balance the bills drawn in 

 fore ign countries upon England in the same period. Thus, to take a 

 familiar instance, although there may be a deficiency in London, to the 

 extent of three-fourths, of bills upon France, there may be an excess, 

 in nearly the same ratio, of bills upon Belgium, and in like manner 

 there may be an excess in Belgium, to the same extent, of bills upon 

 France. Acting on the knowledge of this fact, the London bill- 

 merchant, by means of his agent, will buy bills upon Paris at Antwerp, 

 where they are cheapest, and bring them for sale to London, where 

 tliry are dearest. The cost of procuring, and the profit of the bill- 

 merchant, therefore, upon this transaction, constitute the third element 

 in the calculation. Supposing then the bill to be a ijuod one, that is 

 to say, guaranteed by names of known and established credit, the only 

 remaining operation is to estimate the discount according to mercantile 

 ', or, iti other words, the interest of lOOOi. in money for the 

 time which will elapse before payment of the bill ; and the combined 

 ivxult will give the sum in francs for which the bill is to be drawn, or 

 the amount of bills already drawn to be given in exchange for 1000/. 



The same remarks, mutatis mulandii, are applicable, if instead of a 

 remittance to Paris a sum of money was to be received from thence ; 

 fur the mode adopted would be this. The party in London would 

 draw a bill upon his debtor in Paris, for which the exchange-broker 

 v. ' u i III immediately give him the value, ascertained as before, either in 

 cash or in bills upon London, or in both ; and although the system, as 

 xplnined in detail, may seem, as in truth it is, of some complexity, 

 yet practically the price, like that of every other commodity, readily 

 adjusts itavlf. In London it is the practice for the bill-brokers to go 

 round to the principal merchants and inquire whether they are buyers 

 or sellers of bills. The relation of supply and demand being thus 

 ascertained, a few of the most influential merchants settle the average 

 price at the Royal Exchange ; and a document known as ' Wetenhalf's 

 Li.-tt, ' contains the record of rates according to actual transactions. 

 By these means the value of particular bills, varying of course according 

 to the credit of the parties to them, or, as it is generally called, the 

 1/,,','1,1's.i nf tlir name*, is easily drtermiml. 



iiillrt 'if M-li:mi 1 ' are al*> in frequent use for the purpose of remit- 



froin one part of the United Kingdom to another. Thus the 



tnx'k-r in Matieh' v i. I.....1 .11 l!in i unborn, who has a payment to 



make in London, remits bills of his customers in the country. These 

 are discounted by the monied capitalists through the intervention of 

 bill-brokers. A few of the London bankers also discount for the 

 accommodation of their customers, and the Bank of England deals 

 extensively in that department. The bills so cashed are transmitted 

 to the provincial banks to be presented at maturity for payment. 

 Conversely, in the provincial towns the country bankers discount bills 

 on London, and transmit them to their correspondents there for pay- 

 ment. The rate of discount varies according to the demand for 

 money, and the character of the particular bills ; but it is seldom, 

 upon regular transactions, more than five, or less than two and a half 

 per cent. 



Hitherto bills of exchange have been considered, in their primary 

 application, as means of remittance, but there are other purposes 

 equally important, which, by an intelligible transition, they have been 

 made to serve. For, the use and properties of bills being once under- 

 stood, and their validity recognised, nothing was more natural than 

 that they should be applied to the ordinary transactions of trade. A 

 trader desirous of purchasing a commodity for which his available 

 funds might not enable him to pay ready money, would tender to the 

 seller an order, for payment on some other person, receiving or paying 

 the difference, as the case might be, and making an allowance by way 

 of interest, or, which is the same thing in other words, paying an extra 

 price, in proportion to the time of the bill's currency. To the seller 

 this mode of dealing would obviously be better than the giving of a 

 naked credit, as affording him an additional chance of payment, and a 

 written acknowledgment of his debt. Moreover, when the negotiability 

 of inland bills was once admitted, they would serve all the purposes of 

 actual money, because in the same manner as the original seller had 

 been induced to take the order in payment, another might be willing 

 to receive it from him in the purchase of other commodities ; or it 

 might be at once discounted or converted into cash by application to a 

 money-dealer, whether bill-broker or banker, in the manner which has 

 been already explained in speaking of remittances. 



But the drawing of a bill supposes, as has been said, that the drawee 

 either has in his possession funds of the drawer, or is his debtor to the 

 amount specified in the order ; it was therefore by an easy step that in 

 the transactions of wholesale dealing it became a common practice for 

 the seller to draw upon the buyer, for the price of the goods, a bill 

 payable to his (the seller's) own order at some future day. This bill 

 the buyer immediately accepted, and thus in effect acknowledged 

 himself to be the debtor of the drawer to the amount specified, and 

 engaged to pay the holder at maturity. By this arrangement, now 

 very general, the buyer obtains credit for the term at the expiration 

 of which the bill is made payable, and the 'seller has the advantage of 

 a fixed day for payment being named in the bill, and a means of pro- 

 curing cash if he chooses to negotiate the bill. 



Neither was it an unreasonable extension of the principle that a bill 

 should be drawn and accepted on the faith nf funds to be received by the 

 drawee at or before the maturity of the draft. At the present day this 

 practice prevails to a great extent, and may be illustrated by a supposed 

 case as follows : There are established in most if not all the principal 

 trading ports of the world, merchants who carry on the business of 

 general factors or agents for sale, and whose establishments are known 

 among mercantile men under the name of commission-houses. The 

 course of dealing with such houses is, for the most part, this : A., a 

 manufacturer at Manchester, consigns a cargo of cotton pieces to B. 

 and Co., a commission-house at Mexico, for sale on his account. The 

 English correspondents of B. and Co. are Messrs. C. and Co. of London. 

 By an arrangement among these several parties A. draws on C. and Co. 

 for half or two-thirds, as may be agreed, of the invoice price of the 

 goods consigned, and discounting the bill with his banker obtains at 

 once an instalment in actual money, which immediately returns into 

 his capital, and becomes useful in producing more goods and creating 

 more wealth. Ultimately, account sales are furnished by the Mexican 

 house, and A. again draws on C. and Co. for the balance, if in his 

 favour. Annual balances are struck between B. and Co. and C. and Co., 

 and remittances by bills for the adjustment of the account complete 

 the transaction. The advantages of this anticipatory part-payment are 

 obvious, more especially in the trade with distant countries, such as 

 South America or the East Indies. But the practice has degenerated 

 into something of an abuse. It has of late been the frequent practice 

 of the consignors of goods to make out invoices with prices artificially 

 high, and so to procure a remunerating return even from the pro- 

 portion for which they are authorised to draw in advance. The effect 

 is to throw upon the consignees the whole risk, which was formerly 

 shared between the two, and proportionately to impair the steadiness 

 and security of commerce. 



Perhaps, however, if this were the only abuse of bills, there would 

 be little to complain of nothing, certainly, to counterbalance the 

 immense advantages which are derived from them as instruments of 

 exchange ; but, unfortunately, of late years, the abundance of money 

 in the English market, and the consequent facility of negotiating paper 

 securities, the competition of trade, and the accompanying relaxation 

 of the system of credit, with other causes which will readily suggest 

 themselves, have given occasion to practices which are not only a wide 

 departure from the original purposes of bills of exchange, but are 

 moHt injurious to the general interests of trade. Good bills, we have 



