bills command a slightly higher price than even a banker's sixty-day bill.

Other instructions are also necessary. Suppose the drawee refuses to accept the bill. What is to be done with the documents, and the goods? Shall the bill be protested in case of dishonor either as to acceptance or payment? If the drawee is to be held to his contract by law, the bill should be protested promptly for the sake of its legal value; if not, it is a useless expense. Finally, in case of any emergency, who has the power to act as the drawer's agent?

149. Reference in case of need. If the drawer has an agent to whom he has given power to act, the instruction reads, "In case of need see Blank & Co." If the drawee fails to accept, or pay, the bill, it is at once presented to the referee, and protest fees, cost of telegraphic notices to the drawer, and loss of interest, are saved. In many countries it is more expensive to sue than to accept a partial loss. In any case quick action is necessary by someone thoroughly acquainted with the situation, because charges may pile up rapidly on goods which are not promptly removed from the customs house. Even on a hundred-dollar shipment of furniture which went through a Brazilian port promptly, the original customs duty of $5.25, U. S. money, was increased by other charges to $11.15.2

2 The Americas, June, 1916, p. 43.

.

CHAPTER XIV

THE USE OF DRAFTS AND ACCEPTANCES

150. The services of banks. The theory is that if Wallace and Williams live in one place, and Scott and Small in another, and Wallace buys from Scott $10,000 worth of goods, while Small buys from Williams $10,000 worth of goods, the debts can be settled without a transfer of money. Scott draws a sight draft on Wallace; Small buys this from Scott; Small remits it to Williams; and Williams collects the $10,000 from Wallace. In actual practice these four might have a hard time finding each other. Their transactions would hardly be of the same amount. Sellers and creditors are drawing bills, buyers and debtors are needing them for remittances, but neither class knows the other. Between the importers and the exporters and all classes of domestic and foreign business men the banker, the dealer in exchange, and the broker, act as middlemen. Everybody knows where they can be found. There is always a market for good bills at some price, and the best rates can be secured if one chooses to shop. The banker buys the bill from Scott, and remits it to the other place where he has a bank account. Against this credit he sells Small a draft for the exact amount he needs. The banker in the other place does a service by collecting Scott's draft on Wallace and in giving Williams the money for the banker's draft he received from Small. The entire operation might be reversed. The banker's profit is due to the fact that his buying rate is slightly lower than his selling rate.

The banker is not only a buyer and seller of bills, but he advances funds upon them. Sometimes funds in pay

ment of a draft are not received for a long time. If the security is good a bank will advance 60%, 70%, or 80% of the face of the draft. When a draft is bought, instead of selling it, it may be held until maturity. The bank, in such a case, sends the first of exchange without indorsement marked "for acceptance only" to its agent, who promptly presents it to the drawee for his acceptance. The bank's agent advises the bank of the date of acceptance and toward maturity the second of exchange is indorsed and forwarded to the agent for collection. Both copies are now put together and presented for payment. Banks and other money lenders are continually buying and selling bills which have been accepted. They make the market.

The banker lends his credit in connection with drafts. One feature of this service is explained under the head of bank acceptances (see 158). A bank's credit is also loaned with every draft it buys for resale. Its indorsement makes its sale possible and attracts funds which would never deal in bills without such indorsement.

A bank is a source of information as to the standing of foreign buyers, commercial customs, and the best way to draw drafts in connection with sales. This credit information is of immense importance, for in most cases direct trade is impossible unless credit of at least three months is granted. Banks also give their customers valuable information as to foreign markets and prospective purchasers.

The banker performs a great service as a collection agency. He also acts as a responsible third party between the buyer and the seller. He holds the documents and delivers them only when the conditions have been fulfilled. He may hold funds and pay them over only upon the shipment of the goods and the delivery of the documents.

C. O. D. BY FREIGHT

211

Most interior banks are not equipped for buying, or handling exchange, based on foreign shipments. It is possible, however, for any one of them to arrange facilities with a bank which does have a foreign exchange department, so that an exporter may have his home bank

the one that best knows his claims to credit-handle his foreign business. If this results in extra charges, direct connections should be made with a New York or other large city bank.

151. C. O. D. by freight.—The sight draft, to be presented after the arrival of goods, is used to collect payment upon the delivery of the goods to the buyer. An automobile manufacturer at the time of shipping a car of machines to a dealer gets from the railroad company, not a straight, but an order bill of lading. This is indorsed in blank and attached to a draft drawn on the dealer to the order of the manufacturer himself, which is also indorsed in blank for delivery to the manufacturer's bank. The bank takes the documentary draft and sends it for collection, either directly, or indirectly, to a bank in the dealer's city. When the car arrives the railroad notifies the dealer, but he must have the bill of lading. When the bank receives the draft, it waits until the car arrives, then presents it to the dealer, or notifies him that he has it. The dealer pays the draft, gets the bill of lading, and secures the car of automobiles.

152. Sight draft for collection. Often the buyer and seller know each other so well that the bill of lading is sent direct to the buyer, while the sight draft is sent through the bank for collection, at once, or a number of days later.

The contract of sale sometimes provides that goods are to be charged on open account, but that when the seller wishes payment he is to draw at sight, of which he notifies the buyer. Either this or the draft mentioned in the

preceding paragraph is reasonably certain of payment and can be deposited in bank as a cash item.

When goods have been sold on open account and prompt payment is not made an attempt at collection may be made by sight draft. The theory is that a delinquent debtor will pay more attention to what may go to protest than to a mere request for a remittance. The creditor may leave the draft at his own bank for collection, or he may send it direct to the bank which the debtor gave as a reference when he asked for credit. If the debtor is near the bank a messenger will be sent to collect the draft; if he is some distance away a notice that it is held will be sent by telephone or by mail. The drawee is not compelled to pay the draft, but if he does not a shadow has been cast upon his credit. It may be the drawee's rule never to accept, or pay, a draft — many houses will not; the bank knows this, but it has also learned that the buyer with this particular seller is slow pay. The buyer may of course have a good reason for refusing payment. He may dispute the account, or claim credits, which have not been allowed. The account may already have been paid. Whatever the reason, it is attached to the draft and the draft returned. If the draft is paid, the bank remits to the sending bank, or the drawer, if he sent it, and charges a commission for its services (see 53).

153. Authority to draw. The buyer may make an open credit arrangement with his bank to honor drafts that are drawn upon it by certain sellers for his account. The buyer then orders goods from the seller and instructs him to draw upon the named bank for his account. It may be agreed that the shipping documents are to be attached to the draft. When the draft appears, the bank according to its arrangement with the buyer pays it. This is an "authority to draw." It has not been confirmed by the banker and can be canceled by the buyer at any time.