This section is from the "The Science Of Wealth" book, by Amasa Walker.
Bills of exchange maybe divided into two kinds,— domestic and foreign.
Domestic bills are those drawn and payable within the same country, as between different cities and different States. The manner in which these bills save the use of money, in domestic trade, is illustrated as follows: —
A, in Boston, sells to B, in New York, goods to amount of one thousand dollars.
C, in New York, sells to D, in Boston, leather to amount of one thousand dollars.
Instead of sending the money, B, in New York, goes to C, in New York, and gets his draft on D, and remits it to A, in Boston, who receives the money of D; and the transactions are all closed without a dollar in money having been transferred from one city to another.
This is the course of all direct trade between any two places. Not, it must be understood, that, in the case supposed, B actually goes to C; but the merchants in Boston are owing millions to merchants in New York, while persons of the latter place are owing, it may be, an equal amount in Boston.
Bills are drawn on Boston for all due to New York, and on New York for all due to Boston. These bills are, when completed, if not before, generally passed into the banks, who pay out the money for them, deducting the interest (and exchange, if there is any). Then, if a merchant in either city wishes to remit, he goes directly to the bank, which will draw on some bank in New York or Boston, as the case may be, for such sum as he may want. The banks negotiate or collect the whole, and sell or dispose of their own checks or drafts for the amount.
This is a labor-saving arrangement of immense importance, greatly reducing the otherwise inevitable demand for a large amount of money to be kept in transitu between the different marts of trade.
But all exchange is not direct between two places.
A, for example, in St. Louis, ships one hundred thousand dollars' worth of lead to New York. He wishes to pay sundry persons in Boston, Providence, Lowell, and Lynn. He draws on his correspondent in New York for all these, in favor of the persons to whom he is indebted; and the drafts are negotiated by the receivers, through bank in the several cities, and finally all sent to New York for collection. All domestic trade thus becomes a great web of exchanges, which adjust themselves by means of these bills; and thus, to their entire aggregate amount, obviate the necessity of transmitting money.