180. Finance Bills

These are the other great class of bankers' long bills in the exchange market. Concerning the exact meaning of "finance-bill" it is surprising what a difference of opinion exists even among well-informed writers on exchange; but concerning the present meaning of the term as it is used in the exchange market in New York, there is no chance for any difference of opinion. Among practical exchange men a finance-bill means just one thing - an unsecured long bill of exchange drawn by a banker in one country on a banker in another and sold for the purpose of raising money. Sometimes the drawer carries a balance with the drawee, sometimes not; usually not, the drawee "accepting" the long bill drawn upon him for a fixed commission. Needless to say, the house abroad has to have a high opinion of the house here, or has to be in pretty close connection with it, before it will agree to accept its unsecured drawings to any extent.

This is the finance-bill as it is - not widely different from accommodation paper among international bankers. The house of Jones and Company in New York, which enjoys good standing and has close connections with Smith and Company in London, wants to raise additional money for some purpose. A credit is arranged with Smith and Company in London and the New York house draws upon them in sterling for the amount required. The bills are then sold and Jones and Company finds itself in possession of the money it needs. For ninety days it has the use of that money, at the end of which time the bills it drew in the first place will be coming due and demand drafts will have to be sent across to meet the maturity. Usually the arrangement calls for the privilege of renewal, which works out as follows:

Suppose at the end of ninety days, Jones and Company in New York find it inconvenient to put up money with which to buy demand exchange in "cover" of the bills they drew ninety days previously. Yet those bills are maturing and have to be met. So, in order to raise the money with which to buy the necessary demand exchange, Jones and Company sell a fresh lot of ninety-day bills. Just here there is an important point to be noted. To take a concrete case, suppose that Jones and Company of New York originally drew £10,000 of ninety-day sight bills and that the exchange market did not materially change between the time the bills were drawn and the time when it became necessary to "cover." Say that when the "nineties" were sold Jones and Company realized $48,700 for them, demand exchange standing at 487. The finance-bills fall due and have to be covered, but Jones and Company decide to renew them by drawing more nineties. From the sale of £10,000 nineties at 484 they would not realize within $300 of enough to buy the necessary demand at 487. That difference represents the interest on the transaction. Usually, when connections are close, instead of drawing for exactly £10,000, the second time, Jones and Company of New York would draw for enough more, say £10,060, so that there would be no real balance to pay. Such a process may be continued indefinitely - is being continued indefinitely, in fact, by many banking houses in New York who have come to regard the money to be raised by the sale of these finance-bills as part of their regular working capital.