Besides promissory notes, another form of obligation given for money loaned is the "draft," or "bill of exchange," like the following specimen:

A bill of exchange may properly be defined as a draft drawn by a party doing business at one place upon a different party residing in some other place at a greater or less distance, for a sum of money representing a bona fide business transaction between the "drawer," who signs the "bill" or "draft," and the "acceptor," who agrees to become responsible for its payment by writing his name across the face of the draft.

For instance, where a party in New Orleans sells a lot of cotton to a party in Liverpool, he draws a "bill of exchange" for the value of the cotton, attaches to it the "bill of lading," or receipt given by the railroad or steamship transporting the cotton to its destination, and a certificate of an insurance company, undertaking the risk against loss by water and fire, and taking it to the bank where he deals, he will be in a position to receive immediately the cost of the cotton from the bank, which, when it lets him have the money, is said to buy or discount the "bill of exchange."

For the money advanced the bank is protected from loss by the bill of lading and the insurance certificate until it receives repayment from the party upon whom the draft is drawn. For the use of the money so loaned or advanced the bank receives what is called "exchange," which is a certain percentage, based not only upon the rate of interest for the use of its money, but also something besides to compensate it for the cost of bringing money to New Orleans with which to buy or discount the draft.

During the movement of the cotton crop, requiring large amounts of currency for a few months, it is necessary for the banks at the South to bring the currency from points more or less distant by express, and the discount or exchange deducted must also cover this expense.

When a bank buys bills of exchange it will get back as much of its money as it can by selling its drafts or bills of exchange to parties who wish to remit money in payment of goods bought or other debts contracted at a distance, and the extent to which it does this determines the rate of exchange. For instance, a bank in New Orleans, after exhausting its funds on hand in buying cotton bills of exchange, will forward these bills to a bank in New York City, requesting it either to buy them in turn or lend money on them. The bank in New York will credit the New Orleans bank with the proceeds of the bills and will, as requested, ship the same in currency by express to the New Orleans bank or ship a portion of same and use a portion to pay bills drawn by the New Orleans bank and sold to parties owing money at the North or elsewhere, and remitting payment for same in drafts on New York.

If the amount of bills bought greatly exceeds the amount of those sold, exchange is said to be at a rate "below par," which means that a discount is deducted from the amount named in the face of the draft to cover the cost and expense of bringing currency by express. If the bills bought equal the amount sold, the discount on the face value of those bought will be just sufficient to cover interest for the use of the money and risk, for no currency need be transported, while the bills sold will be at their face value, or "at par." Again, when the amount of bills sold exceeds the amount bought, then the rate will be "above par," or at a premium, for the bank will then be at the expense of shipping currency to New York from New Orleans, with which to meet payment of the bills it has sold.

These factors will determine the rate of exchange in the same way between New York and London, or any two other points, the principles being the same in all cases.