1. Open Book-account.

The most elementary type of credit instrument may be said to be the open book-account. A sells goods to B and debits him with the value of these goods, or in the current phrase "charges" them to him. A necessarily carries some kind of account books which, in the event of necessity, can be produced and which contain entries to show the amount of goods he has transferred to B. Such books are records, having, of course, only the validity which they acquire from the fact that they are entries made in good faith at the time of the transaction to which they refer. Ordinarily they present no evidence of having been acknowledged by B. Nevertheless, they are in a sense a credit instrument - that is to say, they are a means of recording or measuring credit, or of furnishing evidence that it has been extended. The idea becomes more fully developed when we conceive of both A and B as keeping records, each perhaps purchasing from the other, and their records, therefore, agreeing substantially with regard to the amount of goods given and received. If at the end of a fiscal period they exchange receipted statements, these are evidently elementary credit instruments, and present on their face evidence that the transaction indicated by the charges to account has been completed through the transfer of an equal amount of goods, or through some other form of credit. Such receipted statements are a derivative of the books of record of the concern, and may be regarded in an even fuller sense than the former as being credit instruments.

2. Promissory Note.

Another step in the direction of the credit instrument is taken when the recipient or buyer of the goods gives to the seller an acknowledgment that they have been received. This might conceivably be nothing more than a receipt for the goods - a signed statement that he had received a given number of bushels of wheat or yards of cloth of a certain kind. Examples of this sort are seen in the warehouse receipt which plays so important and growing a part in business to-day. A cotton warehouse receipt, for example, is merely the acknowledgment of the warehouse operator that he has received from his customer a given amount of cotton of a specified grade and is holding it for him. A still further step is taken when the receipt specifies the value of the goods - B, for example, certifying to the receipt of a given number of bushels of wheat at $1 per bushel. Since in this instance B has acknowledged receiving goods of a specified value, it is inferred that he has obligated himself to settle for or liquidate the obligation in an equal amount. A final step may be taken when B does not specify the kind or character of the goods received, but merely acknowledges himself to be indebted in a specified amount for "value received." In this case a full-fledged "credit instrument" has been worked out. It is what is ordinarily termed a note, and constitutes a legal obligation on the part of B to pay A a given number of dollars - that is to say, to return to B value which is represented by a given sum in dollars, although A may, if he choose, exact an actual settlement in money.

3. Bill of Exchange.

Exactly the same result might be reached by a somewhat different route, giving rise to a rather different type of credit instrument. If A, when he sent the goods to B, had drawn upon the latter by issuing an order to him to pay a specified sum either to A himself or to some one else at a given date, this order would have been called a "draft" or bill of exchange.

Bills of exchange may be classified according to the party on whom drawn or the time when payable. If drawn on a person, firm, or corporation, they are called trade bills, and if on a banking institution, they are described as bankers' bills. They are termed sight drafts if payment can be demanded on presentation, or at a fixed time after sight, and time bills if they mature on a specified future date. The term "acceptance" may have several meanings and therefore requires explanation. In the first place it may refer to the act of the drawee in writing across the face of the instrument a formal acknowledgment of the order addressed to him by the drawer and an agreement to pay the obligation at its maturity. The term acceptance is also applied to a time bill of exchange which has thus been duly accepted. This use of the expression "acceptance" is found in commercial practice, but is not recognized in law.

Promissory Note

Bank Check

Bank Acceptance

In a more restricted sense, acceptance is the expression inscribed on the bill by the acceptor. It may be written simply as follows:

Accepted July 1, 1921. William Smith.

This form is described as unqualified acceptance, for the drawee agrees to make payment at the time, to the parties, at the place and in the amount specified on the face of the bill. The acceptance written by the drawee is said to be "qualified" when it differs in any way from the order addressed by the drawer. The above acceptance may be qualified in any one or more of the following ways:

(1) Time. The bill reads "payable thirty days after sight," but the acceptor extends the time to sixty days after sight.

(2) Parties. The draft is drawn on Jones and Smith, but Smith alone accepts.

(3) Place. A draft is payable at the acceptor's business office, but the place of payment is restricted by an acceptance, reading, "Payable at the X Bank only."

(4) Amount. The bill is drawn for $1,000, but the drawee acknowledges only $800 and not the full amount.

4. The Check.

The credit instruments which we have spoken of thus far have been, as already seen, evidence of obligations growing out of the transfer of goods between individuals and giving rise to obligations stated either in terms of goods or in terms of money. There is no reason, however, why the transaction should not be an operation in money throughout. For example, if A advances to B a title to money or money itself, he may simply charge B with the amount on his books, or if B "deposits" money with A, the latter may simply credit the former with the amount. When a bank does this it enters the amount thus deposited in a deposit book or bank book which is presumably a duplicate of B's account as carried on the books of A (in this case the bank), and which thus acts as a kind of receipt or voucher, or, as we have learned to call it, a credit instrument. Suppose now that B, desiring to withdraw some of these funds from the custody of A, directs A to pay them out in cash either to himself or some one else, or to transfer them on his books to the credit of some one else, a written instrument will be needed for this purpose, which is nothing more than an order to A to pay or transfer the credit obtained by B. This is called a draft or check. When the transaction in question occurs between an individual (B) and the bank (A) the term "check" is universally employed, and the check is in the fullest sense of the term a credit instrument.