We have seen that there are three parties to a bill. A party may make a bill payable to himself and thus, while there will technically be three persons involved, there will actually be but two people - the drawer and the drawee. The drawer in this case is also the payee. Drafts may be divided into various classes. The usual qualifying terms are personal, collateral or stock, and bank drafts. Personal drafts are orders drawn on one person by another to pay a third person. In our banks, and especially in the collection department, these are really the dunning orders for payment which are drawn by firms when their customers have not paid their bills at the due time, or they are the kind of draft drawn by a son in college on his father in the hope that it will be paid. It is true that personal drafts are sometimes used for legitimate transactions involving the actual transfer of funds owed. These cases are in the minority and in many instances carry collateral such as stocks, bonds, warehouse receipts or bills of lading attached as security. Bill of lading drafts are a usual form of collateral draft. In the larger cities we see many stock drafts with negotiable shares of stock attached. The advantage of this kind of transaction is that both the buyer and seller are protected throughout as no funds are paid until the security is in hand. The term "bank draft" is in common use and refers to a draft drawn (always at sight - on demand - at presentation) by one bank on another, directing the latter to pay a certain sum of money to a third party. It is simply an order which one bank draws on another bank. Practically all banks keep funds on deposit in banks in other cities, especially in the larger financial centers. In this way they are able to meet the demands of customers who often wish a form of payment that will be accepted without question. Bank drafts pass practically as cash almost everywhere in the country. Drafts on New York are known as "New York Exchange." Suppose that Kane & Co. of Toledo wish to send $1,000 to a firm in Buffalo for goods to be shipped immediately. They send to their bank in Toledo a check for the amount, only in place of the payee's name they write the words "New York draft." Their bank then proceeds to make out a draft on its New York correspondent, payable to Kane & Co., for $1,000. Kane & Co. indorse the draft, making it payable to the Buffalo firm, and mail it to the latter. By having the draft drawn to themselves, instead of to the Buffalo people, Kane & Co. have an instrument which serves as direct evidence of the transaction, and when indorsed and transferred acts as a voucher. Or Kane & Co., instead of having themselves made the payee, might have had the Buffalo firm made the payee. Bank drafts are much used by business men to send remittances of money from one part of the country to another, and are probably used more for that purpose than any other method of payment. Nearly all banks furnish application blanks for drafts.
No. 801 Tacoma, Wash., May 22, 1922.
Pay to the order of William G. F. Birmingham
One thousand and eighty-one 50-100 ($1,081.50)
First National Bank Of Tacoma
James B. Price, To Corn Exchange Bank, Cashier.
The National Bank
Payable To The Order OP
On What City
A bank draft so called, being drawn on a bank is really a check, but general custom has given its present name which will probably remain. Drafts, with the exception of bank drafts, may be either "sight" or "time." Sight drafts are payable at sight or demand; time drafts are payable either at a fixed time after sight or after date, or after some event which is sure to happen.