The chief instruments of banking credit, other than bank notes, are checks, bank drafts, and letters of credit. A check is a written order on a bank for money drawn by one who has a deposit there. Cheeks are usually made payable to someone's "order," and must then be indorsed by the payee; before they can be negotiated further or cashed. A check drawn to "bearer" is payable to any person who holds it. Technically, a check is only an order on the bank, but legally it is an implied promise to pay on the part of the drawer of* the check, and any person "giving a check upon a bank in which he has no deposit account is liable to prosecution for obtaining money under false pretences." A depositor, wishing to make a payment at a distance where he is not known, or being required to present unquestionable evidence of his financial ability to fulfill his agreement in some contract, or bid for bonds, or the like, may request his bank to certify his check. The cashier writes or stamps across the face of the check the word "certified" or "good when properly indorsed," followed by his signature. The check then becomes the bank's promise to pay or guarantee and the depositor's account is at once debited as if the check had been paid. Where a bank does not make a practice of certifying checks, it may instead issue a bank draft or a cashier's check payable to the order of the depositor, or to the person whom he designates.
A bank draft is an order drawn by one bank on another bank. Practically all banks keep funds on deposit with banks in other cities, especially in the large financial centers, in order that they may be able to meet the demands of their customers for a form of payment which will bo accepted without question. The banks draw upon these accounts and sell their drafts to their customers, making a small profit on the charge for "exchange." Bank drafts pass as cash practically anywhere in the country and constitute an important method of making remittances from one part of the country to another. Drafts on New York, commonly known as "New York Exchange," are acceptable all over the country, owing to the fact that New York is the commercial and financial center of the country and that business men everywhere have dealings with that city. The following transaction will illustrate the use of the New York draft. Smith Brothers of Indianapolis want to remit $2,500 to a concern in Providence, R. I., for goods to be shipped at once. They send down to their bank a check for the amount, writing in the place of the payee's name the words "New York Draft." The bank makes out a draft on its New York correspondent for $2,500, payable to Smith Brothers. They indorse the draft, making it payable to the Providence creditor, and mail it to him. In having the draft drawn to their own order, instead of to the order of the creditor, it serves as a direct evidence of the transaction, and acts as a voucher when indorsed and transferred.
A cashier's check is an order on a bank drawn by its own cashier. It differs from a bank draft in being drawn by the cashier upon his own bank instead of on some other bank. It is used when the bank has payments to make, just as an individual uses his cheek, It is also issued to customers to be remitted to their creditors like a bank draft; and it is sometimes used in lieu of certification where it is not the custom of the bank to certify.
A letter of credit is a document issued by a bank or banker directed to its correspondents authorizing the bearer to draw upon the issuing bank or some central agent up to a certain amount. A traveler, before starting abroad, buys a letter of credit from his bank. In any foreign city, as he may have need for the money current in that country, he goes to the office of the correspondent named in his letter of credit, and makes out a draft for the amount he needs. The draft will be cashed, after comparison of the signature on the draft with that on the face of the letter, and the amount withdrawn, plus commission, will be entered on the letter. Thus the letter will show at any time how much of the credit remains unused. Commercial letters of credit provide a convenient means of paying for goods bought in any part of the world or of receiving payment for goods exported.1
To meet the demands of travelers for a convenient, safe and economical method of carrying funds, the express companies and some international bankers issue "travelers' cheques." They are issued for fixed amounts, ranging from $10 up to $100, and show the equivalents in the money of the principal European countries. To provide a simple means of identification and security against loss of the cheques, the intended user places his signature upon each cheque. When he wants to obtain funds at the bank or express office, or to pay his hotel bill he again signs his name in the proper place on the cheque, thus completing the issuance and insuring the identification of the rightful owner, as the two signatures must agree. The advantage of these cheques is that the value of each cheque in the money of the leading European countries is plainly printed on them, and they are cashed without discount or commission by bankers, agents of express companies, and the leading hotels in Europe, the United States, and Canada. They are convertible into money at almost any time and place.