One of the most important functions of banks is to facilitate domestic and international trade transactions through dealing in domestic and foreign exchange. Just as banks in the same city settle their claims against each other through the clearing house, thus reducing to a small balance the amount to be settled in cash, so balances between different cities are settled by the operations of domestic exchange, and balances between countries by foreign exchange.
Reference has been made elsewhere to the work of the banks in facilitating payments and in collecting for their customers, checks, drafts and other instruments of credit in daily use. These transactions involve two sets of settlements: first, those between the buyer and the seller with the bank as intermediary; and second, settlement between the banks involved. It will be recalled that the personal draft or bill of exchange differs from a check in that it is drawn by one person upon another and not upon a bank. It may be drawn in favor of the drawer himself or of a third person, and it may be made payable at sight or at a certain number of days after sight or after date. If it is a time draft it will be presented to the drawee as promptly as possible for his acceptance. An accepted time draft becomes to all intents and purposes the promissory note of the acceptor. The use of these drafts in connection with bills of lading is described in the chapter on loans and discounts. They are used extensively in the financing of the grain and cotton crops and many other lines of business. For example, a New Orleans cotton buyer when he sends a shipment of cotton to New York draws on the New York firm for the amount, attaches the draft to the bill of lading, and takes it to his local banker to realize on it. The banker buys the draft and the proceeds are placed to the shipper's credit at once or as soon as advice is received from New York that the draft has been paid or accepted. The banks render an important service in presenting, collecting and discounting these commercial drafts or bills of exchange.
While merchants and traders in different parts of the country are enabled through the agency of banks to make settlements with each other by offsetting the claims of one section against those of another, these claims never exactly balance. It becomes necessary, therefore, either to ship currency or to provide some form of credit that will have undoubted acceptability. This need is met by the use of the bank draft. A bank draft is an order drawn by the cashier of one bank on another bank or banker. Practically every bank in the country has funds on deposit with banks in other cities, and so is able to sell to its customers drafts calling for the payment of money in those cities. Owing to the fact that New York is the commercial and financial center of the country and that business men all over the country have financial dealings with New York, most banks find it advisable to keep deposits with banks in that city. Drafts on New York, commonly known as "New York exchange," are generally as acceptable as cash anywhere in the United States, and are widely used in making remittances from one part of the country to another.
Even remote country banks can usually sell New York drafts, for though they may not have deposit accounts in New York, they have an arrangement with some bank in a nearby city which maintains a New York deposit by which they, too, are permitted to draw upon it. Drafts upon other large financial centers, like Chicago or St. Louis, are generally acceptable through the West and some local use is made of bank drafts on smaller places, but New York exchange is constantly being used to cancel debts all over the United States.