A draft may be defined as a bank's check. In most essentials it resembles an ordinary check, differing from it chiefly in the fact that it is an obligation of a bank instead of a depositor and is consequently signed by some bank official. It is, in fact, a special form of check adapted for use in making payments at a distance. Every bank provides itself with so-called correspondents in the chief commercial centres of the regions in which its customers are liable to do business, upon which by special arrangement it is permitted to draw drafts which said correspondents agree to honour. A depositor, therefore, who wishes to make a payment outside of his own city or of the region in which his own check will circulate may draw a check in favour of his bank and receive in return a draft on a bank in the place in which his creditor resides or on one whose paper will be readily honoured in that place. Said draft may be made payable to the order of the depositor's creditor or to his own order, in which latter case it will be made payable to the creditor by endorsement in the ordinary form. Drafts are carefully numbered, and all their essential features recorded on stubs kept by the issuing bank. When drawn on foreign correspondents they are usually issued in duplicate, one, called the first of exchange, being given to the purchaser for transmission to his creditor, and the other, called the second of exchange, being sent directly to the bank upon which it is drawn. The duplicate serves as a means of identification of the original, and as a substitute for it in case it is lost. The payment of either of the bills renders the other invalid. When a draft is paid, the amount is debited on the account of the issuing bank and the draft returned to the drawer. By endorsement a draft may pass through many hands and thus be the means of effecting several exchanges before it is finally presented for payment. The obligation of the bank upon which it is drawn to pay it, however, is not established until the original or its duplicate has been presented and accepted.
The superior convenience and economy of drafts over coin or any other form of currency which must be sent by freight or express at the risk and expense of the sender has given them wide circulation in international and in-termunicipal transactions. At the present day they are obliged to compete with similar forms of currency issued by express companies and postal authorities, but they must still be regarded as the chief medium for this class of exchanges. Their use has led to the establishment of such close and intimate relations between the banks of the world as to constitute them a veritable organism, sensitive in a high degree to all kinds of commercial influences and of no small significance in the political life of the modern world.
It must be carefully noted that drafts, like ordinary checks, are based upon deposits, and are, therefore, a means of expanding discounts. They may be purchased either with a check against an already existing credit-balance or by means of the deposit of cash. In either case they make it possible for the bank either to purchase new securities or to lengthen the period before maturity of the old ones. Indeed, from the standpoint of the bank, they may be regarded as a means of extending the circulation of deposits as money, and in this way of expanding the field for the profitable investment of bank- credit.