In previous pages bills of exchange have frequently been mentioned as the most convenient and safe form of bank investments. As one of the most important parts of the machinery by which exchanges between different cities and different countries are effected through the agency of banks, a somewhat detailed description of them is now desirable. To this end it is necessary to discuss first of all the method of balancing the mutual indebtedness of commercial centres.

A. The balancing of the mutual indebtedness of commercial centres. - Between all commercial centres there is a constant flow of goods. Chicago merchants, for example, are daily making purchases in New York which are to be shipped to Chicago, and at the same time are making sales to New York merchants which are to be shipped from Chicago. Londoners are making daily purchases as well as sales in New York. The streams of commodities thus constantly flowing from one place to another give rise to an enormous quantity of debits and credits between different places which in some way must be settled. The New York purchasers must make payments to their creditors in London and Chicago, and London and Chicago debtors must make payments to their creditors in New York. The chief means employed in such cases are bills of exchange.

In order to make clear the precise nature of these instruments and the method of their operation, let us employ a hypothetical case. Suppose that Mr. Jones of New York ships to Mr. Smith of London a cargo of wheat for which he is to receive 1000, and that Mr. Roberts of London about the same time ships to Mr. Brown of New York an assortment of woollen cloths for which he is to receive 1000. The question is, how will Mr. Brown make his payment to Mr. Roberts, and Mr. Smith his to Mr. Jones? It would, of course, be possible for Mr. Smith to send one thousand gold sovereigns by express to Mr. Jones of New York, and for Mr. Brown of New York likewise to send one thousand gold sovereigns, or their equivalent in American gold coins, to Mr. Roberts of London. However, if this method were employed, there would be crossing the Atlantic at the same time in opposite directions two packages of gold sovereigns, a process which would involve a considerable expense in the form of express charges, insurance, and loss of interest upon two thousand gold sovereigns out of business employment for, perhaps, two weeks. Instead of making his payments in this form, let us suppose that Mr. Jones draws a bill of exchange on Mr. Smith, ordering him to pay to Mr. Roberts 1000. This bill would read about as follows: -

"To Mr. Smith of London:

Thirty days after sight please pay to Mr. Roberts One Thousand Pounds 1000), and charge the same to my account.

(Signed) Jones."

Suppose now that Mr. Brown of New York purchases this bill of exchange from Mr. Jones, paying him therefor 1000. By endorsement he then makes it payable to Mr. Roberts of London, and sends it by mail to that person. When Mr. Roberts receives it he presents it to Mr. Smith, who, by the process of acceptance, assumes the obligation of paying it at maturity. When the thirty days have passed the payment is made. The bill of exchange has thus performed its function. Without the shipment of a single coin across the Atlantic, Mr. Jones has received payment for his wheat and Mr. Roberts for his woollens.

It is evident that the bill of exchange used in the settlement of these two transactions might equally well have been drawn by Roberts of London upon Brown of New York, and sold to Smith of London and transmitted to Jones of New York and by him presented to Brown for payment. So far as the nature of the transaction is concerned, it makes no difference which person draws the bill.

B. Technical features and forms of bills of exchange. - To every bill of exchange there must be at least three parties, the person who draws it, called the drawer, the person upon whom it is drawn, called the drawee, and the person to whom it is made payable, known as the payee. Other requisites are the date and place of issue, the time of payment, the sum to be paid, usually expressed both in figures and in letters, the name and address of the drawee, the payee's name or description, the drawer's signature, and occasionally the place at which the bill is to be paid. Variations in these requisites constitute different varieties of bills. From the standpoint of the place of payment they may be classified as inland and foreign, the former being those payable in the country in which they are drawn, and the latter those payable in some other country. As regards the time of payment they may be classified as bills at sight and bills drawn for a term, the distinction being that the former is payable either on demand or upon its presentation to the drawee, while the latter is payable a certain number of days or months after date or after its acceptance by the drawee. This latter class is sometimes subdivided into so-called long bills and short bills, according to the length of time intervening between the date or acceptance of the bill and its payment, those payable within a few days after date or sight being known as short bills, and those payable in thirty, sixty, or ninety days as long bills.

Bills may be drawn in such a form as to render them non-transferable and non-negotiable, in which case they must be made payable to specifically named persons and to them alone, and are known as special bills. Ordinarily they are drawn payable to order, and are transferable by endorsement, the usual form of which is a statement like the following written upon the back of the bill: "Pay to Messrs. G. & Co." or "Pay to Messrs. G. & Co. or order," and signed by the payee. Other forms of endorsement are distinguished as special, restrictive, and blank. A special endorsement directs the payment of the sum for which the bill is drawn to a certain person or firm, with or without leave to transfer. A restrictive endorsement is one in which use is made of certain special clauses, like "per procuration," "for my account," "for my use," employed for the purpose of giving notice that the person in whose favour the endorsement is made is merely a trustee of the endorser or his agent, and does not possess the right to transfer the bill to any one else. A bill is said to be endorsed in blank when the payee simply writes his name across the back. It is then transferable from hand to hand without further endorsement.