The credit of the drawer of a bill is so important an element in its value that large firms of wide reputation and known financial strength have a great advantage in commerce on a large scale over small establishments of less reputation. From this fact, in part, it results that business requiring settlement through bills of exchange falls chiefly to the large and strong concerns. It is often more economical for an exporter to employ a large commission house than to attempt to export directly, since he can make better terms with such a house than it would be possible to make with a foreign importer. On this account also it happens that most of the bills of exchange drawn upon foreign markets bear the names of large firms of international reputation. Inland bills, having a less extended circulation, are more liable to be drawn by smaller firms and less widely known persons.

For convenience in the negotiation of bills special market-places are sometimes established. In the city of London the so-called Royal Exchange answers this purpose. Formerly this building, of great antiquity, was a general meeting place for merchants of all sorts. In recent times, however, special classes of dealers have established independent exchanges in other places, and the Royal Exchange is now chiefly employed by the negotiators of bills of exchange. Twice a week, on Tuesday and Thursday, after luncheon time, there assemble in the courtyard of this building representatives of the chief bill-brokers of the city and of the great foreign banking houses. In a comparatively short period of time the transactions in foreign bills for the day are concluded, and from the bargains thus made the published reports of the rates of foreign exchange are compiled. Such exchanges are, of course, not necessary in places where the offices of bill-brokers are easily accessible to bankers and firms having bills for sale.

E. The value of bills of exchange. - Of the various elements entering into the determination of the value of bills of exchange, one has already been mentioned, namely, the credit of the drawer and acceptor. If the merchant upon whom a bill is drawn is unknown or has the reputation of not meeting his obligations promptly at maturity, either because of dishonesty or inability, its sale will be possible only at a depreciated value, if at all. On the other hand, if both drawer and acceptor are known to be financially sound, this element of risk may completely disappear.

The chief elements entering into the value of bills are the cost of transmitting other forms of currency and the rate of discount. In payments to distant places, as we have seen, merchants have the option of sending cash or bills of exchange, and they choose the latter because it is cheaper. The cost of sending gold to a foreign country consists of freight or express charges, insurance fees, and loss of interest * during the time of transit. If a bill of the requisite face value can be purchased for any sum less than the cost of the gold with all these expenses added, a saving is effected by its use. Suppose the amount of the payment to be made in London is one thousand dollars, and the cost of shipping that amount of gold is one dollar. The New York importer can afford to pay for a bill of exchange any sum less than one thousand and one dollars, and this may, therefore, be regarded as the upper limit of the price of a bill for that amount. An exporter, on the other hand, who has the right to receive one thousand dollars in London, can either order his agent to ship him that amount of gold, which, when expenses are deducted, will net him nine hundred and ninety-nine dollars, or he can sell in New York a bill of exchange upon his London creditor. It is evident that he will adopt the latter method, provided he can sell such a bill for any sum above nine hundred and ninety-nine dollars. This figure, therefore, represents the lower limit of the value of a one-thousand-dollar bill on London. Within these limits the value of bills fluctuates in accordance with the law of demand and supply. If the number of bills offered for sale is in excess of the number demanded, they will fall below par. If the number offered is less than those required on a particular day, their value will go above par. In no ordinary case, however, will the premium or the discount exceed the cost of shipping gold. When the transactions are between different points in the same country, the same principle holds, with the difference that in this case other forms of currency besides gold are available for shipment, and the cost is not, therefore, apt to be so great. In the United States, for instance, besides gold, one may ship silver dollars, bank-notes, greenbacks, Sherman notes, or silver certificates.

* Frequently there are other expenses, such as mint charges, cooperage, and fees of various kinds.

The rate of discount always enters into the value of bills drawn for a term. If a man offers for sale a bill of exchange which falls due in thirty, sixty, or ninety days, he cannot expect to receive for it so large a sum as he would if it were payable on demand. In fact, he will be obliged to sell it for its present worth, which is its face value minus interest upon it until the date of maturity. Time bills, therefore, are always of lower value than sight bills of the same quality. It should be noted also that the discount on time bills is usually reckoned at the rate ruling in the market upon which they are drawn rather than at that of the market in which they are sold. The reason for this is that the purchaser of the bill who holds it as an investment until maturity will receive the rate of interest ruling in the market upon which it is drawn rather than that ruling in his own market: Suppose, for example, a New York broker buys a three-months London bill of the face value of one thousand pounds. This bill, being payable in London, will not be accepted by the drawee at a rate higher than that ruling in his own market, for the obvious reason that he would prefer otherwise to borrow the money and pay the bill at once. The purchaser of the bill will be unable to push its value below the point represented by this rate of discount, because otherwise the drawer would prefer to negotiate it on the foreign market at a higher price.

Various other facts need to be taken into consideration in estimating the value of bills, particularly those drawn on certain foreign cities. These special cases, however, may be best considered in connection with the subject of the foreign exchanges treated in the following chapter.

F. Bills of exchange as currency. - Notwithstanding the fact that their use is a very special one, bills of exchange constitute an important element in the world's currency. The fact that they are issued in irregular amounts and require endorsement every time they change hands, and, in the case of time bills, the constant change in their value as they approach maturity, prevent their extensive use in retail trade, but in the form of bank drafts they are the means ordinarily employed for making payments in distant places, and even ordinary trade bills sometimes serve as currency between great corporations and men who transact business on a large scale. In intercourse between banking institutions they are extensively employed for the purpose of paying balances, and for running up credit accounts for use in time of need. This is indeed their chief currency use, and it is of sufficient importance to merit mention side by side with their use as a form of bank investment.

References

The clearing systems of the most important countries are treated in the following books: Cannon's Clearing-houses; Howarth's Our Clearing System; Seyd's London Bank and Bankers'

Clearing-house System; Easton's The Work of a Bank, ch. vii; Bolles's Practical Banking, pt. III; and Rauchberg's Clearing-und Giro-Verkehr. On bills of exchange and their use see Hutchison's The Practice of Banking, v. I, pt. III; Gambaro's Lessons in Commerce, ch. x; Easton's Banks and Banking, chs. xx-xxv; and the various treatises on commercial law, among which may be mentioned those of White and Spencer, which are well adapted for the use of non-technical students.