Mr. Banker: Just wait a moment, please, until I finish, and you will note the difference. The Bill of Exchange is the medium of settling accounts or debts between parties residing at a distance from each other, without the intervention of money by exchanging checks or drafts.
Mr. Manufacturer: Then they are identically the same thing except a bill of exchange acquires its name from the fact that it settles debts at a distance.
Mr. Banker: That is the exact distinction, if one is to be made at all, and I think it will be well for us to make this distinction to save confusion in our conversation, although in the ordinary and usual language of the street, or the business world, the terms, or words, "draft," "acceptance" and "Bill of Exchange" are used indiscriminately the one for the other.
If the definition of Mr. Lawyer stands, and I think it is a very good one, when he said "the science of exchange is to make one debt pay another debt," the science of Bills of Exchange is to make one debt pay another debt at a distant point. This is not a distinction fully without a difference, because it helps us to classify the transactions and distinguish them in a way as we go along.
A simple illustration is this: A, who lives in Boston, owes B, who lives in San Francisco, $1,000, and C, who lives in San Francisco, owes D, who lives in Boston, $1,000. B and D could exchange drafts with each other; then B and D could collect each other's drafts. But B could sell his draft on A to C for $1,000 and C could pay his debt of $1,000 to D by forwarding him the draft on A. D would then collect the draft on A. It will be seen at once that this transaction has saved the expense of sending $1,000 in money from Boston to San Francisco, and also of sending $1,000 in money from San Francisco to Boston at great expense by express. This transaction between Boston and San Francisco is known and called a transaction in Domestic Exchange.
If A, who lives in New York, owes B, who lives in London, $1,000, and if C, who lives in London, owes D, who lives in New York, $1,000, B, the resident of London, can draw on A in New York, and sell the draft to C, who resides in London, and C could pay his debt to D, who resides in New York, by forwarding B's draft to D, who resides in New York. D could then collect the draft from A. It is perfectly clear that by means of this transaction, the expense of sending $1,000 in gold from New York to London, and also the expense of sending $1,000 in gold from London to New York, has been saved.
This draft would be Foreign Exchange, because the cities are in two different countries.
Mr. Merchant: According to your illustration, Mr. Banker, if our sales of cotton, grain and meat to Great Britain should amount to $1,000,000,000 a year, and the sales of Great Britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $1,000,000,000, we would not have to transmit a single dollar of gold either way, because the debts would just cancel each other. If the debtors in the United States could find out who the debtors in Great Britain were, then they could exchange debts with each other. The debts of the two countries would just offset each other.
Mr. Banker: That is absolutely true, and it is entirely possible that the $2,000,000,000 worth of goods in the two countries could be bought and sold without moving a single dollar's worth of gold either way across the Atlantic.
Mr. Manufacturer: Well, that is just what we want to do and save the expense and trouble of transmitting the money, and it is up to you, Mr. Banker, to explain just how we are to accomplish this trick or feat, because it will save a tremendous expense, if this can be done.