Drafts are often discounted at banks before acceptance where the credit of the drawer is good. In such cases the drafts which are dishonoured are charged up against the drawer's account.
X. FOREIGN EXCHANGE
It is quite in order that we should follow lessons on the clearing-house and commercial drafts with a lesson on foreign exchange.
We learned in the last lesson that commercial drafts are made use of to facilitate the collection of accounts. They are simply formal demands for the payment of legitimate debts. When these formal demands are made upon foreign debtors they are called bills of exchange; and the process of buying and selling these drafts, the drafts themselves, and the fluctuations in price, all are included in the general name exchange.
To illustrate the principles of exchange let us suppose that the following transactions have occurred:
- C of Boston has sold goods, £2000, to H of Hamburg.
- D of Chicago has sold goods, £5000, to F of Glasgow.
- M of Chicago has sold goods, £3000, to K of London.
- E of Philadelphia has sold goods, £6000, to R of Paris.
- P of New York has sold goods, £1000, to G of Paris.
C draws on H for £2000, sells the draft to a banking-house in Boston; they send to Bank A of New York, and the New York bank to their London correspondent, say Bank B, with instructions to collect from Hamburg.
D draws in a similar way on F. E draws on R, and P on G. Suppose that M instead of drawing on K receives a draft drawn by Bank B of London on Bank A of New York, payable to M's order.
America has sold goods worth £17,000 to Europe.