A DRAFT
A draft is a written order from the first party to the second
party to pay to the third party a certain sum of money at a
certain time.
The first party is called the "drawer."
The second party is the "drawee."
The third party is the "payee."
There are two kinds of draft.
The first is usually where the cashier of one bank, through his
own check, draws on another bank for the cash difference in their
accounts with each other.
The second form of draft is the most usual and is the one we shall
here consider.
The cashier's draft is always for cash and the demand is always
honored. The ordinary business draft may be for cash or for goods.
The business draft is usually honored, but there are circumstances
under which it may be ignored.
TO MAKE A DRAFT
But let us suppose that the draft is all right and that a
merchant, let us call him Henry Thomas, and suppose him a resident
of Philadelphia, has a bill against James Taylor, of Cleveland,
and he wants to collect it, without recourse to law. How will he
go about it?
The bill is for $100.
Mr. Thomas writes this draft:
Philadelphia, Pa., Sept. 5, 1910.
At sight pay to the order of
Johnson National Bank of Philadelphia
One hundred................... dollars.
With exchange
and charge same to
Henry Thomas.
To James Taylor,
Cleveland, Ohio.
Having drawn his draft, Mr. Thomas takes it to the Johnson
National Bank for collection. The collection is actually made by
some bank in Cleveland to which the Johnson has endorsed it over.
If Mr. Thomas wished he might have sent his draft direct to the
Cleveland bank, but he no doubt thought it better to transact such
matters through his own bank.
Or if Mr. Thomas lived where he was not in touch with a bank, he
might have drawn through any person whom he knew in Cleveland.
On receiving the draft for collection, the Cleveland bank would at
once give it to a clerk who would without delay present it to Mr.
Taylor.
Mr. Taylor, having written his acceptance of the draft, is given
three days grace in which to make payment.
In states where days of grace are not allowed, he would have to
pay at once.
Mr. Taylor writes the word "accepted," with the date and his name
across the face of the draft, and if he does not pay cash, he
states in the writing where payment will be made.
Of course, Mr. Taylor cannot be compelled to accept a draft. There
may be good and honest reasons for his not doing so, but having
accepted it, in business honor he is bound to pay it.
The term "Sight draft" explains itself, but the order to pay a
draft may indicate, and often does, the number of days allowed for
payment, after presentation.
FOR COLLECTION
What should be done by the man to whom a bill or a note is due,
when the debtor lives in a place where there is no bank?
In that case he must learn in some way the name of a promising
person to make the collection for him.
In this case he makes out the draft as before, and adds the words
"for collection." This acts as a bar to any transfer of the paper.
Most banks refuse to handle a draft marked "for collection."
DISHONOR
Drafts are not necessarily duns.
Some country merchants prefer to pay their bills to wholesalers in
that way, so that collecting drafts is no small part of the
business of the ordinary bank.
While men are not compelled to meet drafts when presented, if the
amount is due and he defaults or refuses to pay he injures his own
credit.
In refusing a just draft he is said to "dishonor" it.
So sure are wholesalers that their drafts will be met by their
distant debtors that they do not hesitate to draw against them
when deposited for collection, regarding them as cash to their
credit in bank.
PROTESTS
When a draft is not accepted or paid when due, if it be a time
draft, it is protested in the same way as a note.
The protest of a draft serves as a notice to the drawer of its
non-acceptance.
Like notes and checks, drafts may be transferred by a similar
endorsement.
BUYING DRAFTS
If I wanted to pay a bill for $150 to Albert Holt, living at
Wallace, Kansas, and did not wish to trouble him with a check, how
would I go about it?
1. I might express the cash, which would be expensive.
2. I might send it in postal order, not always certain.
3. I might send it by a trusted hand, but might have long to wait
before I found a friend going out to Wallace.
I am living in New York City, and am familiar enough with banking
to know that New York is a great financial center and is in
constant communication with nearly all the outside banks.
The outside banks keep money in deposit here, and the New York
banks, particularly in the spring and autumn, keep deposits with
their correspondents.
With my $150 and a small extra sum to pay my bank for drawing the
draft, I go thither and buy a draft for the sum I owe Mr. Holt.
I mail this draft to my creditor and he can cash it without loss
in his home bank. Here is the form:
No. 101.
Madison National Bank of New York.
Pay to the order of Albert Holt,
One hundred and fifty dollars ($150.)...
.......... L. N. Jones,
Cashier.
To Prairie National Bank,
Wallace, Kansas.
A GOOD PLAN
When you buy a draft which you mean to send off in payment of a
debt, a good plan is to have it made payable to yourself.
Let us suppose it is the case of Albert Holt. You transfer the
draft to him by writing across the back, "Pay to the order of
Albert Holt," and add your signature.
Now as all drafts are returned, as payment vouchers, to the banks
from which they were issued, and as Mr. Holt must have signed the
draft to get his money, it follows that there is a record of his
having received it, and this has all the force of a receipt.
Do not endorse a draft with just your name, for in that case,
anyone into whose hands it falls may collect. First write "Pay to
the order of" the person for whom it is intended.
GOOD AS CASH
A draft made payable to yourself is as good as cash, and far safer
to carry.
If you are identified at any bank between the Atlantic and
Pacific, you can have your draft cashed.
All banks furnish blank drafts.
Never endorse a draft made payable to yourself, and this applies
to a check, until you are about to use it.
It is a good plan never to sign your name until it is actually
necessary.
Some people have the foolish habit of signing their names on stray
bits of paper.
Do not get into this habit, even if there is no space to fill out
a note or order above the signature.