A draft is a formal demand for the payment of money. Your bank cheque
is your sight draft on your bank. It is not so stated, but it is so
understood. A cheque differs from an ordinary commercial draft, both
in its wording and in its purpose. The bank is obliged to pay your
cheque if it holds funds of yours sufficient to meet it, while the
person upon whom your draft is drawn may or may not honour it at his
pleasure. A cheque is used for paying money to a creditor, while a
draft is used as a means of collecting money from a debtor.
Nearly all large banks keep money on deposit with one or more of the
banks located in the great commercial centres. They call these
centrally located banks their _correspondents_. The larger banks have
correspondents in New York, Chicago, Boston, and other large cities.
As business men keep money on deposit with banks to meet their
cheques, so banks keep money on deposit with other banks to meet their
drafts.
A BANK DRAFT is simply the bank's cheque, drawn upon its deposit with
some other bank. Banks sell these cheques to their customers, and
merchants make large use of them in paying bills in distant cities.
These drafts, or CASHIERS' CHEQUES, as they are sometimes called, pass
as cash anywhere within a reasonable distance of the money centre upon
which they are drawn. Bankers' drafts on New York would, under
ordinary financial conditions, be considered cash anywhere in the
United States. A draft on a foreign bank is usually called a BILL OF
EXCHANGE.
[Illustration: A cheque for the purchase of a draft.]
Cheques have come to be quite generally used for the payment of bills
even at long distances. If a business man desires to close an
important contract requiring cash in advance he sends a bank draft, if
at a distance, or a certified cheque, if in the same city. If he
desires simply to pay a debt he sends his own personal cheque. Bank
drafts are quite generally used by merchants in the West to pay bills
in the East. A draft on New York bought in San Francisco is cash when
it reaches New York, while a San Francisco cheque is not cash until it
returns and is cashed by the bank upon which it is drawn. In the
ordinary course of business cheques are considered cash no matter upon
what bank drawn. The bank receiving them on deposit gives the
depositor credit at once, even though it may take a week before the
value represented by the cheque is in the possession of the bank.
[Illustration: A bank draft.]
All wholesale transactions and a large proportion of retail
transactions are completed by the passing of instruments of
credit--notes, cheques, drafts, etc.; a part only of the retail trade
is conducted by actual currency-bills and "change." Banks handle the
bulk of these transferable titles and deal to a very small
extent--that is, proportionally--in actual money. The notes, drafts,
bills of exchange, and bank cheques are representative of the property
passing by title in money from the producers to the consumers. A small
proportion--perhaps six or eight per cent.--of these transactions is
conducted by the use of actual bank or legal-tender notes. This trade
in instruments of credit amounts in the United States to fifty
billions of dollars yearly.