A COMMERCIAL DRAFT bears a close resemblance to a letter from one
person to another requesting that a certain sum of money be paid to
the person who calls, or to the bank or firm for whom he is acting.
For instance, the draft shown in the first illustration might be
worded something like this:
_St. Louis, Mo., Feb. 22, 1899._
_Mr. Robert Elsmere,_
_Jefferson City, Mo._
_My dear Sir:_
_Will you kindly pay to the messenger from the ---- Bank who will
call to-morrow the sum of three hundred and ninety-seven dollars
and charge to my account?_
_Yours, very truly,_
_David Grieve._
[Illustration: A sight draft developed from the above letter.]
Commercial usage, however, recognises a particular form in which this
letter is to be written, and the address of the person for whom it is
intended is usually written at the lower left-hand corner instead of
on an envelope. Commercial drafts usually reach the persons upon whom
they are drawn through the medium of the banks rather than directly by
mail. Let us illustrate. Suppose that A of Chicago owes B of Buffalo
$200, and B desires to collect the amount by means of a draft. He
fills in a blank draft, signs it, and addresses it on the lower
left-hand corner to A. Instead of sending it by mail he takes it to
his bank--that is, deposits it for collection. It will reach a Chicago
bank in about the same way that cheques for collection go from one
place to another. A messenger from the Chicago bank will carry the
draft to A's office and present it for payment or for acceptance. If
it is a _sight_ draft--that is, a draft payable when A sees it--he may
give cash for it at once and take the draft as his receipt. If he has
not the money convenient he may write across the face "Accepted,
payable at (his) Bank," as in the illustration. It will then reach his
bank and be paid as his personal cheque would be, and should be
entered in his cheque-book. Banks usually give one day upon sight
drafts. The draft will not be presented a second time, but will be
held at the bank until the close of the banking hours the next day,
where A can call to pay if he chooses. Leniency in the matter of time
will depend largely upon B's instructions and the bank's attitude
toward A. If the draft is a time draft--that is, if B gives A time, a
certain number of days, in which to pay it--A, if he wishes to pay the
draft, _accepts_ it. He does this by writing the word _accepted_ with
the date and his signature across the face of the draft. He may make
it payable at his bank as he would a note, if he so desires. He then
returns the draft to the messenger, and if the time is long the draft
is returned to B; if only a few days, the bank holds it for
collection.
[Illustration: No. 1. A sight draft.]
[Illustration: No. 2. An accepted ten-day sight draft.]
[Illustration: No. 3. An accepted sight draft.]
[Illustration: No. 4. A time draft.]
An accepted draft is really a promissory note, though it is more often
called an _acceptance_. When a man pays or accepts a draft he is said
to _honour_ it. In the foregoing illustration A is not obliged either
to pay or to accept the draft. It is not binding upon him any more
than a letter would be. He can refuse payment just as easily and as
readily as he could decline to pay a collector who calls for payment
of a bill. Of course, if a man habitually refuses to honour legitimate
drafts it may injure his credit with banks and business houses.
It is a very common thing to collect distant accounts by means of
commercial drafts. A debtor is more likely to meet--that is, _to
pay_--a draft than he is to reply to a letter and inclose his cheque.
It is really more convenient, and safer, too, for there is some risk
in sending personal cheques through the mail. There are some houses
that make all their payments by cheques, while there are others which
prefer to have their creditors at a distance draw on them for the
amounts due.
If a business man who has been accustomed to honour drafts continues
for a period to dishonour them, the banks through which the drafts
pass naturally conclude that he is unable to meet his liabilities.
Some houses deposit their drafts for collection in their home banks,
while others have a custom of sending them direct to some bank in or
near the place where the debtor resides. If the place is a very small
one the collection is sometimes made through one of the express
companies.
When goods are sold for distinct periods of credit, and it is
generally understood that maturing accounts are subject to sight
drafts, there should be no need of notifying the debtor in advance.
Some houses, however, make a general custom of sending notices ten
days in advance, stating that a draft will be drawn if cheque is not
received in the meantime.
Notice the illustrations. The protest notice at the left of Nos. 1, 2,
and 4 is intended for the bank presenting the draft for payment. The
reason for this will be fully explained in our lesson on protested
paper. (See LESSON XIII.) No. 2 shows an accepted draft payable to the
order of a bank in the city upon which it is drawn. No. 1 is payable
to the order of a bank in the city of the drawer. No. 3 is a sight
draft payable to the order of a bank and accepted payable at a bank.
No. 4 is a time draft payable to "_ourselves_"--that is, the
Pennsylvania Steel Company.
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.