186. Against Remittances Of Sixty And Ninety Day Bills

Selling demand drafts against remittances of sixty and ninety day bills is the second important form of activity in foreign exchange, operations of this kind constituting, in fact, the main bulk of the business. Most of the merchandise sold in Europe by American merchants is sold on a sixty or ninety day basis; that is to say, a cotton firm which has sold cotton in Liverpool, or a grain house which has sold grain in London, is apt to draw its drafts against the merchandise shipped, at sixty or ninety days' sight. Some of these drafts are drawn direct upon the foreign buyers; some of them on foreign banks designated by the buyers with whom they have opened credits for the importation of the merchandise.

187. A Typical Example

In any case, practically all of these sixty and ninety day drafts are bought by bankers who want to use them in the conduct of their foreign exchange business. A cotton firm in Memphis, for instance, has sold 100 bales of cotton in Liverpool and drawn the draft, as previously explained, with the proper documents attached. The bill is then sold to a banker, perhaps in Memphis or in New York. Suppose, for the sake of illustration, that it has been sold to Messrs. Jones and Company in New York, who pay a rate for it according to the standing and strength of the drawer and the "usance" of the bill - the time for which it runs. A bill running for ninety days, for instance, commands a lower rate of exchange than a bill on which the holder can get his money at the end of sixty days.

Jones and Company in New York having received the bill and paid for it, immediately send it to, say, Smith and Company in London. What happens then depends upon the nature of the bill, whether the documents are for "acceptance" or "payment" as explained in section 174. If the documents are to be delivered on acceptance, Messrs. Smith and Company get the bill accepted as soon as possible and then have it discounted in the open market, placing the proceeds to the credit of Jones and Company, New York. If the documents are deliverable on payment only, Smith and Company get the bill accepted just the same, retaining the documents, however, until the consignees come around and offer to pay the draft under rebate of interest for the unexpired time. In the case of an "acceptance" bill, therefore, the proceeds become an available balance abroad just as soon as the bill can be accepted and discounted. In the case of a "payment" bill, the remitting banker cannot count on having the balance available until the bill actually comes due, though pre-payment may place the funds to his credit long before that time.

188. Opportunity For Profit

Hence in the remitting of sixty and ninety day documentary 'payment" and "acceptance" bills and the drawing of bankers' demand drafts against the proceeds, there is a good deal of leeway and a chance to make considerable profits. Rates commanded by the documentary bills vary widely; discount rates abroad vary on different bills; "payment" bills are prepaid at varying periods before their maturity. Altogether, when a banker begins to engage in remitting large amounts of commercial long paper and drawing his own drafts against the resulting balance, he is undertaking a form of operation the profit on which is governed by a number of different factors. .