The Bill on London: or, the Finance of Trade by Bills of Exchange 1138069205, 9781138069206

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ROUTLEDGE LIBRARY EDITIONS: HISTORY OF MONEY, BANKING AND FINANCE

Volume 3

THE BILL ON LONDON

THE BILL ON LONDON or, the Finance of Trade by Bills of Exchange

First published in 1952 by Chapman & Hall Ltd Fourth revised edition published in 1976 by Methuen & Co Ltd This edition first published in 2018 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © Gillett Brothers Discount Company Ltd All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: ISBN: ISBN: ISBN:

978-1-138-70169-4 978-1-315-10595-6 978-1-138-06920-6 978-1-315-11581-8

(Set) (Set) (ebk) (Volume 3) (hbk) (Volume 3) (ebk)

Publisher’s Note The publisher has gone to great lengths to ensure the quality of this reprint but points out that some imperfections in the original copies may be apparent. Disclaimer The publisher has made every effort to trace copyright holders and would welcome correspondence from those they have been unable to trace.

The Bill on London or, the Finance of Trade by Bills of Exchange

P u b l i s h e d for GILLETT BROTHERS DISCOUNT 65 C o r n h i l l , L o n d o n EG3V 3PP by M e t h u e n & Co L t d

COMPANY

LTD

Published in 1952 by C h a p m a n & H a l l L t d 11 N e w Fetter L a n e , L o n d o n EC4 for Gillett Brothers Discount C o m p a n y L t d 65 C o r n h i l l , L o n d o n EC3V 3PP Second revised edition 1 9 5 9 T h i r d revised edition 1 9 6 4 F o u r t h revised edition 1 9 7 6 published by Methuen & C o L t d 11 N e w Fetter L a n e , L o n d o n EC4 © Gillett Brothers Discount C o m p a n y L t d ISBN

416 85670 5

Design & typography R o n Costley/Shenval Printed in E n g l a n d by Shenval Press, L o n d o n and H a r l o w

Contents Foreword

page 11

D r a m a t i s personae

I II

12

W h a t is a b i l i ?

15

PART

T H E STORY OF T H E

ONE

H i s t o r y o f the b i l l o f exchange T h e functions o f the b i l l

III

'Term'and'sight'bills

IV

Credits

V

BILL

19

20 21

22

The quality of a bill

22

A T h e names o n the b i l l B T h e n a t u r e o f the t r a n s a c t i o n u n d e r l y i n g t h e b i l l VI VII VIII

Y o u r name on a bill T h e cost o f b i l l PART T W O

I

26

T h e discounting o f a bill finance

26 27

T H E BILL

I N

A C T I O N

T h e b i l l o f exchange a n d the exporter

31

M e t h o d 1 T h e irrevocable documentary letter o f credit M e t h o d 2 L o n d o n acceptance c r e d i t M e t h o d 3 T h e negotiated bill M e t h o d 4 T h e foreign domicile bill II

T h e b i l l o f exchange a n d the i m p o r t e r

39

M e t h o d A T h e irrevocable d o c u m e n t a r y letter o f credit M e t h o d B L o n d o n acceptance c r e d i t M e t h o d C T h e negotiated (trade) b i l l N o t e o n b a n k endorsed bills III

T h e b i l l o f exchange a n d the manufacturer

IV

T r a d e bills

V

46

49

T h e b i l l o f exchange a n d the i n t e r n a t i o n a l trader

51

VI

R e m i t t e d bills

53

T h e b i l l o n L o n d o n and the foreign banker A F i n a n c i n g exports B Financing imports VII VIII IX

A parcel o f bills Conclusion PART

I

57

T h e b i l l o f exchange a n d the investor 60

THREE

PROCEDURE

T h e b i l l o f exchange a n d the exporter 1

59

63

I r r e v o c a b l e d o c u m e n t a r y l e t t e r o f c r e d i t issued b y a b a n k o r a c c e p t i n g house i n f a v o u r o f t h e E x p o r t i n g C o m p a n y .

2

R e v o l v i n g acceptance c r e d i t c o v e r i n g exports f r o m t h e U . K . t o A t l a n t i s opened i n favour o f the E x p o r t i n g C o m p a n y b y W i l l i a m Caxton & Co—unsecured.

3

R e v o l v i n g acceptance c r e d i t c o v e r i n g exports f r o m t h e U . K . t o A t l a n t i s opened i n favour o f the E x p o r t i n g C o m p a n y by W i l l i a m C a x t o n & Co—secured.

II

T h e b i l l o f exchange a n d the i m p o r t e r 4

74

I r r e v o c a b l e d o c u m e n t a r y l e t t e r o f c r e d i t i n f a v o u r o f a n overseas e x p o r t e r o p e n e d b y a b a n k o r a c c e p t i n g house.

5

R e v o l v i n g acceptance credit covering shipments o f w o o l to the U . K . opened i n favour o f the I m p o r t i n g C o m p a n y b y W i l l i a m Caxton & Co—unsecured.

6

R e v o l v i n g acceptance credit covering shipments o f w o o l to the U . K . opened i n favour o f the I m p o r t i n g C o m p a n y b y W i l l i a m C a x t o n & Co—secured.

III

T h e bill o f exchange a n d the manufacturer 7

86

R e v o l v i n g acceptance c r e d i t c o v e r i n g purchases o f cocoa a n d other materials, opened i n favour o f the M a n u f a c t u r i n g C o m ­ pany by W i l l i a m Caxton & Co—unsecured.

IV

T h e b i l l o f exchange a n d the investor PART

FOUR

Glossary a n d i n d e x

91

GLOSSARY A N D 95

I N D E X

Illustrations Figure 1

T h e face o f a b i l l

2

A n export b i l l (irrevocable documentary letter o f credit)

page 14

3

A n e x p o r t b i l l ( L o n d o n acceptance c r e d i t )

4

A n export b i l l (foreign domicile)

34

38

5

A n i m p o r t b i l l (irrevocable documentary letter of credit)

6

A n i m p o r t b i l l ( L o n d o n acceptance c r e d i t )

7

A n i m p o r t b i l l (negotiated (trade) bill)

8

A manufacturer's bill

9

A trade bill

40

42

44

48

50

i o

A n i n t e r n a t i o n a l t r a d e r ' s b i l l ( L o n d o n acceptance c r e d i t )

11

A continental importer's bill

2a

32

52

56

A n export b i l l (irrevocable d o c u m e n t a r y letter of credit) - accepted a n d endorsed

64

3a

A n e x p o r t b i l l ( L o n d o n acceptance c r e d i t ) - a c c e p t e d a n d endorsed

5a

A n i m p o r t b i l l (irrevocable d o c u m e n t a r y letter o f credit) - accepted a n d endorsed

71

76

6a

A n i m p o r t b i l l ( L o n d o n acceptance c r e d i t ) - a c c e p t e d a n d endorsed

8a

A m a n u f a c t u r e r ' s b i l l - a c c e p t e d a n d endorsed

88

81

A C K N O W L E D G M E N T S O u r m o s t g r a t e f u l t h a n k s are d u e to a n u m b e r o f friends i n t h e C i t y w h o h a v e freely g i v e n us t h e benefit o f t h e i r k n o w l e d g e a n d experience, s p e n d i n g m a n y h o u r s o n t h e c o r r e c t i o n a n d i m p r o v e m e n t o f o u r o r i g i n a l drafts. W e a c k n o w l e d g e w i t h t h a n k s t h e courtesy o f T h e N e w E r a P u b l i s h i n g C o i n a l l o w i n g us t o m a k e use o f T h o m s o n ' s Dictionary of Banking

i n the c o m p i l a ­

t i o n o f t h e Glossary. A n y h e l p w e needed w i t h w o r k s o f reference

was

p r o v i d e d b y t h e l i b r a r i a n o f t h e I n s t i t u t e o f Bankers, t o w h o m w e r e t u r n thanks. W e h a v e w e l c o m e d t h e c o m m e n t s o f o u r readers a n d h a v e i n c o r p o r a t e d a n u m b e r o f t h e i r suggestions for a d d i t i o n s a n d i m p r o v e m e n t s i n this revised edition. T h e q u o t a t i o n o n page 61 is f r o m R u d y a r d K i p l i n g ' s T n t h e N e o l i t h i c A g e ' f r o m Barrack

Room Ballads a n d is p r i n t e d b y k i n d p e r m i s s i o n o f t h e late M r s

G e o r g e B a m b r i d g e , t h e o w n e r o f the c o p y r i g h t , a n d o f Messrs M e t h u e n & C o Ltd.

The City of London can still claim to be the most highly organised international market for money in the world. Its freedom and elasticity are without parallel. Its accepting houses and discount houses provide unequalled facilities for the financing of national and international commerce.' c

M A C M I L L A N

R E P O R T ,

I930

Foreword 'To

M e r c h a n t s , T r a d e r s , I m p o r t e r s , E x p o r t e r s a n d M a n u f a c t u r e r s , these

notes o n " T h e B i l l o n L o n d o n " are offered i n t h e h o p e t h a t t h e t r a d i t i o n a l m e t h o d o f finance b y Bills m a y become b e t t e r k n o w n , m o r e easily u n d e r ­ stood a n d m o r e w i d e l y used. T h e C i t y o f L o n d o n is the f i n a n c i a l centre o f t h e w o r l d , a n d t h e L o n d o n M o n e y M a r k e t has l o n g been the M a r k e t , b e y o n d a l l others, t o w h i c h m e r c h a n t s f r o m B r i t a i n a n d m a n y o t h e r c o u n t r i e s c o m e for t h e finance o f trade. T o us, as a D i s c o u n t H o u s e , Bills are o u r s t o c k - i n - t r a d e . T h e m o r e g o o d Bills t h e r e are, t h e b e t t e r for the D i s c o u n t M a r k e t , a n d t h e b e t t e r for us, w h o get o u r share. W e s h a l l w e l c o m e a n y e n q u i r i e s a b o u t B i l l F i n a n c e , a n d s h a l l be g l a d t o e x p l a i n o r t o enlarge u p o n a n y p o i n t s w h i c h are n o t clear. W e believe t h a t i t is t o t h e a d v a n t a g e o f a n y business w h i c h d r a w s Bills o f E x c h a n g e t o be i n d i r e c t t o u c h w i t h a D i s c o u n t H o u s e , w h i c h has m u c h t o offer i n experience a n d k n o w l e d g e o f the L o n d o n M o n e y M a r k e t , w h e r e Bills are b o u g h t a n d sold.' R o n a l d G i l l e t t , c h a i r m a n f r o m 1946 u n t i l his d e a t h i n 1965, w r o t e those w o r d s as the F o r e w o r d t o t h e first e d i t i o n . T h e y r e m a i n as t r u e t o d a y as w h e n t h e y w e r e w r i t t e n t w e n t y - f i v e years ago. T h e i n t e r v e n i n g p e r i o d has seen the d e v e l o p m e n t o f n e w m o n e y m a r k e t s a n d f i n a n c i a l centres overseas i n a l m o s t a l l cases successfully m o d e l l e d o n L o n d o n p r a c t i c e a n d the ' B i l l o n L o n d o n ' . W e h o p e t h a t the f o u r t h e d i t i o n o f o u r b o o k w i l l c o n t i n u e t o h e l p i n some measure t o w a r d s a b e t t e r u n d e r s t a n d i n g o f t h e t r a d i t i o n a l usage o f bills i n domestic a n d i n t e r n a t i o n a l markets t h r o u g h o u t the w o r l d . /v

June igj6

Chairman G I L L E T T 65

B R O T H E R S

C O R N H I L L ,

D I S C O U N T

L O N D O N

E C3 V

C O M P A N Y 3 P P

L T D

D R A M A T I S

PERSONNE

T H E

L O M B A R D

B A N K

T H E

C L E A R I N G

A L o n d o n clearing bank Another L o n d o n clearing bank

B A N K

& c o . A L o n d o n a c c e p t i n g house

W I L L I A M

C A X T O N

G I L L E T T

B R O T H E R S

D I S C O U N T

C O M P A N Y

L T D .

A L o n d o n discount

house T H E

B A N K

A n overseas b a n k w i t h a b r a n c h office i n

O F A T L A N T I S

London T H E

B A N K

O F E U R O P A

T H E

B A N K

O F

A f o r e i g n b a n k w i t h n o b r a n c h office i n L o n d o n

RURiTANiA

A n o t h e r f o r e i g n b a n k w i t h n o b r a n c h office i n

London O F ASIA

A n E a s t e r n E x c h a n g e b a n k w i t h a L o n d o n Office

T H E

B A N K

T H E

E X P O R T I N G

c o . A British exporter

T H E

I M P O R T I N G

c o . A British importer

THE

wooLBUYiNG

c o . A firm t h r o u g h w h o m t h e I m p o r t i n g C o b u y s

wool T H E

M A N U F A C T U R I N G

T H E

T R A D E R

T H E

I N D U S T R I A L

c o . A British manufacturer

A B r i t i s h t r a d e r i n goods f o r sale t o i n d u s t r y i n t h e U K c o . A B r i t i s h i n d u s t r i a l c o m p a n y w h i c h b u y s some o f its

r a w materials from the trader T H E

I N T E R N A T I O N A L

T R A D E R

A British trader i n commodities i n various

p a r t s o f the W o r l d T H E

C O N T I N E N T A L

I M P O R T E R

A foreign i m p o r t e r , customer of the B a n k

of Europa T H E

T E A E S T A T E

T H E

L O N D O N

T H E

O V E R S E A S

A n e x p o r t e r o f tea f r o m I s l a n d i a t o t h e U K

B L E N D E R

A B r i t i s h i m p o r t e r o f tea f r o m I s l a n d i a

I M P O R T E R

goods f r o m t h e U K

A trader i n another country w h o imports

NOTE W i t h t h r e e exceptions a l l names used t h r o u g h o u t t h e b o o k are i m a g i n a r y A n y resemblance t o t h e n a m e o f a n y e x i s t i n g firm o r i n s t i t u t i o n is a c o i n c i d ­ ence. T h e exceptions are the B a n k o f E n g l a n d , t h e E x p o r t C r e d i t s G u a r a n t e e D e p a r t m e n t o f the D e p a r t m e n t o f T r a d e and Industry, a n d our o w n name Gillett Brothers. G i l l e t t B r o t h e r s D i s c o u n t C o L t d , a m e m b e r o f the L o n d o n D i s c o u n t M a r k e t A s s o c i a t i o n , was f o u n d e d i n 1867. O n e o f the p r i n c i p a l a c t i v i t i e s o f such a firm is b u y i n g a n d s e l l i n g bills o f exchange, as d e s c r i b e d i n this b o o k . As a d i s c o u n t house G i l l e t t s also d e a l i n d a y - t o - d a y m o n e y , p r i n c i p a l l y w i t h L o n d o n bankers, a n d i n B r i t i s h g o v e r n m e n t T r e a s u r y bills a n d

short-dated

bonds, L o c a l a u t h o r i t y bills a n d bonds, s t e r l i n g certificates o f deposit, d o l l a r certificates o f deposit a n d bills o f exchange i n currencies o t h e r t h a n s t e r l i n g . W e h a v e chosen t h e n a m e W i l l i a m C a x t o n & C o for o u r a c c e p t i n g house. W i l l i a m C a x t o n ( 1 4 2 2 - 9 1 ) , a m e m b e r o f the L o n d o n M e r c e r s ' C o m p a n y or G u i l d , t r a d e d f o r t h i r t y years i n t h e L o w C o u n t r i e s . T h e r e he b e c a m e interested i n p r i n t i n g , p r o c u r e d e q u i p m e n t a n d w o r k m e n , and b r o u g h t t h e m to L o n d o n . H e f o u n d e d his Press at W e s t m i n s t e r i n 1476 a n d i n t r o d u c e d t h e a r t a n d craft o f p r i n t i n g t o this c o u n t r y . H e a n d m e n l i k e h i m w e r e fore­ r u n n e r s o f those w h o i n t h e n i n e t e e n t h c e n t u r y f o u n d e d i n L o n d o n t h e g r e a t a c c e p t i n g houses for the finance o f i n t e r n a t i o n a l t r a d e . I t is w i t h d u e respect to t h e m e m o r y o f a g r e a t E n g l i s h m a n t h a t w e use his n a m e . A n a c c e p t i n g house is a firm o f bankers specialising i n t h e a r r a n g e m e n t o f s h o r t - t e r m finance b y g r a n t i n g acceptance credits (see p . 2 2 ) . U n d e r these credits bills o f exchange

are d r a w n o n a n d ' a c c e p t e d '

b y the

accepting

house, a n d are t h e n n e g o t i a b l e i n s t r u m e n t s w h i c h m a y be d i s c o u n t e d (i.e. sold at a d i s c o u n t for cash) w i t h a L o n d o n d i s c o u n t house. T h e

accepting

house, b y a c c e p t i n g , m a k e themselves responsible for p a y m e n t o f t h e b i l l at m a t u r i t y , a n d i t is p r i m a r i l y o n the s t r e n g t h o f t h e i r n a m e t h a t t h e d i s c o u n t house p r o v i d e s t h e cash. F o r thus l e n d i n g t h e i r n a m e the a c c e p t i n g house w i l l charge a commission. A c c e p t i n g houses m a y also take deposits, m a k e loans, d e a l i n f o r e i g n exchange, act as p r i n c i p a l s i n t h e a r r a n g e m e n t o f c a p i t a l issues, a n d engage i n m a n y other b a n k i n g activities.

H

I

A&F

H

25,000

-

BRADFORD

00

At

of The I m p o r t i n g C o

3 months

Ji/fci/

5th A p r i l , &

s i g h t ^€&jf£r

the

#

L- T w e n t y F i v e t h o u s a n d

76

the

sum o f

pounds

Drawn u n d e r C r e d i t N o S 2 1 9 6 , a g a i n s t p a r t o f s h i p m e n t o f 1 , 0 0 0 b a l e s o f w o o l f r o m R o y a l C i t y , A t l a n t i s , t o t h e u n i t e d K i n g d o m p e r S . S . "GOLDEN FLEECE". Ä

for T H E IMPORTING CO

W i l l i a m Caxton & C o . , London, E . G . 2 . DIRECTOR

B8cD

C&E i

F I G U R E

T h e face o f a b i l l

A

A n unconditional order i n w r i t i n g

B

addressed b y one person ( T h e drawer)

c

t o a n o t h e r ( T h e drawee)

D

signed b y t h e person g i v i n g i t ( T h e drawer)

E

r e q u i r i n g t h e p e r s o n t o w h o m i t is addressed (The

drawee, who when he signs becomes The acceptor)

F

to pay

G

o n d e m a n d , o r a t a fixed o r d e t e r m i n a b l e f u t u r e t i m e

H

a sum certain i n money

1

t o , o r t o t h e o r d e r of, a specified person, o r t o b e a r e r ( T h e payee)

W H A T

IS A

BILL?

A b i l l o f exchange is d e f i n e d b y t h e Bills o f E x c h a n g e A c t , 1 8 8 2 : A

B I L L

O F

E X C H A N G E

IS

an u n c o n d i t i o n a l o r d e r i n w r i t i n g addressed b y one p e r s o n t o a n o t h e r signed b y t h e p e r s o n g i v i n g i t r e q u i r i n g t h e p e r s o n t o w h o m i t is addressed to p a y o n d e m a n d o r at a fixed o r d e t e r m i n a b l e f u t u r e t i m e a sum certain i n money to o r t o t h e o r d e r o f a specified person or t o b e a r e r F i g . 1 ( o n t h e o p p o s i t e page) shows w h a t these phrases m e a n . A

B I L L

O N

L O N D O N

IS

a b i l l o f exchange addressed t o a d r a w e e i n t h e U n i t e d K i n g d o m and payable i n L o n d o n T H E

P A R T I E S

T O

A

B I L L

The

parties t o a b i l l o f exchange are t h e d r a w e r , t h e acceptor, the payee

and

t h e endorser (s).

T h e d r a w e r is t h e p e r s o n w h o d r a w s t h e b i l l . T h e a c c e p t o r is t h e p e r s o n t o w h o m t h e b i l l is-addressed a n d w h o shows his assent b y s i g n i n g his n a m e across t h e b i l l i n d i c a t i n g t h a t he w i l l p a y t h e b i l l at m a t u r i t y . T h e payee is t h e p e r s o n t o w h o m o r t o whose o r d e r t h e b i l l is d r a w n p a y a b l e . A n endorser is a payee o r a n y o t h e r p e r s o n w h o signs his n a m e o n t h e b i l l . T h e r i g h t s a n d responsibilities a t t a c h e d t o these, t h e p a r t i e s t o t h e b i l l , are severally d e f i n e d i n t h e glossary at t h e e n d o f t h e b o o k .

Part one The story of the bill Tou have devised and sustained a most marvellous system of credit.' c

D I S R A E L I

t o t h e H o u s e o f C o m m o n s (1866)

The story of the bill I

HISTORY

OF T H E BILL

OF

19

EXCHANGE

T h e b i l l is one o f t h e oldest i n s t r u m e n t s o f c r e d i t i n t h e w o r l d , a n d w e c a n t r a c e its o r i g i n s far b a c k i n classical h i s t o r y . T h u s i n t h e f o u r t h c e n t u r y B G t h e Greeks m a d e use o f b i l l s . T h a t c r e d i t s t a n d i n g a n d t h e v a l u e o f a g o o d n a m e w e r e a l r e a d y w e l l u n d e r s t o o d is i n s t a n c e d b y a s t o r y b y H e r o d o t u s . W r i t i n g t h r e e generations after t h e f a i l u r e o f one G l a u c u s t o h o n o u r a b i l l i n defiance o f o r a c u l a r a d v i c e f r o m D e l p h i , H e r o d o t u s describes h i m , his descendants, a n d even a n y o f his house, as b e i n g ' u t t e r l y e x t i r p a t e d f r o m Sparta'. L a t e r C i c e r o a n d others s h o w i n t h e i r w r i t i n g s t h a t t h e R o m a n s d r e w bills o n t h e i r agents i n o t h e r c o u n t r i e s , b u t i f t h e R o m a n s i n t r o d u c e d t h e b i l l i n t o E n g l a n d w e h a v e n o r e c o r d o f i t . N o t u n t i l t h e N o r m a n conquest, w h e n j e w s first c a m e t o this c o u n t r y , are bills o f exchange r e c o r d e d i n c o m m o n use, a n d t h e y are o f f i c i a l l y m e n t i o n e d first i n a statute o f 1379 u n d e r R i c h a r d I I . M e a n w h i l e , o n t h e c o n t i n e n t , bills h a d s u r v i v e d t h e d a r k ages. T h e y are k n o w n t o h a v e been i n c o m m o n use i n F l o r e n c e , Siena, H a m b u r g a n d V e n i c e i n t h e t w e l f t h a n d t h i r t e e n t h centuries, a n d subject t o c o n t r o l b y F r e n c h a n d V e n e t i a n statute l a w . T h e n e x t i m p o r t a n t d a t e is 1697

w

n

e

n

i n l a n d bills w e r e m a d e l e g a l i n

E n g l a n d . F r o m t h e n o n t h e use o f bills i n this c o u n t r y increased c o n s i d e r a b l y . A t least u n t i l t h e m i d d l e o f t h e n i n e t e e n t h c e n t u r y t h e y w e r e w i d e l y used i n c o n n e c t i o n w i t h d o m e s t i c t r a d e , a n d i n some centres f o r m e d p a r t o f t h e c u r r e n c y o f t h e d i s t r i c t , since bills b e a r i n g t h e names o f l o c a l

firms

and

individuals o f h i g h standing changed f r o m h a n d to h a n d i n settlement o f debts. N o t o n l y w e r e b i l l s t h e p r i n c i p a l means o f p a y m e n t f o r a l l except v e r y s m a l l sums, b u t d i s c o u n t i n g bills w i t h a b a n k was t h e u s u a l m e t h o d o f o b t a i n i n g b a n k a c c o m m o d a t i o n . A t t h a t t i m e t h e b a n k i n g system o f t h e c o u n t r y was m a d e u p o f a g r e a t n u m b e r o f s m a l l p r i v a t e banks. A c c o r d i n g to t h e i r r e q u i r e m e n t s these banks b o u g h t o r sold bills t h r o u g h t h e L o n d o n d i s c o u n t m a r k e t , w h i c h t h u s p r o v i d e d a means o f t r a n s m i t t i n g t h e surplus m o n e y i n t h e h a n d s o f banks i n the a g r i c u l t u r a l areas t o t h e banks i n t h e d e v e l o p i n g i n d u s t r i a l areas. B y t h e second h a l f o f t h e n i n e t e e n t h c e n t u r y , b i l l s h a d b e c o m e s u c h a n i m p o r t a n t m e t h o d o f finance a n d so w i d e l y used t h a t , t o f a c i l i t a t e t h e i r use,

20

The Bill on London

successive s t a t u t o r y rules w e r e c o d i f i e d i n t h e Bills o f E x c h a n g e A c t , 1882. B y this act b i l l transactions are g o v e r n e d t o d a y . T h e d e v e l o p m e n t o f j o i n t stock b a n k i n g , w i t h its system o f cash transfers b e t w e e n branches, a n d t h e g r o w i n g c u s t o m o f g r a n t i n g o v e r d r a f t facilities, led t o a r e d u c t i o n i n t h e use o f b i l l s for d o m e s t i c finance d u r i n g t h e n i n e t e e n t h c e n t u r y . O n t h e o t h e r h a n d t h e e s t a b l i s h m e n t i n L o n d o n o f branches o f f o r e i g n banks, a n d t h e rise o f t h e L o n d o n a c c e p t i n g houses, resulted i n t h e great development o f the i n t e r n a t i o n a l b i l l o n L o n d o n . W i t h B r i t a i n o n t h e g o l d s t a n d a r d , bills accepted b y first class L o n d o n houses w e r e t h e same as g o l d , as t h e y c o u l d a l w a y s be d i s c o u n t e d i n t h e L o n d o n d i s c o u n t m a r k e t , t h e proceeds c o n v e r t e d i n t o g o l d i f t h e state o f t h e exchanges j u s t i f i e d i t , a n d t h e g o l d t a k e n o u t o f t h e c o u n t r y t o a n y p a r t o f t h e w o r l d . T h i s gave t h e £ b i l l o n L o n d o n t h e s u p r e m e p o s i t i o n w h i c h i t h e l d d u r i n g t h e years o v e r t h e t u r n o f the c e n t u r y , as t h e p r e d o m i n a n t i n s t r u m e n t for t h e finance o f i n t e r n a t i o n a l t r a d e . Since 1914, t h e r e h a v e been vast d i s t u r b a n c e s o f i n t e r n a t i o n a l t r a d e a n d finance,

a n d t h e use o f b i l l s has at times been g r e a t l y r e d u c e d , b u t as t r a d e

revives t h e B i l l o n L o n d o n once m o r e comes i n t o its o w n . A

financial

i n s t r u m e n t w h i c h has stood t h e test o f centuries m u s t be o f i n t e r e s t t o e v e r y business m a n . II

T H E F U N C T I O N S OF T H E

BILL

T h e p r i m a r y f u n c t i o n o f t h e b i l l is t o enable t h e seller o r e x p o r t e r o f goods to o b t a i n cash as soon as possible after t h e d e s p a t c h o f t h e goods, a n d y e t enable t h e b u y e r o r i m p o r t e r t o defer p a y m e n t u n t i l t h e goods r e a c h h i m , o r later. T h e seller a n d t h e b u y e r are often s e p a r a t e d f r o m each o t h e r b y g r e a t distances. I n i n t e r n a t i o n a l t r a d e t h e y m a y h a v e t o c o n t e n d also w i t h

fluc­

t u a t i n g exchange rates, a n d o t h e r t e c h n i c a l p r o b l e m s n o t easy t o assess. F o r b u y e r a n d seller, w h e t h e r t h e y are i n d i f f e r e n t c o u n t r i e s o r i n t h e same c o u n t r y , a b a n k o r a c c e p t i n g house acts as a n i n t e r m e d i a r y o n w h o m b o t h c a n r e l y ; l e n d i n g a n u n d o u b t e d n a m e ; t a k i n g o f f t h e i r shoulders t h e b u r d e n of

financing

t h e goods i n t r a n s i t f r o m one t o t h e o t h e r ; a n d h e l p i n g t o ensure

t h a t e a c h observes t o w a r d s t h e o t h e r t h e agreed

financial

conditions o f their

The story of the bill

21

business deals. T h e b i l l is t h e i n s t r u m e n t t h r o u g h w h i c h a b a n k o r a c c e p t i n g house c a n thus act. A f u r t h e r f u n c t i o n o f t h e b i l l is t o p r o v i d e essential s h o r t t e r m finance f o r t r a d e a n d i n d u s t r y . I n this c o n t e x t t h e b i l l is f r e q u e n t l y a n c i l l a r y t o t h e b a n k a d v a n c e b u t s h o u l d n o t a l t o g e t h e r take its place. B i l l finance is t e m p o r a r y finance,

to be used for specific transactions o r for seasonal o r o t h e r s h o r t - t e r m

requirements, w h i c h w o u l d not justify raising more permanent capital. Some o f t h e w a y s i n w h i c h t h e b i l l fulfils these f u n c t i o n s are set o u t i n t h e f o l l o w i n g pages. T h e m a n n e r i n w h i c h t h e v a r i o u s m e t h o d s d e s c r i b e d c a n i n p r a c t i c e be used m a y , i n those c o u n t r i e s i n c l u d i n g t h e U n i t e d

Kingdom

w h i c h h a v e E x c h a n g e C o n t r o l , d e p e n d o n the rules i n force at t h e t i m e . Ill

'TERM'

& 'SIGHT'

BILLS

U p t o this p o i n t , w e h a v e for t h e most p a r t h a d i n m i n d bills d r a w n i n s u c h a w a y as t o be p a y a b l e after a p e r i o d o f t i m e , s u c h as n i n e t y days. Bills m a y be d r a w n for a n y p e r i o d , t h e m o s t u s u a l b e i n g n i n e t y days, o r t h r e e m o n t h s , but

m a n y are d r a w n f o r a n y t h i n g f r o m t h i r t y days t o six m o n t h s . T h e s e

' t e r m ' bills are n e g o t i a b l e i n s t r u m e n t s w h i c h m a y be b o u g h t a n d sold o n the L o n d o n discount market. M e n t i o n m u s t also be m a d e , h o w e v e r , o f ' s i g h t ' b i l l s , i.e. bills d r a w n p a y a b l e at sight, o r o n d e m a n d . A s sight bills are p a i d i m m e d i a t e l y t h e y are presented t o t h e p e r s o n o n w h o m t h e y are d r a w n , t h e q u e s t i o n o f d i s c o u n t i n g t h e m does n o t arise. F o r this reason, l i t t l e f u r t h e r m e n t i o n o f t h e m w i l l be f o u n d i n this b o o k , b u t i t m a y be said t h a t t h e u n d e r l y i n g p r i n c i p l e s a n d p r o c e d u r e for a b i l l d r a w n at sight are v e r y s i m i l a r t o those d e s c r i b e d as applicable to a ' t e r m ' bill. I t s h o u l d be r e m e m b e r e d , t o o , t h a t a v e r y s u b s t a n t i a l p a r t o f i n t e r n a t i o n a l t r a d e is

financed

b y means o f sight b i l l s , p a r t i c u l a r l y at a t i m e o f sellers'

m a r k e t s . W h e n m a r k e t s are f a v o u r i n g b u y e r s t h e seller m a y find t h a t he has to a c c o r d l o n g e r c r e d i t t e r m s t o the b u y e r , a n d this w i l l l e a d t o t h e d r a w i n g of

' t e r m ' bills, or, as t h e y are sometimes k n o w n i n i n t e r n a t i o n a l t r a d e ,

'usance' b i l l s .

22

The Bill on London

IV

CREDITS

F r e q u e n t m e n t i o n is m a d e o f 'credits', a n d i t m a y be useful t o define t h e m here. A c r e d i t , for o u r purposes, means a n y a r r a n g e m e n t w i t h bankers b y w h i c h t h e y are t o p a y o r accept bills o f exchange o n b e h a l f o f a c u s t o m e r . W h e n t h e bills are presented t o t h e banks o r a c c e p t i n g houses o n w h o m t h e y are d r a w n , t h e drawees ' a c c e p t ' t h e m b y s i g n i n g across t h e b i l l a p r o m i s e to p a y at t h e e n d o f t h e p e r i o d . A c c e p t e d bills are often c a l l e d 'acceptances'. O P E N I N G

A

C R E D I T

A prospective b o r r o w e r m a y go t o his o w n b a n k a n d discuss t h e p o s s i b i l i t y of opening a credit. A l t e r n a t i v e l y he m a y decide t h a t t h e business he has i n m i n d w o u l d be m o r e s u i t a b l e for a n a c c e p t i n g house, i n w h i c h case he m a y go t o one w i t h w h i c h he has d i r e c t connections a n d seek t o a r r a n g e a c r e d i t . I f , o n t h e o t h e r h a n d , he is a l r e a d y i n t o u c h w i t h a d i s c o u n t house he m a y c o n s u l t w i t h t h e m as t o t h e best m e t h o d a n d t h e best a p p r o a c h . T h e a c c e p t i n g house w i l l decide, o n t h e basis o f i n f o r m a t i o n p r o v i d e d b y t h e p r o s p e c t i v e b o r r o w e r , w h e t h e r o r n o t t h e y are p r e p a r e d , i n p r i n c i p l e , t o g r a n t a c r e d i t . I f t h e y are p r e p a r e d t o g r a n t a c r e d i t , t h e d e t a i l e d t e r m s w i l l be t h e subject o f n e g o t i a t i o n . I f a g r e e m e n t is r e a c h e d , f o r m a l expression is g i v e n t o i t b y t h e issue b y t h e a c c e p t i n g house, t o t h e b o r r o w e r , o f a f a c i l i t y letter or a letter o f credit. A n u m b e r o f examples o f t y p i c a l f a c i l i t y letters a n d letters o f c r e d i t are g i v e n i n p a r t three ( P r o c e d u r e ) . V

T H E Q U A L I T Y

OF A

BILL

T h e r e are m a n y classes o f b i l l w h i c h m a y be d r a w n a n d m a n y types o f c r e d i t p r o v i d i n g f o r t h e d r a w i n g o f bills w h i c h m a y be a r r a n g e d . I n t h e f o l l o w i n g pages w i l l be f o u n d notes addressed t o each o f t h e m a i n p o t e n t i a l users o f b i l l s o u t l i n i n g t h e p r i n c i p a l w a y s i n w h i c h t h e b i l l m a y be used t o s u i t t h e m best. T h e r e are, h o w e v e r , some p o i n t s o f g e n e r a l interest t o a l l w h o are c o n s i d e r i n g b i l l finance. These c o n c e r n w h a t m a y be c a l l e d t h e quality of a bill. T h e q u a l i t y o f a b i l l w i l l be j u d g e d f r o m t w o t h i n g s , first t h e s t a n d i n g ( g o o d n a m e a n d c a p i t a l resources)

o f t h e d r a w e r a n d t h e acceptor,

and

The story of the bill

23

second t h e n a t u r e o f t h e t r a n s a c t i o n against w h i c h t h e b i l l is d r a w n . A -

T H E N A M E S

Fine bank

O N T H E

B I L L

bills

F i n e b a n k bills are bills d r a w n o n , a n d accepted b y , L o n d o n banks a n d a c c e p t i n g houses o f u n d o u b t e d s t a n d i n g . S u c h bills c o m m a n d t h e

finest

rates o f d i s c o u n t . N o t i c e w i l l also be t a k e n o f t h e n a m e o f t h e d r a w e r , even t h o u g h i t is o n t h e n a m e o f t h e a c c e p t o r t h a t t h e b i l l is j u d g e d . Foreign bank

bills

F o r e i g n b a n k bills are bills d r a w n o n a n d accepted b y t h e L o n d o n branches o f overseas banks, i.e. b a n k s whose h e a d offices are l o c a t e d a b r o a d . Some o f these banks enjoy t h e highest s t a n d i n g i n the L o n d o n m a r k e t a n d

fine

rates are q u o t e d for t h e i r acceptances. Trade

bills

T r a d e b i l l s are bills d r a w n b y one t r a d e r o n a n o t h e r . A f u l l e r n o t e o n these w i l l be f o u n d o n p 49. Suffice i t here t o say t h a t t h e rates q u o t e d for t r a d e b i l k are c u s t o m a r i l y h i g h e r t h a n those q u o t e d for fine b a n k o r f o r e i g n b a n k b i l l s a n d t h a t t h e t o t a l a m o u n t o f t r a d e bills t h a t c a n be m a r k e t e d o n t h e s t r e n g t h o f t h e n a m e o f a n y one d r a w e r o r a c c e p t o r is l i m i t e d . Foreign

c

domicile

3

bills

T h e s e are bills d r a w n o n a n d accepted b y banks, c o m p a n i e s o r i n d i v i d u a l s a b r o a d . N o m a t t e r h o w g o o d t h e names o f t h e a c c e p t o r a n d t h e d r a w e r m a y be s u c h bills are n o t saleable i n the L o n d o n d i s c o u n t m a r k e t . T h e h o l d e r o f a f o r e i g n d o m i c i l e b i l l m a y get a n a d v a n c e against i t f r o m his bankers i f he h a n d s i t t o t h e m f o r c o l l e c t i o n , b u t he c a n n o t r e l y o n b e i n g able t o sell i t t o a d i s c o u n t house, since a f o r e i g n d o m i c i l e b i l l w o u l d n o t be g o o d s e c u r i t y f o r a d i s c o u n t house t o place against its loans f r o m t h e banks. A b i l l accepted b y a f o r e i g n b a n k , l e t us say b y t h e B a n k o f R u r i t a n i a , w h i c h has n o L o n d o n Office, is a f o r e i g n d o m i c i l e b i l l , a n d its c h a r a c t e r is n o t a l t e r e d even i f t h e B a n k o f R u r i t a n i a inscribes o n t h e face o f t h e b i l l ' p a y a b l e at T h e L o m b a r d

24

The Bill on London

B a n k , L o n d o n . . . ' ; b u t s u c h a b i l l m a y possibly be p l a c e d i n t h e L o n d o n d i s c o u n t m a r k e t i f i t is endorsed b y a L o n d o n b a n k , w h i c h t h u s guarantees to t h e h o l d e r t h a t he w i l l receive p a y m e n t i n L o n d o n . (See: ' N o t e o n b a n k endorsed b i l l s ' , p 46.) I t is m o s t i m p o r t a n t t o e x p o r t e r s t h a t t h e y s h o u l d be a w a r e o f t h e l i m i t a ­ tions o f f o r e i g n d o m i c i l e b i l l s . T h e e x p o r t e r t o R u r i t a n i a , f o r e x a m p l e , s h o u l d n o t be satisfied, unless he has n o o p t i o n , w i t h a c r e d i t o p e n e d i n his f a v o u r a n d a v a i l a b l e b y drafts o n t h e B a n k o f R u r i t a n i a a b r o a d . H e s h o u l d insist t h a t t h e c r e d i t be o p e n e d i n L o n d o n w i t h a L o n d o n b a n k o r a c c e p t i n g house o n w h o m he c a n d r a w . H e w i l l t h e n h a v e a b i l l w h i c h he c a n d i s c o u n t i n t h e L o n d o n d i s c o u n t m a r k e t , a n d thus o b t a i n i m m e d i a t e £ funds. See also: ' T h e B i l l o f exchange a n d t h e e x p o r t e r ' , Method four, p 36. B - T H E

N A T U R E

The documentary

O F

T H E T R A N S A C T I O N

U N D E R L Y I N G

T H E

B I L L

bill

W h e n a b i l l is d r a w n t o c o v e r a n a c t u a l m o v e m e n t o f goods f r o m t h e seller to t h e b u y e r , a n d t h e r e l a t i v e d o c u m e n t s ( b i l l o f l a d i n g , i n s u r a n c e p o l i c y etc.) are a t t a c h e d t o t h e b i l l w h e n i t is d r a w n , t h e b i l l is k n o w n as a documentary bill. T h e b u y e r o f t h e goods m a y ask t h e seller t o d r a w a t e r m b i l l o n h i m d i r e c t ( t r a d e b i l l ) , o r he m a y o p e n a c r e d i t i n f a v o u r o f t h e seller w i t h a L o n d o n b a n k o r a c c e p t i n g house, o n w h o m t h e seller w i l l d r a w his b i l l (fine b a n k b i l l ) . I n e i t h e r case t h e b i l l b o t h before a n d after i t is accepted is n e g o t i a b l e . T h e seller o f t h e goods c a n sell i t for i m m e d i a t e cash t o his l o c a l b a n k e r s o r , after i t is accepted, t o a L o n d o n d i s c o u n t house. T h e seller is t h u s p a i d f o r his goods w h e n t h e y are despatched. T h e b u y e r for his p a r t does n o t h a v e t o p a y u n t i l t h e b i l l , h a v i n g b e e n d u l y accepted, m a t u r e s , a n d this w i l l u s u a l l y be after t h e goods h a v e r e a c h e d t h e i r d e s t i n a t i o n a n d h a v e been re-sold. I f t h e b i l l is d r a w n o n t h e b u y e r h i m s e l f he m u s t m e e t i t at m a t u r i t y , w h i l e , i f t h e b i l l is d r a w n o n a L o n d o n b a n k e r u n d e r a c r e d i t o p e n e d o n b e h a l f o f t h e b u y e r , he m u s t p u t t h e b a n k e r i n funds b y t h e m a t u r i t y d a t e o n w h i c h t h e b a n k e r has t o p a y t h e b i l l . D u r i n g t h e l i f e t i m e o f t h e b i l l t h e goods are o n t h e m o v e across t h e seas, o r h a v e r e a c h e d w a r e h o u s e , o r are o t h e r w i s e i n

The story of the bill

25

course o f resale o r use, a n d t h e p e r i o d o f t h e perfect b i l l is j u s t e n o u g h t o s p a n t h e i n t e r v a l b e t w e e n s h i p m e n t b y t h e e x p o r t e r a n d r e c e i p t o f cash f r o m t h e resale b y t h e i m p o r t e r . T h e b u y e r m a y h a v e c o n t r a c t e d b e f o r e h a n d t o sell t h e goods t o a c u s t o m e r o f his o w n , t h e proceeds o f t h e sale p r o v i d i n g t h e cash t o m e e t t h e b i l l . I n such a case t h e b i l l is a p t l y d e s c r i b e d as 'selfl i q u i d a t i n g ' , b u t b i l l s are i n p r a c t i c e r e g a r d e d as s e l f - l i q u i d a t i n g w h e n i t is i n t h e n o r m a l course o f t h e b u y e r ' s business t o sell t h e u n d e r l y i n g goods. H e r e i t is a p p r o p r i a t e t o p o i n t o u t t o buyers o f goods a n i m p o r t a n t a d v a n t a g e i n h a v i n g bills d r a w n o n a n d accepted b y t h e i r bankers o r a n a c c e p t i n g house, i n s t e a d o f themselves. I f there has been a d e l a y i n t h e a r r i v a l o f t h e goods, o r i f for a n y o t h e r unforeseen reason t h e b u y e r is n o t i n funds w h e n a b i l l w h i c h he has accepted falls d u e for p a y m e n t , he m u s t nevertheless p a y t h e b i l l , a n d i t m i g h t be h i g h l y i n c o n v e n i e n t , o r i n d i f f i c u l t t i m e s even i m p o s s i b l e , for h i m t o d o so. T h e h o l d e r o f t h e b i l l w i l l h a v e t h e r i g h t o f i m m e d i a t e a c t i o n against h i m . I f , h o w e v e r , he has a r r a n g e d for a b a n k o r a c c e p t i n g house t o accept t h e b i l l f o r h i m , t h e b i l l w i l l c e r t a i n l y be p a i d t o t h e h o l d e r at its m a t u r i t y . W h e n a b i l l is d r a w n t o finance a m o v e m e n t o r s h i p m e n t o f goods t h e d r a w e r s h o u l d p u t o n t h e face o f t h e b i l l a few w o r d s d e s c r i b i n g t h e n a t u r e o f t h e t r a n s a c t i o n . F o r e x a m p l e , ' e x p o r t s o f m a c h i n e tools t o S o u t h A f r i c a p e r S.S. Fortress', Golden Fleece\

o r ' i m p o r t s o f x bales o f w o o l f r o m A u s t r a l i a p e r

S.S.

T h e i n s e r t i o n o f such phrases is c o m m o n l y c a l l e d ' c l a u s i n g ' .

C l a u s i n g makes clear t h e n a t u r e o f t h e t r a n s a c t i o n w h i c h is b e i n g

financed.

T h e banks, w h o b u y bills f r o m the d i s c o u n t houses, l i k e t o see evidence o f t h e u n d e r l y i n g t r a n s a c t i o n , a n d t h e c l a u s i n g answers i n a d v a n c e questions w h i c h m i g h t o t h e r w i s e be asked. I t is a wise p r e c a u t i o n , w h e n d e a l i n g w i t h instruments o f credit, to make any questioning o f the u n d e r l y i n g transaction unnecessary. I t r e m a i n s t r u e , h o w e v e r , t h a t a l t h o u g h a n y evidence o f t h e n a t u r e o f t h e u n d e r l y i n g t r a n s a c t i o n w i l l be s t u d i e d b y a n y one w h o is asked t o d i s c o u n t a b i l l , o r t o accept i t as security for a l o a n , t h e respect e n j o y e d b y a b i l l o f exchange depends a b o v e a l l o n t h e s t a n d i n g a n d c r e d i t o f t h e acceptor a n d the drawer.

26

The Bill on London

The finance bill T h e r e is m u c h discussion o f t h e m e a n i n g o f t h e t e r m ' f i n a n c e b i l l ' , a n d n o exact d e f i n i t i o n c a n be g i v e n w i t h o u t fear o f c o n t r a d i c t i o n . I n d e e d i t often h a p p e n s t h a t o n e e x p e r t i n s p e c t i n g a b i l l w i l l g i v e his o p i n i o n t h a t i t is a finance

bill, w h i l e another, equally well qualified to j u d g e , w i l l argue that

i t is n o t . I n a g e n e r a l w a y i t m a y be said t h a t n o w a d a y s bills d r a w n t o finance t h e h o l d i n g o r processing o f stocks o f r a w m a t e r i a l s , o r t o e n a b l e t h e d r a w e r t o g i v e c r e d i t t o his c u s t o m e r b y h i r e p u r c h a s e o r b y s i m p l e c r e d i t t e r m s , are f r e q u e n t l y b u t n o t i n v a r i a b l y described as finance bills. C i t y i n s t i t u t i o n s w h i c h d e a l i n bills d o n o t a l w a y s l o o k o n finance bills as b e i n g q u i t e such a t t r a c t i v e i n v e s t m e n t s as bills c o v e r i n g t h e m o v e m e n t o f goods, a n d t h e a m o u n t o f finance p a p e r t h a t c a n be d i s c o u n t e d i n t h e m a r k e t o r at t h e B a n k o f E n g l a n d m a y be l i m i t e d . N o n e t h e less, m a n y o f t h e

finest

names t o be f o u n d o n bills i n t h e m a r k e t h a v e at times b e e n o n finance b i l l s , d r a w n t o s u p p l y w o r k i n g c a p i t a l for a l i m i t e d p e r i o d u n t i l i t c o u l d be f a v o u r a b l y o b t a i n e d b y a share o r d e b e n t u r e issue. M a n y first class bills h a v e b e e n d r a w n n o t 'for v a l u e r e c e i v e d ' , b u t m e r e l y as a c o n v e n i e n t m e a n s o f taking a loan. Since a

finance

b i l l is n o t l i n k e d t o a specific u n d e r l y i n g t r a n s a c t i o n o r

m o v e m e n t o f goods its q u a l i t y is even m o r e d e p e n d e n t o n t h e n a m e s o f t h e d r a w e r a n d t h e acceptor. T h e less t h e evidence o f a n a c t u a l t r a n s a c t i o n u n d e r l y i n g a b i l l , t h e stronger these n a m e s m u s t be. VI

YOUR NAME ON A

BILL

Two good names on a bill give quality to the bill. Nothing

They also lend lustre to each other.

adds so much to the standing of even the greatest firms, as to be seen to enjoy

the confidence in each other which is implied by the association of their two names on a bill. VII

T H E

DISCOUNTING

OF

A

BILL

T o a v o i d c o n f u s i o n w e s h a l l use t h e t e r m ' d i s c o u n t i n g ' a b i l l t o m e a n , f o r t h e o w n e r o f t h e b i l l , s e l l i n g i t , once i t is d u l y accepted, t o a b a n k o r d i s c o u n t house i n L o n d o n . F o r t h e b a n k o r d i s c o u n t house i t w i l l m e a n b u y i n g t h e b i l l .

The story of the bill

27

Bills c h a n g e h a n d s before t h e y are accepted, b u t these deals are u s u a l l y d e s c r i b e d as s i m p l y b u y i n g o r s e l l i n g b i l l s , o r ' n e g o t i a t i n g ' t h e m . A b i l l is n o t r e a d y t o be d i s c o u n t e d i n L o n d o n u n t i l i t is accepted. A b i l l is t h e p r o p e r t y o f t h e d r a w e r u n t i l he sells o r discounts i t ; once sold, i t belongs t o t h e b u y e r . A n d , the a c c e p t o r h a v i n g p l a y e d his p a r t b y s i g n i n g across t h e b i l l his p r o m i s e t o p a y , i t is t o t h e d r a w e r o r o w n e r o f t h e b i l l , o r t o his o r d e r , t h a t t h e proceeds o f d i s c o u n t i n g w i l l be p a i d . T h e d r a w e r o r o w n e r therefore has t h e r i g h t t o decide w i t h w h o m t h e b i l l s h a l l be dis­ c o u n t e d , a l t h o u g h p r a c t i c e varies. F r o m c o m m o n experience i t m a y be said t h a t banks o r a c c e p t i n g houses w i l l u s u a l l y t e l l t h e d r a w e r o r o w n e r o f a b i l l t h a t he is free t o d i s c o u n t i t w h e n , a n d w i t h w h o m he wishes. T h e y w i l l also t e l l t h e d r a w e r o r o w n e r t h a t t h e y are q u i t e w i l l i n g t o act o n his i n s t r u c t i o n s t o h a n d t h e b i l l for d i s c o u n t t o a d i s c o u n t house n a m e d b y h i m , or, i f he prefers, t o a d i s c o u n t house o f t h e i r o w n choice. W h e r e a m e r c h a n t a b r o a d sells a b i l l t o l o c a l

bankers,

c l e a r l y i t w i l l be t h e i r L o n d o n agents w h o w i l l decide w h i c h d i s c o u n t house t o use. NOTE:

F o r t h e d e t a i l e d p r o c e d u r e o f d i s c o u n t i n g a b i l l a n d for a d i s c o u n t

statement

issued b y G i l l e t t B r o t h e r s D i s c o u n t C o m p a n y L t d f o r a

bill

d i s c o u n t e d w i t h t h e m , see P a r t I I I ( P r o c e d u r e ) . V I I I

T H E COST OF BILL

FINANCE

T h e cost t o a b o r r o w e r o f r a i s i n g m o n e y b y means o f a n acceptance c r e d i t varies a c c o r d i n g t o t h e business. T o a merchant or manufacturer

financing

purchases o f r a w m a t e r i a l s , t h e

cost w i l l be m a d e u p o f t h e a c c e p t i n g c o m m i s s i o n c h a r g e d b y t h e b a n k o r a c c e p t i n g house, p l u s t h e r a t e o f d i s c o u n t at w h i c h t h e bills are sold t o t h e d i s c o u n t house. T h e a c c e p t i n g c o m m i s s i o n is a m a t t e r for n e g o t i a t i o n w i t h t h e b a n k e r a n d t h e r a t e o f d i s c o u n t for a b a n k b i l l varies w i t h t h e present a n d p r o s p e c t i v e rates for m o n e y . See n o t e o n d i s c o u n t rates page 62. I f t h e b o r r o w e r is a n i m p o r t e r , h o w e v e r , w h o arranges f o r a seller a b r o a d t o d r a w o n a L o n d o n b a n k o r a c c e p t i n g house, t h e i m p o r t e r has t o p a y t h e a c c e p t i n g c o m m i s s i o n , b u t t h e cost o f s e l l i n g a b i l l l o c a l l y a n d / o r d i s c o u n t i n g

28

The Bill on London

i t i n L o n d o n , w i l l u s u a l l y f a l l o n t h e seller, w h o m a y o r m a y n o t i n c l u d e p a r t or a l l o f t h e cost i n his i n v o i c e . I t is possible, a n d i t is f r e q u e n t l y d o n e , t o a r r a n g e i n t h e c r e d i t for these costs t o be b o r n e b y t h e b u y e r , i n w h i c h case e i t h e r t h e seller w i l l receive o n p r e s e n t i n g his b i l l t h e face v a l u e t h e r e o f p l u s t h e cost o f l o c a l b i l l stamps, i f a n y , or, i f he sells o r discounts t h e b i l l himself, t h e costs i n c u r r e d w i l l be r e i m b u r s e d t o h i m . T h e c h a r g e m a d e b y t h e dis­ c o u n t e r for d i s c o u n t i n g a b i l l is s i m p l y a r a t e o f d i s c o u n t p e r a n n u m f o r p r o v i d i n g t h e m o n e y for t h e l i f e t i m e o f t h e b i l l . I n d i c a t i o n s o f t h e c u r r e n t rates at w h i c h t h e d i s c o u n t m a r k e t w i l l b u y b i l l s are g i v e n e v e r y d a y i n t h e

financial

c o l u m n s o f The Times. T h e y a p p e a r

as p a r t o f a t a b l e o f m o n e y a n d b i l l rates u n d e r t h e h e a d i n g RATES'.

NOTE:

S i m i l a r i n f o r m a t i o n is g i v e n d a i l y i n The Financial

'MONEY

MARKET

Times.

A n y d i s c o u n t r a t e q u o t e d is a r a t e p e r c e n t per annum. T h u s a d i s c o u n t

r a t e o f 8 - 5 % f o r 3 m o n t h s means 8 - 5 % p e r a n n u m c h a r g e d f o r 3 m o n t h s , w h i c h is e q u i v a l e n t t o a n a c t u a l c h a r g e o f 2• 125 % .

Part two The bill in action Then said the Interpreter, "Come in: I will show thee that which will be profitable to thee" ' c

J O H N

B U N Y A N

31

The bill in action 1

T H E

TO

T H E

You

BILL

OF

E X P O R T I N G

E X C H A N G E A N D

T H E

EXPORTER

C O M P A N Y

are a n e x p o r t e r o f f i n i s h e d goods f r o m the U K t o A t l a n t i s a n d y o u r

overseas i m p o r t e r requires c r e d i t . T h i s means t h a t y o u w i l l h a v e t o finance t h e s h i p m e n t w h i l e i t is i n t r a n s i t , a n d possibly f o r some weeks after its a r r i v a l i n the c o u n t r y t o w h i c h y o u h a v e sent i t . T h e r e are a n u m b e r o f w a y s i n w h i c h the b i l l o f exchange m a y help y o u . M E T H O D

O N E :

The irrevocable documentary letter of credit

B y far t h e best p r o c e d u r e is for y o u t o ask y o u r c u s t o m e r t o o p e n i n y o u r favour a n irrevocable documentary letter o f credit w i t h a L o n d o n

bank.

U n d e r this m e t h o d he requests his o w n b a n k i n A t l a n t i s , t h e B a n k o f A t l a n t i s , to open a credit i n y o u r favour. As the Bank o f A t l a n t i s have a L o n d o n office w h i c h enjoys a v e r y h i g h s t a n d i n g i n t h e m a r k e t t h e y w i l l request this office t o issue t o y o u a n i r r e v o c a b l e l e t t e r o f c r e d i t . I n this l e t t e r o f c r e d i t t h e L o n d o n office o f t h e B a n k o f A t l a n t i s u n d e r t a k e t o accept a b i l l d r a w n o n t h e m b y y o u , against s u r r e n d e r t o t h e m o f the s h i p p i n g d o c u m e n t s re­ l a t i n g t o t h e goods. A s p e c i m e n o f the l e t t e r o f c r e d i t o p e n e d i n y o u r f a v o u r b y t h e B a n k o f A t l a n t i s w i l l be f o u n d o n p . 63. W h e n y o u r b i l l d r a w n u n d e r this c r e d i t has been a c c e p t e d b y the B a n k o f A t l a n t i s , L o n d o n , y o u c a n at once offer i t t o a d i s c o u n t house w h o w i l l d i s c o u n t i t f o r y o u (i.e. b u y i t f r o m y o u a t a d i s c o u n t ) at a n agreed r a t e (see 'foreign bank bills', p. 23). W h e t h e r y o u b e a r t h e cost o f d i s c o u n t i n g the b i l l , o r w h e t h e r y o u i n c l u d e this c h a r g e separately i n y o u r i n v o i c e o r i n t h e p r i c e o f y o u r goods,

will

d e p e n d o n y o u r c o n t r a c t w i t h the b u y e r . H e h i m s e l f w i l l n o r m a l l y be re­ sponsible f o r t h e a c c e p t i n g c o m m i s s i o n , a n d w h e n t h e b i l l m a t u r e s he has t o p u t t h e B a n k o f A t l a n t i s i n funds t o m e e t t h e b i l l . A n e x a m p l e o f a b i l l d r a w n u n d e r this m e t h o d appears o n t h e n e x t p a g e at fig 2. T h e procedure for

financing

exports t o a f o r e i g n c u s t o m e r whose b a n k ,

t h e B a n k 6 f E u r o p a , has n o t a n office i n L o n d o n is v e r y s i m i l a r . T h e d i f f e r -

32

The Bill

on London

66.391-^0

At

l5tì\/{pnL

LONDON

sixty

dags

Aitante -T^&afikefkkAtK

/&S$*EMPlR£QiLLErW^^^J

T

t/Al>t^U/^€^"&T y£g*tst*sf*s&^^ty

J T w U l i a m Caxton & C o . .

f o r

T

H

E

EXPORTING C O .

London, E . C . 2 .

DIRECTOR

F I G U R E

3

A n export bill d r a w n by T h e Exporting C o , L o n d o n , on W i l l i a m C a x t o n & C o under a L o n d o n acceptance credit as described on page 33. The same bill, accepted by William

Caxton

& Co and endorsed

fig ^a in part three ( Procedure ) onp yi, and again in the parcel

by The Exporting of bills

Co, will befound

at the end of the

book.

at

The bill in action

35

m o n t h s , h a v i n g m e t t h e first £400,000 o f bills, y o u w i l l p r o b a b l y h a v e t o p r o d u c e t o W i l l i a m C a x t o n evidence t h a t a f u r t h e r £500,000 o f e x p o r t business is o u t s t a n d i n g , against w h i c h y o u w i l l be e n t i t l e d t o d r a w a n d dis­ c o u n t a f u r t h e r £400,000 o f bills. B -

S E C U R I T Y

T h e a c c e p t i n g house m a y r e q u i r e security, such as h y p o t h e c a t i o n t o t h e m o f t h e r e l a t i v e s h i p p i n g d o c u m e n t s , b u t i n some cases, a n d f o r b o r r o w e r s o f h i g h s t a n d i n g , t h e y are p r e p a r e d t o g r a n t a ' c l e a n ' o r ' u n s e c u r e d ' c r e d i t , o n t h e u n d e r s t a n d i n g t h a t t h e y are f u r n i s h e d w i t h evidence o f t h e s h i p m e n t s o r t r a n s a c t i o n s against w h i c h t h e b i l l is d r a w n . W h e r e s e c u r i t y is r e q u i r e d this is a m a t t e r for n e g o t i a t i o n b e t w e e n t h e a c c e p t i n g house a n d t h e

b o r r o w e r . I n some cases t h e a c c e p t i n g house

w o u l d w i s h t o keep u n d e r t h e i r c o n t r o l t h e bills o f l a d i n g o r o t h e r d o c u ­ m e n t s o f t i t l e c o v e r i n g y o u r exports. These t h e y w o u l d send t o t h e i r o w n agent i n t h e c o u n t r y t o w h i c h y o u r goods are consigned, f o r release t o t h e i m p o r t e r against p a y m e n t , o r b y o t h e r agreed

arrangement.

I t m a y be t h a t y o u are a c c u s t o m e d t o d r a w i n g t r a d e bills (see p 49) o n y o u r overseas customers. I f so, the a c c e p t i n g house m a y g r a n t y o u t h e c r e d i t f a c i l i t y f o r w h i c h y o u are asking, against t h e c o l l e c t i o n o f these b i l l s , d u l y h y p o t h e c a t e d , (i.e. m a d e o v e r ) t o t h e m b y w a y o f security. A l l these a n d o t h e r essential details y o u w i l l n e g o t i a t e w i t h t h e a c c e p t i n g house at the t i m e o f opening the credit. An %

e x a m p l e o f a b i l l d r a w n u n d e r m e t h o d t w o appears opposite

at

3S p e c i m e n f a c i l i t y letters issued t o y o u a n e x p o r t e r , b y W i l l i a m

Caxton

& C o , a L o n d o n a c c e p t i n g house: (i)

g r a n t i n g u n s e c u r e d facilities w i l l be f o u n d o n p a g e 68, a n d

(ii) g r a n t i n g secured facilities, o n p a g e 6 9 . W h i l e these are t h e p r i n c i p a l L o n d o n b i l l m e t h o d s i n g e n e r a l use, y o u w i l l find great

flexibility

i n t h e a p p r o a c h o f t h e a c c e p t i n g house t o y o u r

p a r t i c u l a r p r o b l e m s . P r o v i d e d t h a t t h e parties t o t h e t r a n s a c t i o n are o f g o o d s t a n d i n g , a n d t h e business is g e n u i n e e x p o r t business, t h e finance w i l l f o r t h c o m i n g i n t h e m a n n e r a n d o n t h e t e r m s a p p r o p r i a t e t o t h e case.

be

36

The Bill on London As

y o u w i l l k n o w , exporters f r e q u e n t l y insure t h e i r overseas business

against t h e risk o f n o n - p a y m e n t ,

etc, w i t h t h e E x p o r t C r e d i t s G u a r a n t e e

D e p a r t m e n t o f t h e D e p a r t m e n t o f T r a d e a n d I n d u s t r y . T h i s gives a n a d d e d sense o f security t o a l l parties t o t h e c r e d i t , t h o u g h n o m e n t i o n o f this p r e c a u t i o n w i l l n o r m a l l y a p p e a r o n t h e b i l l s themselves, w h i c h are d e a l t i n o n their o w n merits. M E T H O D

T H R E E :

The negotiated bill negotiated under credit or authority to

negotiate E x p o r t s t o countries whose banks h a v e b r a n c h e s i n L o n d o n , s u c h as A t l a n t i s , m a y be

financed

b y means o f b i l l s t o be n e g o t i a t e d u n d e r a c r e d i t .

T h e i m p o r t e r overseas, i n s t e a d o f o p e n i n g a n a c c e p t a n c e c r e d i t , o r a c r e d i t p r o v i d i n g for sight b i l l s i n L o n d o n i n y o u r f a v o u r , arranges for the L o n d o n office o f the B a n k o f A t l a n t i s t o issue t o y o u a c r e d i t , i n w h i c h t h e b a n k u n d e r t a k e s to ' n e g o t i a t e ' bills d r a w n b y y o u on the importer. Y o u d r a w y o u r b i l l s o n t h e i m p o r t e r a n d present t h e m , w i t h d o c u m e n t s a t t a c h e d , t o t h e B a n k o f A t l a n t i s , L o n d o n , w h i c h b u y s t h e m f r o m y o u for cash, a n d sends t h e m o u t t o t h e B a n k o f A t l a n t i s , A t l a n t i s . T h e r e the B a n k o f A t l a n t i s h a n d t h e d o c u m e n t s t o y o u r i m p o r t e r c u s t o m e r , t h e d r a w e e , against p a y m e n t , o r at t h e i r d i s c r e t i o n against acceptance i f t h e b i l l is d r a w n at usance (i.e. f o r a period). T h i s m e t h o d is t r a d i t i o n a l for m a n y B r i t i s h exports to countries

whose

b a n k s h a v e b r a n c h e s i n L o n d o n , o r L o n d o n c o r r e s p o n d e n t s w i l l i n g t o act f o r t h e m i n this w a y ; b u t these n e g o t i a t e d bills, h a v i n g f o r e i g n d o m i c i l e , are as w e h a v e a l r e a d y s h o w n o n page 23, n o t r e a d i l y saleable o n t h e L o n d o n discount

market.

M E T H O D

F O U R :

The foreign

domicile

bill

Y o u r c u s t o m e r overseas asks y o u t o d r a w y o u r b i l l s o n h i m d i r e c t . I f y o u c a n n o t persuade h i m t o o p e n a c r e d i t i n y o u r f a v o u r i n L o n d o n y o u m a y agree t o d o this, e v e n i f he has n o t a r r a n g e d f o r a L o n d o n b a n k t o n e g o t i a t e y o u r b i l l s (see m e t h o d t h r e e above) u n d e r a u t h o r i t y f r o m his o w n b a n k . Y o u d r a w y o u r b i l l s o n y o u r overseas c u s t o m e r a n d t a k e t h e m , w i t h d o c u ­ m e n t s a t t a c h e d , t o y o u r o w n bankers, t h e L o m b a r d B a n k .

The bill in action

37

T h e L o m b a r d B a n k w i l l d o one o f t h r e e t h i n g s for y o u . E i t h e r (a) t h e y w i l l b u y t h e bills f r o m y o u ; o r (b) t h e y w i l l m a k e y o u a n a d v a n c e ,

against

t h e s e c u r i t y o f t h e b i l l s ; o r (c) t h e y w i l l s i m p l y h a n d l e t h e bills for c o l l e c t i o n t h r o u g h t h e i r overseas correspondents, b u t w i l l n e i t h e r b u y t h e m n o r m a k e a n a d v a n c e against t h e m . L e t us s t u d y each o f these t h r e e courses o f a c t i o n by y o u r bankers: a - The Lombard

Bank buys the bills from you:

I f y o u r b a n k agree t o b u y these

bills f r o m y o u (or t o m a k e y o u a n a d v a n c e against t h e m ) i t is l a r g e l y o n t h e s t r e n g t h o f y o u r g o o d n a m e t h a t t h e y d o so, a n d i t is to y o u as t h e d r a w e r o f t h e bills t h a t t h e b a n k w i l l h a v e recourse for p a y m e n t i f for a n y reason y o u r overseas c l i e n t fails t o p a y o n t h e d u e date. T h e p r i c e w h i c h t h e b a n k w i l l p a y y o u for a b i l l d r a w n i n £ w i l l v a r y w i t h c u r r e n t m o n e y rates. I f t h e b i l l is d r a w n i n f o r e i g n c u r r e n c y t h e L o m b a r d B a n k , p r o v i d e d t h e y are at the t i m e buyers o f t h a t p a r t i c u l a r c u r r e n c y , w i l l p a y y o u at t h e i r c u r r e n t b u y i n g r a t e for drafts o n t h e c o u n t r y o f t h e d r a w e e . I n e i t h e r case, i n f i x i n g t h e p r i c e at w h i c h t h e y w i l l b u y y o u r b i l l , t h e b a n k w i l l i n c l u d e a p r o v i s i o n for t h e i r o w n h a n d l i n g charges a n d for those o f t h e i r overseas correspondents, w h o w i l l present t h e b i l l t o the d r a w e e for accept­ ance a n d l a t e r for p a y m e n t b y h i m at m a t u r i t y . M e a n w h i l e y o u h a v e h a d t h e a d v a n t a g e o f b e i n g p a i d cash for y o u r s h i p m e n t . T h i s p r o c e d u r e , y o u w i l l n o t e , is t h e reverse o f t h a t described o n page 45 u n d e r t h e h e a d i n g o f ' N e g o t i a t e d ( t r a d e ) b i l l ' , w h i c h concerns i m p o r t e r s a n d i m p o r t b i l l s . H o w e v e r , bills d r a w n b y exporters o n t h e i r overseas cus­ t o m e r s , a n d passed t h r o u g h L o n d o n bankers for acceptance a b r o a d , are n o t ' b i l l s o n L o n d o n ' a n d t h e y are n o t d e a l t i n o n t h e L o n d o n d i s c o u n t m a r k e t . E v e n i f t h e y w e r e d r a w n ' p a y a b l e i n L o n d o n ' t h e y w o u l d s t i l l be classed as foreign domicile bills. An

e x a m p l e o f a f o r e i g n d o m i c i l e b i l l appears o n t h e n e x t page at fig 4.

See also: ' f o r e i g n d o m i c i l e b i l l s ' , page 23, a n d ' T h e n e g o t i a t e d b i l l ' , page 36. b - The Lombard Bank make you

an advance, against the security of the bills:

case w h e n y o u t a k e t h e bills, w i t h d o c u m e n t s

I n this

attached, to the L o m b a r d

B a n k , t h e b a n k , b y p r e v i o u s a g r e e m e n t , m a k e y o u a cash a d v a n c e , at c u r r e n t

38

The Bill

on London

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