III INSTRUMENTS OF COMMERCIAL CREDIT Introduction Credit instruments probably originated soon after, if not simultaneously with, the development of credit itself, for an obligation entered into upon a credit basis would appear to require almost as a matter of necessity some evidence of the transaction involved. It is of course possible that credit operations may have at one time been extensively conducted without the use of written proof thereof; but there appears to be no historical evidence that such informal credit extension was ever the rule rather than the exception. Without doubt there were always many "character" loans, however, where one's word was as good as his bond, even as now there are between friends informal loans where no note is required. But in all probability some form of note or bill of exchange was generally used almost from the very beginning. There is abundant proof that these instruments were well developed among the Greeks and Romans and even among the Assyrians and Babylonians. At the present time a great part of credit is evidenced merely by entries in account books, and is known as book credit. Such informal credit extension is quite as significant as any from one standpoint, but from another point of view it is much less important than formal credit. Where a note or bill of exchange arises from a credit operation, we have at hand tangible legal instruments that may be used in a modified way as media of exchange, while in the bank check we have an instrument that in the modern business world has largely superseded the use of money itself in the making of exchanges. Bonds and stocks arising from investment transactions also serve to some extent in lieu of money; but it is only in the instruments of commercial credit that we have a generally acceptable substitute for money. The adaptability of these instruments to serve as media of exchange has long been recognized, and there has been gradually developed a definite body of law governing their use. The fundamental principle which has given them the wide circulation they now possess is known as negotiability, whereby one of these instruments may come to have a good title even though there was originally a flaw in it; that is to say, when it gets into the hands of a third party it may, under certain conditions, be a better instrument than when in the possession of the original holder. This principle, so far as our own legal history is concerned, was developed in the English courts to meet the needs of mediaeval trade. In due time it was extended to America, where, in the various states, it developed along similar lines, though with so many local variations that the bar association eventually undertook the securing of identical legislation on the subject in all the states. A uniform negotiable instruments law, however, has only recently been secured. 13. TYPES OF COMMERCIAL CREDIT INSTRUMENTS A promissory note is an unconditional written promise by X (the maker) agreeing to pay, either on demand or at a definite future date, a sum of money to Y (the payee) or to Y's order or to bearer. It may or may not designate the place at which payment is to be made. Promissory notes may be issued by institutions and governments as well as by individuals. Bank notes, United States notes, certificates of deposit, etc., are forms of the promissory note. 3.500.00 No 246 Due. Chicago Illinois, Mechelt 1916 after date for value received the undersigned promise to pay to the order of THE NATIONAL CITY BANK OF CHICAGO Five hundred and fas DOLLARS at its Banking House in Chicago Illinois, with interest AFTER MATURITY at the rate of seven per cent per annum until paid and with costs of collection and a reasonable attorney fee if not paid at maturity. Presentment and demand for payment, notice of non-payment, protest and notice of protest are each and all hereby walced by the makers, endorsers and guarantors jointly and severally. Any indebtedness owing from said bank or legal holder hereof to the undersigned or to any endorser or guarantor may be appropriated and applied by said bank or legal holder on this note at any time either before or after maturity of this note and without demand upon or notice to any one. John Doe Richard Roe To indorse a note the payee writes his name across the back of the instrument. This act makes the payee, like the maker, responsible for the payment of the note. Notes may also be indorsed by third parties, thereby adding to the number of those responsible for the payment of the note. Notes which show only one person responsible for the payment are called single-name paper. Those which have two or more signers are called double-name or three-name paper. A bill of exchange is an unconditional written order, signed by X (the person giving the order-the drawer), ordering Z (the drawee) to pay, either on demand or at a definite future date, a sum of money to Y (the payee) or to Y's order or to bearer. The drawee may indicate his willingness to honor it by signing his name to the word "accepted" written across the face of the bill., Bills of exchange are of two kinds, foreign and domestic, or inland. A foreign bill is legally defined as one the drawer and drawee of which live in different countries or different states, while a domestic bill is one both parties to which live within the same state. Business custom, however, warrants our using the term domestic bill for all bills when both parties live in the United States, regardless of state lines. There is likely to be some confusion as to when to use the term draft. Draft and bill of exchange are often used interchangeably. For instance, we speak of drafts on London and bills of exchange on London, and we say New York exchange and drafts on New York. In the business world, however, there is a growing custom of using the term draft when speaking of domestic transactions, while one more frequently hears the term bill of exchange in connection with foreign transactions. Bills of exchange may be classified according to whether or not the parties to the order are bankers. A banker's draft is an order drawn by one bank and payable by another. It is not necessary, however, that the party to whom it is payable be a bank. In the case of individual or trade bills of exchange the payee may be the drawer himself as well as a third party. The payee may also be a bank. The second party, the drawee, may likewise be a bank, in which case the bill of exchange is in the form of the familiar check drawn by a person against his deposit account in a bank. Bills may be classified according to whether or not they arise out of actual commercial transactions. Hence we have bankers' or finance bills, trade or commercial bills, and accommodation bills. Bankers' bills are used merely as a means of making payments and transferring balances and are secured by the reputation of the bank that draws them. A commercial bill arises out of an actual sale of goods and, is secured, not only by the general responsibility of the drawer, but also by the goods which have been exchanged for the of sale. Accommodation bills are bills which do not arise purpose out of any business transaction already concluded, though there may be an intention to purchase goods with the funds procured. 19 Pay to th Dollar Lixty days after Sight of this FIRST OF EXCHANGE (Second unpaid) please pay to the order of Richard Roe One Thousand pounds Value received, and charge to account of To The Union of London and Smithe Bank Ltd. 2 Princes St. Manciniteure In order to illustrate the use of these instruments, suppose that X has bought a bill of goods from Y. X may pay in one of several ways: (1) He may "pay cash," and this may be in bank notes, United States notes, gold certificates, etc. (2) He may give Y a check on his (X's) bank. (3) He may draw and deliver a bill of exchange on Z payable to Y or Y's order. In such a case Z is presumably a debtor to X. (4) He may give Y a promissory note. This will merely defer actual payment. (5) He may "accept" a bill of exchange which Y has drawn upon him. This also merely defers actual payment. (6) He may transfer to Y some check or promissory note or bill of exchange which some other person (say V) has drawn to X's order or to bearer. (7) He may buy from his banker a banker's draft drawn (on some other banker) in favor of Y. (8) He may buy from his banker a cashier's check. 14. ORIGIN AND DEVELOPMENT OF MERCANTILE INSTRUMENTS1 BY WILLIAM GREEN HALE The law governing negotiable instruments had its inception in the customs of the mercantile world-indeed, these instruments were born of the necessities and needs of merchants. Bills, notes, and checks are thus frequently referred to as commercial paper, or mercantile specialties, and the law pertaining to such instruments as the Law Merchant. Adapted from Law of Negotiable Instruments, pp. 1-2. (Blackstone Institute, 1915.) |