12. Do not write any unnecessary information on the back of your

cheque. A story is told of a woman who received a cheque from her husband, and when cashing it wrote "Your loving wife" above her name on the back. V. BANK CHEQUES (_Continued_) If you wish to draw money from your own account, the most approved form of cheque is written "Pay to the order of _Cash_." This differs from a cheque drawn to "_Bearer_." The paying teller expects to see yourself, or some one well known to him as your representative, when you write "Cash." If you write "Pay to the order of (_your own name_)" you will be required to indorse your cheque before you can get it cashed. If your note is due at your own bank and you wish to draw a cheque in payment, write "Pay to the order of _Bills Payable_." If you wish to write a cheque to draw money for wages, write "Pay to the order of _Pay-roll_." If you wish to write a cheque to pay for a draft which you are buying, write "Pay to the order of _N. Y. Draft and Exchange_," or whatever the circumstances may call for. [Illustration: A cheque made to obtain money for immediate use.] If you wish to stop the payment of a cheque which you have issued you should notify the bank at once, giving full particulars. Banks have a custom, after paying and charging cheques, of cancelling them by punching or making some cut through their face. These cancelled cheques are returned to the makers at the end of each month. If you have deposited a cheque and it is returned through your bank marked "_No Funds_," it signifies that the cheque is worthless and that the person upon whose account it was drawn has no funds to meet it. Your bank will charge the amount to your account. The best thing to do in such a case is to hold the cheque as evidence of the debt, and write the person who sent it to you, giving particulars and asking for an explanation. If you wish to use your cheque to pay a note due at some other bank, or in buying real estate, or stocks, or bonds, you may find it necessary to get the cheque _certified_. This is done by an officer of the bank, who writes or stamps across the face of the cheque the words "_Certified"_ or "_Good When Properly Indorsed_," and signs his name. (_See illustration._) The amount will immediately be deducted from your account, and the bank, by guaranteeing your cheque, becomes responsible for its payment. Banks will usually certify any cheque drawn upon them if the depositor has the amount called for to his credit, no matter who presents the cheque, and this certifying makes it feasible for a man to carry in his pocket any amount of actual cash. If you should get a cheque certified and then not use it, deposit it in your bank, otherwise your account will be short the amount for which the cheque is drawn. In Canada all cheques are presented to the "ledger-keeper" for certification before being presented to the paying teller. [Illustration: A certified cheque.] THE USEFULNESS OF BANKS Banks are absolutely necessary to the success of modern commercial enterprises. They provide a place for the safe-keeping of money and securities, and they make the payment of bills much more convenient than if currency instead of cheques were the more largely used. But the great advantage of a banking institution to a business man is the opportunity it affords him of borrowing money, of securing cash for the carrying on of his business while his own capital is locked up in merchandise or in the hands of his debtors. Another important advantage is to be found in the facilities afforded by banks for the collection of cheques, notes, and drafts. VI. BANK DRAFTS 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. VII. PROMISSORY NOTES [Illustration: Ordinary form of promissory note.] A PROMISSORY NOTE is a written promise to pay a specified sum of money. At the time of the note's issue--that is, when signed and delivered--two parties are connected with it, the _maker_ and the _payee_. The maker is the person who signs or promises to pay the note; the payee is the person to whom or to whose order the note is made payable. NEGOTIABLE in a commercial sense means _transferable_, and a negotiable note is a note which can be transferred from one person to another. A note to be made negotiable must contain the word _bearer_ or the word _order_--that is, it must be payable either _to bearer_, or _to the order_ of the payee. A NON-NEGOTIABLE note is payable to a particular person _only_. A note may be written on any kind of paper, in ink or pencil. It is wise, however, to use ink to prevent changes. All stationers sell blank forms for notes which are easily filled in. The samples of notes which appear in this lesson are selected simply to illustrate to students the fact that there are a great many special forms of notes in common use. The wording differs slightly in different States. The DATE of a note is a matter of the first importance. Some bankers and business men consider it better to draw notes payable at a certain fixed time, as, "_I promise to pay on the 10th of March, 1897_." The common custom is to make notes payable a certain number of days or months after date. A note made or issued on Sunday is void. The DAY OF MATURITY is the day upon which a note becomes legally due. In several of the States a note is not legally due until three days, called DAYS OF GRACE, after the expiration of the time specified in the note. [Illustration: A promissory note filled out on an engraved blank.] The words VALUE RECEIVED, which usually appear upon notes, are not necessary legally. Thousands of good notes made without any value consideration are handled daily. The PROMISE TO PAY of a negotiable note must be unconditional. It cannot be made to depend upon any contingency whatever. Notes that are made in settlement of genuine business transactions come under the head of regular, legitimate business paper. An ACCOMMODATION note is one which is signed, or indorsed, simply as an accommodation, and not in settlement of an account or in payment of an indebtedness. With banks accommodation paper has a deservedly hard reputation. However, there are all grades and shades of accommodation paper, though it represents no actual business transaction between the parties to it, and rests upon no other foundation than that of mutual agreement. No contract is good without a consideration, but this is only true between the original parties to a note. The third party or innocent receiver or holder of a note has a good title, and can recover its value, even though it was originally given without a valuable consideration. An innocent holder of a note which had been originally lost or stolen has a good title to it if he received it for value. [Illustration: A special form for a promissory note.] A note does not draw interest until after maturity, unless the words WITH INTEREST appear on the face. Notes draw interest after maturity and until paid, at the legal rate. A note should be presented for payment upon the exact day of maturity. Notes made payable at a bank, or at any other place, must be presented for payment at the place named. When no place is specified the note is payable at the maker's place of business or at his residence. In finding the date of maturity it is important to remember that when a note is drawn _days after date_ the actual days must be counted, and when drawn _months after date_ the time is reckoned by months. To DISCOUNT a note is to sell it at a discount. The rates of discount vary according to the security offered, or the character of the loan, or the state of the money market. For ordinary commercial paper the rates run from four to eight per cent. Notes received and given by commercial houses and discounted by banks are not usually for a longer period than four months. VIII. THE CLEARING-HOUSE SYSTEM In large cities cheques representing millions of dollars are deposited in the banks every day. The separate collection of these would be almost impossible were it not for the clearing-house system. Each large city has its clearing-house. It is an establishment formed by the banks themselves, and for their own convenience. The leading banks of a city connect themselves with the clearing-house of that city, and through other banks with the clearing-houses of other cities, particularly New York. Country banks connect themselves with one or more clearing-houses through city banks, which do their business for them. The New York banks, largely through private bankers, branches of foreign banking houses, connect themselves with London, so that each bank in the world is connected indirectly with every other bank in the world, and in London is the final clearing-house of the world. [Illustration: The advantages of the clearing-house system.] Suppose that the above diagram represents the banks and clearing-house of a city, and also the two business houses of Brown and Smith. Brown keeps his money on deposit in Bank E, and Smith in Bank B. Brown sends (by mail) a cheque to Smith in payment of a bill. Now, Smith can come all the way to Bank E, and, if he is properly identified, can collect the cheque. He does not do this, however, but deposits Brown's cheque in Bank B, the bank where he does his banking business. Now, B cannot send to E to get the money. It could do this, perhaps, if it had only one cheque, but it has taken in hundreds of cheques, some, perhaps, on every bank in town, and on many banks out of town. It would take a hundred messengers to collect them. So, instead of B's going to E, they meet half-way, or at a central point called a clearing-house, and there collect their cheques. B may have $5000 in cheques on E, and E may have $4000 in cheques on B, so that the exchange can be made--that is, the cheques can be paid by E paying the difference of $1000, which is done, not direct, but through the officers of the clearing-house. Now Bank E's messenger carries Brown's cheque back with him and enters it up against Brown's account. This in simple language is the primary idea of the clearing-house. The clearings in New York in one day amount to from one to two hundred millions of dollars. By clearings we mean the value of the cheques which are _cleared_--that is, which change hands through the clearing-house. Usually once a week (in some cities oftener) the banks of a city make to their clearing-house a report, based on daily balances, of their condition. [Illustration: The route of a cheque.] To illustrate the connection between banks at distant points let us suppose that B of Media, Pennsylvania, who keeps his money on deposit in the First National Bank of Media, sends a cheque in payment of a bill to K of South Evanston, Illinois. K deposits the cheque in the Citizens Bank of his town and receives immediate credit for it upon his bank-book, just the same as though the cheque were drawn upon the same or a near-by bank. The Citizens Bank simply sends the cheque, with other distant cheques, to its correspondent, the National Bank of the Republic, Chicago, on deposit, in many instances in about the same sense that K deposited the cheque in the Citizens Bank. The National Bank of the Republic sends the cheque, with other cheques, to its New York correspondent, the National Park Bank. It may possibly send to Philadelphia direct, or even to Media; but this is very unlikely. The National Park Bank sends the cheque to its Philadelphia correspondent, say the Penn National Bank. Now the clearing-house clerk of the Penn National carries the cheque to the Philadelphia clearing-house and enters it, with other cheques, on the First National of Media. Custom, however, differs very greatly in this particular. Many near-by country banks clear through city banks; others clear less directly. If the First National Bank of Philadelphia is known at the clearing-house as the representative of the First National Bank of Media it likely has money belonging to this Media bank on deposit. In that case the cheque is charged up against the account of the First National of Philadelphia. This bank then sends the cheque to the First National of Media, by which it is charged up against B. This system of collection of cheques is about as perfect as is the post-office system of carrying registered mail. [Illustration: Backs of two paid cheques.] Now, the banks and clearing-houses through which the cheque passes on its way _home_ stamp their indorsements and other information upon the back. Our illustration shows the backs of two cheques which have "travelled." Millions of dollars are collected by banks daily in this way, and all without expense to their customers. It is estimated that these collections cost the New York City banks more than two million dollars a year in loss of interest while the cheques are _en route_. Ten thousand collection letters are sent out daily by the banks of New York City alone. IX. COMMERCIAL DRAFTS 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. X. FOREIGN EXCHANGE It is quite in order that we should follow lessons on the clearing-house and commercial drafts with a lesson on foreign exchange. We learned in the last lesson that commercial drafts are made use of to facilitate the collection of accounts. They are simply formal demands for the payment of legitimate debts. When these formal demands are made upon foreign debtors they are called bills of exchange; and the process of buying and selling these drafts, the drafts themselves, and the fluctuations in price, all are included in the general name _exchange_. [Illustration: Foreign exchange.] To illustrate the principles of exchange let us suppose that the following transactions have occurred: