CHAPTER XI.

COMMERCIAL PAPER.

Definition of a Promissory Note-Terms Used to Designate the Parties, etc.-Discounting a Note-Indorsement-Transfer by Delivery-Definition of a Bill of Exchange-Acceptance-Foreign and Inland BillsDefinition of a Check-Essentials of Negotiable Paper-Three Peculiar Characteristics of Commercial Paper-The Presumption of a ConsiderationWho is a Bona Fide Holder for Value-Negotiability-Days of Grace.

The subject of commercial paper is a somewhat difficult one in its technicalities, but it will be treated here as briefly and simply as possible, without entering into the finer and more troublesome points.

Commercial paper is the representative of money, as money is that of property itself, which in earliest civilization was interchanged by barter before money came into common use. A great proportion of all the business in the world is now facilitated by the use of commercial paper.

Commercial paper consists of promissory notes and bills of exchange. Checks drawn on banks are sometimes called commercial paper, and they will be considered here in connection with notes and bills, as their nature is very similar.

Definition of a Promissory Note.

A promissory note is a written promise by one person to pay to another, or to his order, or to bearer, a certain sum of money, absolutely, without condition, and at a time certain to arrive. [See Appendix, for blank form of promissory note.]

The party who makes the promise is called the maker of the note. The person to whom the promise is given, is the payee. When the note is given into the possession of the payee, this delivery makes it a binding promise; but while the maker keeps it in his own possession without delivery, it is not a contract at all. The delivery is essential to its life as a note.

Discounting a Note.

If the note is made payable "to the payee or order," the payee may at any time sell the note to a third party, receiving therefor the sum which was originally promised "the face of the note," as it is called

-or a less sum, as he may be able to arrange with the party who buys it. When a note is given by a reliable party, whose name is well and favorably known in business circles, it is easy to raise money on it, even when no one can be found who will buy it outright, by taking it to a bank or note broker, and getting it "discounted;" that is, receiving the "market value" of the note, which is the face value minus a percentage, the amount of which depends on the state of the money market, and a small percentage to the broker for his services.

Indorsement.

In any case, to sell such a note, the payee, to whose order it is payable, must indorse it; that is, he must

write his name across the back of the note, with or without special words of direction to pay to the party to whom he sells it. Simply writing his name is a sufficient indorsement to pass it. [See Appendix, for form of indorsement on note.] Having thus indorsed the note, he who was the payee thereby becomes an indorser; and every successive person into whose hands the note may come is an indorsee, until he indorses it (for a note or bill may pass from hand to hand indefinitely), by which act he also becomes an indorser. The person who has the note at any given time is also called the holder.

Transfer by Delivery.

If the payee only writes his name and does not fill out a formal indorsement, directing to whom it shall be paid, he is said to indorse it "in blank," and the effect is then the same as it would have been had the note originally been made payable to payee "or bearer," instead of "or order." In either of these cases, if the payee simply writes his name across the back, the note may then pass from one person to another merely by transfer; that is, no further indorsements, even by name, need be made on it.

When the time expires for which a note is given, it must be presented to the maker for payment.

Definition of a Bill of Exchange.

A bill of exchange is a written request by one person to another, to pay to a third person, or to his order, or to bearer, a certain sum of money, absolutely, without condition and at a time certain to arrive. [See Appendix, for blank form of bill.]

He who makes the request is called the drawer

of the bill. He to whom the request is addressed, is the drawee. The third party, to whom the drawee is requested to pay the sum, is the payee. When the drawee "accepts" the bill, he becomes the acceptor.

A bill is always supposed to be drawn by one who has been having business dealings with the drawee, and the latter is supposed to have funds of the drawer's in his possession. Thus a request is sent by A to B, asking him to pay over to C a certain sum of money belonging to A, but which is in B's possession. By this means A may pay C a debt which he owes him, very conveniently to all parties.

Acceptance.

Before the time arrives when the money is directed to be paid, the payee, into whose hands the drawer delivered the bill, must present it to the drawee for acceptance; and if the latter recognizes the signature, and has funds in his possession belonging to the drawer, he will accept the bill; that is, he will write "accepted" with the date and his name or initials (or some other words to the same effect) across the face of the bill, by which act he ceases to be the drawee, and becomes the acceptor of the bill. After such acceptance, by which the acceptor makes himself personally liable to pay the bill, as much as though it were his own note, the bill may be indorsed by the payee to some other person, after which it may be indorsed or transferred from party to party, just as a note may be, until the time for payment comes, when it must be presented to the acceptor for payment. If the acceptor fails to pay as agreed, the original drawer may then be looked to for payment by the holder, whoever this may be at the time of the maturity of the bill.

Foreign and Inland Bills.

Bills of exchange may be foreign or inland. A foreign bill is one of which the drawer and drawee are in different countries.

Thus C is going from this country to Europe, and he will want a large sum of money to use on his arrival there, but does not wish to carry it with him, so he pays over the money to A, who gives him therefor a bill drawn on B, who is A's business correspondent in Europe, and who has funds of A's. When C arrives in Europe he may present the bill to B, who accepts it, and C may then get it discounted; or if the time is short, he may keep it, and present it himself to the acceptor for payment, and receive the full face value and interest. The convenience of this arrangement will be readily perceived.

Inland bills, more commonly called drafts, are drawn between parties living in the same country, but usually in different sections of it. All the explanations as to indorsement, parties, etc., given concerning notes, apply equally to bills.

Definition of a Check.

A check is very similar to a bill of exchange, but it is always drawn upon a bank, and should be drawn only by one who has money deposited therein. [See Appendix, for blank form of check.]

Essentials of Negotiable Paper.

The definitions which have been given of a promissory note and a bill of exchange, should be carefully considered in their every part. In a note or bill, which may be negotiated, the promise must be to pay in money; a promise to pay in commodities of