COMMERCIAL BANKS

Auckland Star, Volume LXIX, Issue 280, 26 November 1938, Page 6 (Supplement)

COMMERCIAL BANKS

Their Origin Their Work

Persons sending money to one another frequently use cheques. A cheque is a form specially printed by the banks for the convenience of their customers, and as a safeguard against- fraud. Every cheque has an impressed duty stamp. It is although unusual, to draw up a cheque on ordinary notepaper to which is affixed the necessary stamp. W hen a cheque is drawn, or filled in, care must be taken to state four facts: The date upon which the document is written must be placed in the top right-hand corner. If this is not done the cheque is incomplete and may be Tefused by the bank. A cheque dated before the correct day cannot be paid until the arrival of the day named, while those drawn on Sundays, Christmas Day or bank holidays can be cashed only on the next business day.

In the body of the cheque is placed the name of the payee, or the person to whom payment is to be made. Then follows the amount written in words, while at the left-hand corner the sum is stated in figures. This repetition is to prevent mistakes. Legally, the banker is obliged to pay the written amount only. In practice, if the two amounts differ, the bank returns the cheque for correction.

All cheques have to be signed by the customer from whose account payment has to be made.' The banker has a copy of the signature of every client, and all cheques have their signatures compared with these specimens.

A cheque can be drawn for any amount, including shillings and pence, and may be so marked that it is valueless to anyone other than the person entitled "to payment (or his banker). The cheque is then said to have its negotiability limited. This is done by "crossing." Crossings are of two kinds—general and special. A general crossing consists of two parallel lines drawn vertically across the face of the cheque and adding the words, "not negotiable." This cheque cannot be cashed, but must be paid into a bank» account. This is also a caution notice meaning, "Beware of the person handing you this cheque." To accept such a payment from a stranger is a risk. If the cheque has been stolen the receiver, though innocent of theft, has to repay its value to the lawful owner, who is protected by these words.

A specially crossed cheque has the name of a bank inserted between the lines referred to above. The result is that the person receiving it must pay the cheque into the bank named.

An uncrossed cheque is said to be "open" and may be cashed by anyone who presents it to the bank. A "blank" cheque is one signed by the drawer, who leaves the amount column "blank" or unfilled. This is

a dangerous practice, for if the cheque falls into wrong hands theft may follow.

If a cheque is lost the drawer may make it valueless by sending the number to the bank and asking the payment to be stopped.

When the persons concerned know each other the cheque is a safe and convenient method of transporting money value. In Great Britain and lier Dominions, together with the U.S.A., cheques totalling millions of pounds value are circulated daily. BILLS OF EXCHANGE TN the previous article it was A assumed that Black and Co. were ready to wait until the bill of exchange matured and was paid by Tartans, Ltd. If, however, Black and Co. required the money represented in the value of. th e hill issued on the goods supplied to Tartans, Ltd., the company could "discount" the bill. The bill would be taken to a banker or a bill broker and sold for cash. Suppose the value of the merchandise supplied, and therefore of the bill, is £100, and that the tenor is 90 days, but that after 30 days Black and Co. need the money. Whet is Black and Co. to do? By going to a bill broker the company could sell, or "discount," the bill. The broker would pay £100, less the amount of interest that sum would earn in the remaining 30 days. This interest is what is called "discount." The broker would also charge a small fee, known as brokerage. When the bill matured Tartans, Ltd., would pay not Black and Co., but the new owners of the bill. Thus a bill may be easily converted into cash by the person drawing it.

A bill of exchange may also be need, to pay a third party. If Black and Co. had bought wool from a New Zealand firm, Shearers, Ltd., they could so draw their bill that Tartans. Ltd., would not pay Black and Co. direct, but Shearers, Ltd., on behalf of Black and Co. This would save the London merchant having either to arrange a bill with Shearers, Ltd., or send gold. Thus bills of exchange save large stocks of gold from being constantly sent from one country to another. In this respect they serve the same purpose in oversea payments as cheques do within the country where they are used.

By the practice of buying and selling bills of exchange it is possible to avoid the trouble of drawing such instruments. In the example Black and Co. drew up a bill accepted by Tartans, Ltd. The payment might have been made by Tartans, Ltd., buying a bill maturing in London. By forwarding this through their bankers Black and Co. would have received cash from the payee of the bill forwarded.

This system is used widely in trade and has a direct effect upon the volume of trade flowing from one country to another. Some of these effects will be considered in a future article on the control of currency.

BANK DRAFTS AND LETTERS OF CREDIT THE Centennial Exhibition, to be opened in Wellington next year, will attract many oversea visitors. Few of these travellers will be known personally or by reputation to the business people of this Dominion. Therefore, although solvent, the cheques of such tourists will not be generally acceptable here. Consequently these sightseers will have to arrange their funds in such a way that they can readily pay their travelling and other expenses.

They will do this by means of letters of credit. Before leaving for New Zealand these people will go to their respective banks and arrange to have credit taken from their personal accounts and lodged in what is called a "letter of credit account." The bank will then issue a document stating the total amount that the customer is entitled to receive on this instrument. In some cases a specimen signature is placed on the letter of credit, in others a letter of identification is given to the client who signs his name on it as a specimen.

On arrival in New Zealand, or, indeed, anywhere else, the bearer presents the letter of credit to the branch or agency of the bank which issued it and drawa a cheque in the usual way. The signature on the cheque is compared with the specimen on the letter of credit or in the letter of identification and, being in order, cash is paid to the amount of the cheque. This amount is endorsed on the letter of credit so that all the banks to which the client subsequently goes may know the amount which is left in the customer's letter of credit account. The payments so made are subject to the ruling rate of exchange; e.g., an Englishman with a document on London will receive 25/ for each £1 drawn on his letter of credit in New Zealand.

This proceeding saves travellers having to carry large sum« of money with them and so does away with the risk of loss or theft. Letters of credit are acceptable by the banks throughout the world and the officer making payments are paid by the bank issuing the letter.

A bank draft ifl really a cheque issued by a bank in its own name. A person may wish to make a payment to a firm overseas or at a distant centre in hi«. own country. Because the individual i« not known to the trader concerned his cheque may not be acceptable. In such a

8y.... D. K. Boyd

case the person making payment will go to his banker and have the necessary sum drawn from hie own account and given to the bank, which issues a bank draft and sends it either to the person to be paid or to his banker. This really means that the bank allows its name to be used in order to transport value. The draft is acceptable because the bank's power to pay is well known. A fee is charged for this service.

Letters of credit and bank drafts are not so frequently used as are bills of exchange or cheques, but they provide a real service to the community. The essential quality of these documents is the reputation given to them by the known solvency of the bankfl of is^ue.