Skip to main content

Exchange, Bills of

EXCHANGE, BILLS OF

EXCHANGE, BILLS OF. The most common and yet most complex form of negotiable instrument used for business transactions is known as the draft, or the bill of exchange. A bill of exchange can be used for payment, credit, or security in a financial transaction. The term comes from the English and is defined as an unconditional order in writing that is addressed by one person to another and signed by the person giving it. Bills of exchange, also referred to as commercial bills, were initially developed in inland trade by merchants who wished to resell goods before making a payment on them. Later they came to be used as a type of IOU in international trade.

In a bill of exchange transaction, a person, or the drawer, agrees to pay to another, also known as the drawee, a sum of money at a given date, usually three months ahead. In principle, the bill of exchange operates much a like a postdated check in that it can be endorsed for payment to the bearer or any other person named other than the drawee.

If the person accepts the bill of exchange by signing his name, or his name with the word "accepted," across the face of the paper, he is called an acceptor. The person to whom a bill is transferred by the acceptor's endorsement is called the endorsee. Any person in possession of a bill, whether as payee, endorsee, or bearer, is termed a holder. The basic rule applying to bills of exchange is that any signature appearing on a bill obligates the signer to pay the specified amount drawn on the bill.

The bill of exchange then must be accepted or "endorsed" by an accepting house, an institution that deals exclusively with bills of exchange, such as a bank, or a trader. Once the bill is accepted, the drawee does not have to wait for the bill to mature before receiving his funds. If he so chooses, the drawee can also sell the bill on the money market for a small discount.

A bill of exchange can also be passed beyond the drawer, drawee, and creditor. For the purposes of payment or borrowing, the creditor may transfer the bill of exchange to a fourth party, who in turn may pass it on and on through endorsement or signature of the transferor. Endorsement transfers the rights of the endorser to the new holder and also creates a liability of the endorser for payment of the amount of the draft if the drawee does not meet payment when the draft is due. A failure to pay a draft must be more or less formally recognized, and the draft holder may claim payment from any endorser whose signature appears on the instrument.

In English laws, bills of exchange were defined in the Bills of Exchange Act of 1882. The act later influenced American legislation, particularly the passage of the United States Negotiable Instruments Act, which was eventually adopted throughout the United States. However, English law of what constitutes a bill of exchange is somewhat different than bills of exchange laws in Europe and Asia. In 1988, the United Nations Commission on International Trade Law (UNCITRAL) began working to synchronize these laws through the "United Nations Convention on International Bills of Exchange and International Promissory notes." With the development of other means of credit, the use of bills of exchange has declined.

BIBLIOGRAPHY

Hedley, William. Bills of Exchange and Bankers' Documentary Credits. London: LLP, 1997.

Jahn, Uwe. Bills of Exchange: A Guide to Legislation in European Countries, Asia and Oceania. Paris: ICC Publishing, 1999.

Meg GreeneMalvasi

See alsoBanking: Overview ; Credit .

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Exchange, Bills of." Dictionary of American History. . Encyclopedia.com. 18 Dec. 2018 <https://www.encyclopedia.com>.

"Exchange, Bills of." Dictionary of American History. . Encyclopedia.com. (December 18, 2018). https://www.encyclopedia.com/history/dictionaries-thesauruses-pictures-and-press-releases/exchange-bills

"Exchange, Bills of." Dictionary of American History. . Retrieved December 18, 2018 from Encyclopedia.com: https://www.encyclopedia.com/history/dictionaries-thesauruses-pictures-and-press-releases/exchange-bills

Learn more about citation styles

Citation styles

Encyclopedia.com gives you the ability to cite reference entries and articles according to common styles from the Modern Language Association (MLA), The Chicago Manual of Style, and the American Psychological Association (APA).

Within the “Cite this article” tool, pick a style to see how all available information looks when formatted according to that style. Then, copy and paste the text into your bibliography or works cited list.

Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.com cannot guarantee each citation it generates. Therefore, it’s best to use Encyclopedia.com citations as a starting point before checking the style against your school or publication’s requirements and the most-recent information available at these sites:

Modern Language Association

http://www.mla.org/style

The Chicago Manual of Style

http://www.chicagomanualofstyle.org/tools_citationguide.html

American Psychological Association

http://apastyle.apa.org/

Notes:
  • Most online reference entries and articles do not have page numbers. Therefore, that information is unavailable for most Encyclopedia.com content. However, the date of retrieval is often important. Refer to each style’s convention regarding the best way to format page numbers and retrieval dates.
  • In addition to the MLA, Chicago, and APA styles, your school, university, publication, or institution may have its own requirements for citations. Therefore, be sure to refer to those guidelines when editing your bibliography or works cited list.