Bill of exchange

Bills of exchange developed during the Middle Ages as a means of transferring funds & making payments over long distances without physically moving bulky quantities of precious metals. In the hands of thirteenth-century Italian merchants, bankers, and foreign exchange dealers, the bill of exchange evolved inkhổng lồ a powerful financial tool, accommodating short-term credit transactions as well as facilitating foreign exchange transactions.

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The invention of the bill of exchange greatly facilitated foreign trade. The mechanics of this can be seen in the following example: Assume that a merchant in Flanders sold goods to a Venetian merchant và accepted in payment a bill of exchange drawn on the Venetian merchant promising to pay an agent of the Flemish merchant in Venice at a certain date in the future, và in a certain currency. The bill of exchange allowed the Venetian merchant to lớn accept delivery on the goods from Flanders, sell them, và take the proceeds khổng lồ redeem the bill of exchange in Venice, probably in Venetian currency.


Bills of exchange were also instruments for foreign exchange transactions. Merchants in Italy và major trading centers in Europe bought bills of exchange payable at future dates, in other places, và different currencies. In the example above sầu, the Flemish merchant could sell the bill of exchange khổng lồ an exchange dealer for currency of his own choosing. In turn, the exchange dealer could sell the bill of exchange to lớn a Flemish merchant engaged in buying goods in Venice. When the bill came due for payment in Venice, the Flemish merchant would use it khổng lồ buy goods in Venice where the bill of exchange was paid. While this process seems complicated, it substantially reduced the transportation of precious metals. In our example, a Venetian merchant bought goods from Flanders, và a Flemish merchant bought goods from Venice without any foreign currency leaving Venice or Flanders.


Bills of exchange gave cover khổng lồ bankers evading usury laws by hiding interest charges in exchange rate adjustments that governed foreign exchange transactions. A Florentine bank could advance a sum lớn an Italian merchant & receive a bill of exchange payable at a future date lớn an agent of the Florentine ngân hàng in a foreign market. When the bill of exchange matured, the Florentine agent in the foreign market would draw another bill of exchange on the Italian merchant, payable at a date in the future at the Florentine bank that drew the first bill of exchange on the Italian merchant. The Italian merchant would be borrowing the use of money for the time it took for these transactions to lớn be completed, và the interest would be embedded in the fees for handling the bills of exchange. Bills of exchange drawn only to grant credit were called dry bills of exchange.

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Credit transactions involving bills of exchange are difficult to untangle, even challenging the talents of Adam Smith, who cited the difficulty of the subject of bills of exchange as credit instruments in the Wealth of Nations:


The practice of drawing and redrawing is so well known khổng lồ all men of business that it may perhaps be thought unnecessary to give an trương mục of it. But as this book may come into the hands of many people who are not men of business, và as the effects of this practice are not perhaps generally understood even by men of business themselves, I shall endeavor to lớn explain it as distinctly as I can.

(Smith, 1952)

Smith goes on lớn describe a process by which bills of exchange are drawn and then redrawn with interest charges added, turning the bill of exchange inkhổng lồ a khung of long-term credit.

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Bills of exchange circulated as money substitutes, partially playing the role of paper money, & economizing on the need to move sầu specie between countries. When London became the financial center of world during the eighteenth century, bills of exchange became less important as credit instruments. Uninfluenced by church doctrines toward usury, the London financial markets developed financial instruments that clearly stated what interest rate was paid.


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