Concepts: Bills of Exchange and Bill Discounting
Before we dive into Marx’s first critique of his contemporaries, it’s important that we outline a few concepts in order to make the critique more clear. I’d venture to guess that many readers will not have experience in banking or finance, but if you do, feel free to skip ahead to the next post as much of this may already be known to you. In this post we are going to learn about bills of exchange including what they are and how they function in our economy.
So, what is a bill of exchange? A common type of bill of exchange is the check–like the one we draw from our banks. When we give a person or entity a check as means of payment, what we are actually doing is instructing the bank, in which we hold our money, to pay that person or entity. The bills of exchange that Marx refers to in the Grundrisse were used more commonly in trade in the past. Before electronic banking made international exchange much easier, companies would draw a bill of exchange to transfer payment of goods sold to another entity that they might owe money to for goods or services: instead of the purchaser paying the party from which they bought the goods, they would pay a third party for the seller. This was a key means of payment in early international trade, as transporting physical cash, gold, or other valuable means of payment across long distances was much more dangerous.
On a base level, a bill of exchange is an unconditional order of payment for goods or services drawn by one party and given to another. This second party must pay the amount indicated on the bill by the due date provided or suffer legal action. Now, like in the example above, a bill of exchange transaction can actually involve up to three parties. Commonly this involves a drawee, a payee, and a drawer. The drawee is the party who must pay the amount indicated on the bill of exchange to the payee, and the drawer is the party who compels the drawee to pay the payee. Sometimes the drawer and the payee are the same party, but oftentimes the drawer transfers ownership of the bill of exchange to a third party which becomes the new payee. Say I made a payment to a company for goods or services via check. In this case I would be the drawer, the company would be the payee, and my bank would be the drawee.
Discounting a Bill of Exchange
So, say you are a company and you have sold goods to a company called Iroha. Now, you received goods and service from another company recently called ABC Foods. You draw a bill of exchange and send it to Iroha, asking for payment for the goods they purchase in exactly six months. You transfer ownership of this bill of exchange to ABC Foods to pay off your debt to them. When six months is up, Iroha will pay ABC Foods the amount due instead of paying you.
Now, say ABC Foods is in need of money and doesn’t want to wait six months to receive their payment. Since the bill of exchange is essentially a promise of payment ABC Foods can, in turn, transfer ownership of the bill of exchange again to a bank or financial institution (let’s call them USA Bank) for immediate payment. Now, USA Bank will not pay the full amount on the bill to ABC Foods, but they will pay the amount minus the interest or an agreed upon discount rate calculated against the days remaining until the bill is to be paid. This is called discounting a bill of exchange. When the due date comes around, Iroha will pay USA Bank the full amount on the bill of exchange, and USA Bank will have made money since they deducted interest or the discount rate from their payment to Iroha.
As you might be able to tell, just like in lending, banks or financial institutions which discount bills of exchange will need to calculate the risks involved in accepting this arrangement. For example: the company which must pay (the drawee) may run into economic hardship and become unable to pay. Because of this, banks will generally increase the discount rate in an economic downturn as the chances of a failure of payment will be much higher. A higher discount rate will both discourage parties in more precarious financial situations from accepting a discounted bill, reducing the amount of risk the bank takes on, and give the bank more revenue to offset the risk.
This is essentially what we need to know about bills of exchange and discounting bill of exchange moving forward. If you would like to learn more there are plenty of other resources online. While this specific method of payment might not be as popular today, it is still important to understand the concepts to get at the crux of Marx’s arguments against his contemporaries, and to see how they can relate to different political arguments in our own time.