Each time money is thus drawn the amount is indorsed by the paying agent on a sheet of the letter, with the date, the amount both in writing and in figures, and the name of the bank or agent making payment. Letters of credit are usually drawn in pounds sterling, and the amount of each draft is converted into marks, francs, or whatever kind of money the traveler needs where he happens to be. Whatever balance may remain when the traveler returns will be redeemed by the banker issuing the letter. Generally the tourist buys the letter outright at the ruling rate of demand exchange plus 1 per cent commission. If the buyer is a depositor enjoying high credit the bank may issue a letter of credit to him without payment until the customer's drafts have been received from abroad. Sometimes where the amount of the letter is large and the period of absence considerable no commission is charged, the use of the undrawn funds being regarded as sufficient compensation. A modified form of the letter of credit is the traveler's check which is issued by the American Bankers' Association, also by some of the largest banks and express companies. These travelers' checks are made out in even amounts of dollars, ten, twenty and so on, and formerly stated on the face the equivalent value in pounds, francs, marks, etc., so that the traveler knew the exact amount he should receive when cashing them in a foreign city.1 The user of the checks writes his name on the face of each, and on a space below he signs his name again in the presence of the paying officer when he cashes them. These checks are readily cashed all over Europe by bankers and hotel keepers either at par or for a small commission. Banks are generally willing to cash letters of credit and travelers' checks because they furnish exchange on London, which is always and everywhere in demand. 123. Commercial letters of credit.—The commercial letter of credit is somewhat similar in principle to the traveler's letter, but it is used to pay for merchandise purchased from exporters in foreign countries. In effect it authorizes an exporter to draw against the correspondents of the issuing bank for the amounts named in the letter on account 1 During the post-war period when foreign exchanges were so disturbed, these checks were made payable abroad "at banker's buying rate of exchange for checks on New York." of specific shipments. Though dollar credits have come into large use during the war period sterling credits are still the most readily negotiable throughout the world. By means of a commercial letter of credit an importer can purchase merchandise in any foreign country on a cash basis, although he will not have to pay for it until the maturity of the drafts drawn by the exporter, from one to six months after date of acceptance. At the same time the exporter in a foreign land receives his payment on a cash basis as soon as he presents to the local representative of the issuing bank evidence that he has shipped the goods according to contract. The financing of commercial credit may take various forms, but the principles upon which the whole business is based may be shown by a concrete case.1 A silk manufacturer in Paterson, New Jersey, purchases by cable ten bales of raw silk in Canton, China. He goes to his banker in New York and gets a commercial letter of credit covering the terms of his purchase. Such a letter would be addressed to some bank in London requesting it to "accept" the drafts of the Canton merchant up to a specified amount and under certain conditions relating to bills of lading, insurance papers, etc. The New York banker sends the letter of credit to the silk exporter in Canton, who ships the goods to New York after having them insured and receiving the marine bill of lading and the insurance certificate. The Canton merchant then draws a four months' draft on the London correspondent of the New York bank, attaching to it the invoice, bill of lading, and other shipping papers. He takes the draft to his local bank and sells it at the prevailing rate for four months' exchange on London. He has received his payment for the goods and is out of the transaction. Long before the silk gets to New York the draft will reach London and be presented to the London correspondent of the New York bank. If the London banker is satisfied that the draft and the documents conform to the 1 Escher, pp. 143-160. terms of the credit, he accepts the draft, marking it payable four months from the date of presentation. He then dispatches the documents which were attached to the draft to the New York banker by mail steamer. After a time the silk also arrives and arrangements must now be made We hereby authorize you to value on the Guaranty Trust Company of New York, 33 Lombard St., up to an aggregate amount of Twenty seven hundred and seventy-five Pounds Sterling -- to Milwaukee, Wis. -- Bills of Lading for such shipments must be made out to the order of the Guaranty Trust Company CONSULAR INVOICE AND ONE BILL OF LADING MUST BE SENT BY THE BANK OR BANKER NEGOTIATING The remaining documents must accompany the drafts drawn on Guaranty Trust Company of New The amount of each draft, negotiated, together with date of negotiation, must be endorsed on back hereof. We hereby agree with bona fide holders that all drafts drawn by virtue of the Credit, and in accordance with the above stipulated terms, shall meet with due honor upon presentation at the Office of the Guaranty Trust Company of New York, London if drawn and negotiated prior t Jaly 15, 1914. Guaranty Trust Company of Ny Y Cancelled COMMERCIAL LETTER OF CREDIT-FRONT by which the Paterson manufacturer may get possession of it. He has not paid anything on the importation, yet he wants the goods. On the other hand, when the banker surrenders the bill of lading he parts with the only security he has for the payment of the draft for which he is responsible through his London correspondent. Sometimes the goods are stored and turned over to the merchant only when he shows that he has sold them and needs them to make delivery. In the case of this raw silk it may be ware Calcutta Negotiated & Nenchundred 7-5-14) + fourpounds 5/italy £90 21. 5. 14. 28. 5. 2/7/14 7.8.14 MERCANTILE MK 131489.2793--13-4 BANKING EASTERN BANK CBS COMMERCIAL LETTER OF CREDIT-BACK housed and parcelled out to the manufacturer in small lots as needed. More generally the importer gets possession of the goods by signing a "trust receipt." This receipt states that the manufacturer has received the goods and that he will sell them and apply the money received to the payment of the four months' draft before or at maturity. The particular form of receipt will depend upon the standing of the firm signing it. Most trust receipts stipulate that the proceeds from the sale of the goods will be kept separate from other assets of the firm and deposited with the banker as the goods are sold. At the end of the four months the draft drawn by the Canton firm and accepted by the London bank falls due and the New York |