many banks as well as private bankers now issue them. A letter of credit is a circular letter addressed to the correspondents of the issuing bank introducing the holder, certifying that he is authorized to draw a certain sum of money, and requesting that his drafts be honored up to that amount. A list of the foreign correspondents is added on a separate leaf of the letter. The signature of the traveler is written at the bottom of the letter. Every time he draws money at one of the correspondent offices he signs a draft or receipt for the amount drawn and his signature is carefully compared with that on his letter. 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 and several of the large express companies. express checks are made out in even amounts of dollars, ten, twenty and so on, and state on the face the equivalent value in pounds, francs, marks, etc., so that the traveler knows the exact amount he should receive when he cashes a check in a foreign city. The user of the checks writes his name on the face of each, and on a space below he signs his name again when he cashes them. These express 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 author izes an exporter to draw against the correspondents of the issuing bank for the amount named in the letter on account of specific shipments. As a rule it is issued in pounds sterling, as this form of credit is 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 1 Escher, pp. 143-160. satisfied that the draft and the documents conform to the 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 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 'against shipment of Hessians from Calcutta, India Milwaukee, Wis. Bills of Lading for such shipments must be made out to the order of the Guaranty Trust Company of New York, unless otherwise specified in this credit CONSULAR INVOICE AND ONE BILL OF LADING MUST BE SENT BY THE BANK OR BANKER NEGOTIATING DRAFTS, DIRECT TO THE GUARANTY TRUST COMPANY OF NEW YORK, NEW YORK, UNDER ADVICE TO GUARANTY TRUST COMPANY OF NEW YORK, LONDON. The remaining documents must accompany the drafts drawn on Guaranty Trust Company of New York, London. 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 this 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 to Jaly 15, 1914. - |