Typical Letter of Credit The front page of a typical letter of credit, drawn in foreign currencies, as used before the war (Figure 27a), ran as follows: The reverse side of this letter of credit is used as a record of all payments made against it. The following (Figure 27b) is a reproduction of the reverse page, bearing a fictitious indorsement: The dollar letter of credit in use today (Figure 28) reads somewhat as follows: The other side of the letter contains the statement: "Pay ments made under this letter of credit must be indorsed on this page and must not exceed in the aggregate dollars, United States currency." Columns are also provided for date, paid by, amount in words, and amount in figures.
Identification of Holder of Letter of Credit The identity of the holder is established through a specimen of his signature inserted on the front inside cover of the booklet, "List of Correspondents," issued with each letter of credit. This arrangement enables a person to carry his means of identification separate from the relative letter of credit and in case either the list or the letter is lost it is worthless to the finder. The list of correspondents consists of the names of banks and bankers in every city of importance throughout the world which will act as paying agents, and contain:, complete instructions with regard to the use of the letter of credit. These universal circular letters are issued reluctantly by the bank, if at all, and the traveler is asked to specify in what countries he expects to travel and is given a list of correspondents in those countries alone. The universal letter of credit contains hundreds or even thousands of correspondents as paying agents, depending upon the connections of the issuing bank.
The drafts are not drawn against these paying agents but against the issuing bank; these agents have simply agreed to honor the letter of credit and will reimburse themselves, with few exceptions, as directed on its face. When a bank's name is put into this list, the issuing bank sends it a specimen of its letter of credit, and since, as a correspondent, the newly listed bank already has on hand a current set of specimen signatures of those authorized to sign for the issuing bank, it is enabled to determine the genuineness of the letters of credit presented.
Methods and Terms of Issuance Letters of credit are frequently issued in the joint names of two or more persons who may be traveling together, and drafts drawn by any one of them are honored by the correspondents. Letters of credit are, in the absence of definite instruction, always issued for one year. Upon request a letter of extension will be
issued extending the time under which drafts may be drawn against the credit, and this letter of extension must always be presented along with the relative letter of credit.
The issuing bank prefers that the traveler take out at the beginning and carry with him a letter of credit large enough to meet all his requirements, but it provides for the issue of another letter. In case the need of another letter arises the traveler should communicate with the issuing bank directly or through friends at home in time to have a second letter forwarded to a designated place before the first one is exhausted. The first one, with a small amount unused, should be retained as a means of identification in order that the new letter may be readily delivered to the proper person. In emergencies arrangements for the issue of such additional letters of credit may be made by cable. A code, devised to meet the peculiar needs of travelers, is issued in duplicate with each letter of credit. One copy is carried by the holder and one is left at home with the party with whom he is likely to communicate by cable. The use of this code reduces to a minimum the expense incurred in such communications.
Letters of credit are issued to the public in three ways: i. The "paid" letter of credit is issued against cash paid at the time of issue. The charges for such letter drawn in foreign currency are, say, its face amount converted at the "posted rate" for exchange, plus i per cent commission. The commission rate is quite uniform for all issuing banks of the Street. The posted rate is established by adding about fifty points to the cable rate; this addendum varies with the banks and conditions of exchange. If there is an unused balance, it is refunded upon the surrender of the credit.
2. A guaranteed letter of credit is issued at the request of some individual or firm, usually a bank, which guarantees that the issuing bank's charges for drafts drawn against it will be duly honored on presentment. These charges are, say, the face of the draft converted at the posted rate, plus i per cent commission and interest for 15 days at 6 per cent. This interest item is to re imburse the bank for the loss of interest from the time the drafts are charged to its account in London or Paris until settlement is made in New York. Either such drafts are charged to the account of the depositor and the amount advised, or the guarantor may remit upon receipt of statement for the amount of the draft.