3. A letter of credit may be issued against the deposit of marketable securities as collateral ; a certain margin, say, 20 per cent, is required, depending upon the character of the securities. The same charges are made for this form as for the guaranteed form. If the beneficiary has an account with the issuing bank he will probably instruct it to debit his account with the charges; if not, he will instruct it to present them to the institution with which he has made arrangement for their protection. In the event of.inability to secure reimbursement from any other source, the bank may sell such portion of the securities as will satisfy its claim. This method of obtaining letters of credit is the least frequently used.
The dollar letter of credit is also a sort of domestic letter for use in the United States, Canada, Mexico, Central and South America, and the West Indies. The conditions governing their is sue are the same as prevail in the issuance of the foreign currency letters. The list of correspondents embraces the correspondents in the countries named. The common commission charge on such letters of credit is I z per cent net to the issuing bank.
Upon the issue of a letter of credit a special letter of advice must be sent to the prospective drawee banks (in the case of the sample letter given above, the three banks in London and Paris), giving all the particulars of the letter of credit— its number, amount, date of expiration, name of beneficiary, and a specimen of the beneficiary's signature. With this information and signa ture the London and Paris banks are prepared to honor the drafts drawn on them under the letter of credit. The banks mentioned in the list of correspondents do not receive direct advice of each letter of credit issued, but a list of all letters issued during the preceding month is sent in the early part of every month. This list provides the correspondent with a permanent reference record of all credits issued and enables the correspondent to tell whether or not a letter of credit under which a draft is pre sented for payment is in order.
The Issuance of Travelers' Checks Before the war travelers' checks were issued by American banks in denominations of $10, $20, $50, and $ioo, and stated on their face the exact equivalent which would be paid in the foreign currencies. These conversions were made at fixed arbitrary rates, the rates being such as would protect the issuing bank and allow it a fair profit; for instance, the sterling conver sion rate was put at $4.90 plus X per cent, or $4.925, whereas the
gold export point scarcely ever exceeded $4.8925. Although a letter of credit might be bought at the cable rate plus, say, fifty points, the buyer of travelers' checks paid at the rate of $4.90; but he bought the latter because there was greater convenience in cashing them. The letter of credit could not in general be cashed except by the correspondents mentioned in the list, but travelers' checks could be cashed anywhere by anyone willing to take them, and they were readily accepted by banks, hotels, railroads, etc. By their terms they are cashable through named correspondents, but in practice they enjoy quite general accept ability. An extensive list of correspondents is prepared by the issuing bank for use with the checks but is seldom given out because it is not needed.
Figure 29 is the legend of a sample pre-war $1c) traveler's check.
When a check of this kind was cashed in America it could be used as sight exchange on New York. The check might specify other banks in other cities against which it could be used as sight exchange; the issuing bank would have made arrangements for the protection of its travelers' checks by these banks. Through the new federal reserve collection system, such checks could be collected at par almost anywhere in the United States.
When cashed abroad the checks could be used as exchange on the nearest reimbursement office mentioned in the list printed on the back of the check. The charges of the banks cashing the checks were generally i/8 per cent, and were paid by the reim bursement offices, which in turn charged them to the issuing bank's account with the usual additional T/8 per cent added for themselves.
Fluctuation of exchange rates and the restrictions of war on foreign exchange business forced our bankers to limit their travelers' checks to dollar checks. These are issued in denomina tions of $10, $20, $50, and $ioo. A specimen check of this type (Figure 3o) is given on page 738.
It is probable that dollar checks will prevail for years, at least until exchange fluctuations become less pronounced.
Travelers' checks are almost invariably issued against cash, the practice of issuing them against guaranty or deposited col lateral is frowned upon by the Comptroller of the Currency, for travelers' checks in circulation are much like cashiers' checks. The bank enjoys the use of this cash until the drafts are pre sented, and interest is not allowed. The commission charged for the issue of these checks is I z per cent.