These legal preferences are based upon the self-liquidating and commercial character of acceptances. Borrowed money is often considered and used as invested capital, unless the loan is for seasonal requirements or specific purposes, and borrowings as a class are not always highly liquid. Bankers' acceptances are, on the other hand, "based on current commercial transactions, within limitations designed to minimize credit risks." There is greater reason for expecting their retirement at maturity than is the case with an ordinary loan. If the acceptance is secured, the collateral may be liquidated quite easily in its broad market; and ff it is not secured, the completion of the underlying transaction, barring failure or fraud, will automatically provide funds for its retirement. The banker is also conversant with the details of the transaction because he sees either the documents covering the goods or the contracts to export or import. The law requires that the acceptance shall arise out of a commercial transaction.
Classification of Commercial Credits A recent study made by the division of analysis and research of the Federal Reserve Board classifies commerdal credits as follows: The import letter of credit is the authorization addressed to the beneficiary in one country by the credit-issuing bank in another under which the former is given the right to draw drafts up to a specified sum and within a definite time, and the latter undertakes to honor the drafts when presented. The export letter of credit is the advice from a bank to the beneficiary that a credit has been opened in his favor by a foreign bank and that the notify ing bank agrees to honor drafts drawn by the beneficiary.
Letters of credit may be classified also according to their terms and conditions. If a bank agrees to honor drafts drawn by the exporter only when accompanied by satisfactory bills of lading, consular and commercial invoices, the statement is called a docu mentary letter of credit. It is termed a clean or "open " credit if such stipulations are not mentioned.
A broad basis of classification of letters of credit rests on the right of the issuing bank to rescind its engagement to honor drafts drawn by the beneficiary. If the credit-issuing bank reserves the right to withdraw from the undertaking, the document is styled a "revocable" letter of credit. The "irrevocable" letter of credit contains a definite engagement on the part of the issuing bank to honor drafts drawn by the beneficiary in accordance with the terms and conditions specified in the letter. This engagement may not be canceled by the issuing bank prior to the expiration date without the consent of the beneficiary. The " irrevocable" letter of credit may be strengthened further by having the notify ing bank in the same country as the exporter add its unqualified assurance that it will pay or accept the bills drawn by him even if the foreign bank should refuse to honor them. It is then called
a " confirmed" export letter of credit. Expressing, therefore, both the definite undertaking of the issuer and also of the notifier, it is actually an " irrevocable-confirmed" letter of credit. Where the notifying bank does not add its guaranty, the credit is de scribed as "unconfirmed, " since the advising bank maintains that it is merely transmitting the information of the credit to the beneficiary without incurring liability for its continuance. Thus three classes of letters of credit may exist: (t) Irrevocable by the issuer and confirmed by the adviser; (2) irrevocable by the issuer but unconfirmed by the adviser; (3) revocable by the issuer and also unconfirmed by the adviser.
This classification is a departure from the usual precept that the terms "confirmed" and "irrevocable" are synonymous as applied to commercial credits. However, while writings on this subject accept the twofold grouping of confirmed or irrevocable as against unconfirmed or revocable credits, actual banking prac tice operates on the classification given above.= Confirmation may be made in numerous ways, as by signing the instrument to that effect, or by letter or cable. Theseller of goods when negotiating his draft prefers to have the letter con firmed, for there is then no question of his authority to draw and the draft can be sold more readily. He may also be engaged in the manufacture of an article that can be used only by the client ordering the goods, and to cancel the credit may destroy the mar ket. It is, therefore, advisable for him to have a confirmed credit established which cannot be revoked except with the consent of all parties interested.
Naturally the bank opening the credit will not confirm a credit unless expressly instructed to do so by the party at whose instance it is opened, for the bank thereby assumes a contingent liability. In establishing an unconfirmed credit both the open ing and the issuing banks reserve the right to cancel it at any time. Full or partial performance of the agreement on the part of the beneficiary, however, may, upon notice, serve to stop revocation as between the parties thereto, and a refusal of pay ment by the bank only affords a cause of action for judicial deter mination. The distinction between confirrned and unconfirmed credits is sometimes a fine one, and great caution is exercised by the commercial credit departments that they refer all matters pertaining to confirmation to the officers of the bank.2 The Federal Reserve Board in its investigation found that most import credits issued by American banks are irrevocable. Many banks have adopted the policy of opening no revocable import credits whatever since cancellations, even though justified, tend to impair the credit standing of the issuers. Export credits are somewhat less commonly confirmed than import credits, and acceptance or time credits are ordinarily confirmed.