Although the two instruments are much alike, however, the authority to purchase is used only in trade to the Orient, largely in the export trade, whereas letters of credit cover both exporta tions and importations, from and to all parts of the world. Then, too, letters of credit provide for drafts drawn at sight or on time, in dollars or in foreign currency, whereas authorities provide only for time dollar drafts. Letters of credit are usually irrevocable and allow the drawing of drafts practically without recourse to the beneficiary, whereas the authority is usually revocable and the issuer reserves full recourse on the drawer. Finally letters of credit give rise to bankers' bills and acceptances, whereas authorities occasion commercial bills and trade acceptances, for which the discount market is more limited and discount rates higher.
Dollar Credits A further line of credit classification is the currency in which the credit is given and the drafts drawn. They may be drawn in sterling, francs, marks, or other foreign currencies, or in dol lars. Prior to the outbreak of the war in Europe fully 99 per cent of the credits issued to cover importations and exportations of the United States were sterling credits. Requests for the issuance of credits available by drafts drawn in United States dollars on New York banks were extremely rare and were issued only in exceptional cases.
Conditions have changed materially in this respect. Not un til 1914 were national banks privileged to accept drafts drawn on them, and their privilege is still quite restricted by law. The development of dollar credits has also been delayed by certain banking conditions. Arnerican banks are relatively little known abroad and dollar drafts were until recently nearly unknown. Banks in foreign countries, as for instance, in Brazil, would not pay as good a price for dollar drafts as for sterling drafts and the Brazilian exporter would therefore insist upon sterling credits. English and continental banks had established great systems of branch banks, which would invariably draw drafts in foreign currencies, push the use of such credits, and not encourage the use of dollar credits, whereas American banks had, until re cently, no foreign branches whatever, and even now only a few of the larger institutions have branches and the number of these branches per bank is relatively small.
Moreover, before the war the rate of discount was generally lower in London than in New York, and sterling bills in foreign countries would therefore sell for higher prices than dollar drafts.
Custom and business inertia favored the continuance of foreign currency credits. American bankers were also influenced by the facts that foreign remittances were more easily made in sterling than in dollars and that under foreign credits they earned their commissions without accepting themselves, the direct liability of the acceptance being undertaken by the foreign bank for account of the issuing bank.
Advantages of Dollar Credits The war created conditions which favored dollar credits, and it became more economical to use them than sterling or continental credits for the following reasons: 1. The commission on issuance is lower; only one. commis sion, that to the New York bank, is paid under dollar credits opened directly, whereas two commissions, one to the New York bank and another to the foreign bank, are paid on sterling or con tinental credits. This saving of commission will undoubtedly accrue ultimately to the customers when competition makes it impossible for a bank to retain both commissions.
2. The dollar credit is based on the dollar, the value of which in the United States is known and relatively stable as compared with the recent extreme and violent fluctuations in foreign ex change rates; dollar credit shifts the risk of fluctuation to the foreigner; the price quotations to the American importer and the quotations by the American exporter are, in the majority of cases, in terms of dollars; maturities drawn under dollar credits are due and payable in dollars on given dates, and no question arises as to what the exchange rate on London may be a certain number of days before the maturity of the bill. This advantageous posi tion will last only so long as the United States is a sellers' market.
3. The Brazilian exporter under dollar credits is concerned only with the exchange rate between New York and Rio, be tween dollars and milreis, and, except as an arbitrage considera tion, may ignore the New York-London exchange rate and the Rio-London exchange rate.
4. Under dollar credits the bill of lading and all other docu ments come direct to America, and none of them needs to be sent through London. This direct remission of documents saves de lay in getting possession of the goods and prevents the merchan dise from going to general order if the goods arrive before the documents, as often happens when the documents are sent through London.