Coramercial Letters of Credit There are many types of letters of credit, made to fit special circumstances. Their use may be illustrated by a typical case which assumes that a New York importer takes out a sterling credit through his New York bank in order to import coffee from a Brazilian exporter. The statement may be more conveniently made in terms of the symbols used in the beginning of this chap ter (page row). The price of the sale of coffee by Eb to Ia de pends upon whether Ia can arrange for a banker's credit, and what the conditions of that credit are; if, for instance, Eb is per mitted to draw at three rather than six months he will offer to sell the coffee at a lower price, for the shorter the issuance the higher the price he can get for his bill.
Having come to an agreement upon the terms of sale, Ia goes to Ba and procures a commercial letter of credit for which he pays cash or pledges collateral; or another institution may guar antee his obligation to Ba, or Ba may issue the credit for Ia's unsecured obligation. The terms vary with the bank's policy and the credit title of Ia. If Ia is a steady customer of Ba he has probably an established line of credit with the bank, and if his application is within the line, the letter of credit will be speedily granted, for many of the details as to commission charges, etc., will have been previously arranged; otherwise, these matters have to be considered and agreed upon. Ba may authorize Eb to draw on Be, and obligate Be to accept the drafts drawn under the terms of the letter; in this case Be is either a branch of Ba's or has given Ba a power to sign for and legally bind Be. In other cases Ba may have to apply to Be for the privilege of issuing a specific letter of credit. These practices rest upon the standing financial relations of Ba and Be. Anyway, Ba authorizes Eb to draw on Be in sterling at, say, three months' sight, up to a specific amount, for invoice cost of coffee shipped to Ia within, say, one year; Eb is to send to Be advice of the drawing and copies of the bill of lading and invoice, and upon receipt of these papers Be will honor the drafts if properly drawn; the bill of lading is to be issued to the order of the shipper and indorsed in blank. If the letter of credit is to be confirmed Be will confirm to Eb by letter or cable.
Eb will then ship his coffee direct to Ia, send the copies of the bill of lading and invoice to Be, attach the original bill of lading and other documents to the draft, and sell it to Bb. Bb will
send it to his London agent, who will present it to Be for accept ance. Be accepts the drafts and removes and keeps the docu ments. The London agent then has a clean acceptance, which he will hold till maturity or sell in the discount market, in ac cordance with his instructions from Bb. Be sends the docu ments, with advice of acceptance, to Ba. Ba will deliver the documents against payment by Ia, or deliver them against a trust receipt created by Ia in New York; and Ia, having got the documents, takes possession of the goods. Before the accept ance is due in London Ba will buy exchange and remit to Be to cover. The party who buys the acceptance in the London dis count market is the real creditor for the transactions; Ia does not advance funds, nor does Ba nor Be; after Bb sells his acceptance in London he has a larger balance in London but less in Rio Janeiro, and he is creditor only while the bill is in transit between these cities. Ba and Be are paid commissions for their services; Bb presumably profits by the difference between the cost and selling prices of the bill.
Travelers' Letters of Credit The subject of travelers' letters of credit has been treated at length in Volume III, Chapter XXXIX, but brief consideration may here be given to its relation to foreign exchange operations. A traveler's letter of credit is a banker's credit established for the convenience of customers traveling abroad, against which the traveler may draw. Ba secures from Be a list of correspondents who act as agents for the payment of Be's traveler's credits, and Ba arranges with as many agents as are willing to become paying agents for travelers' credits which Ba is about to place; to all who agree so to act Ba then sends specimen copies of its letter of credit.
The letter of credit is addressed to Ba's correspondents and all other banks to which it may be presented; it introduces to them the traveler in whose favor it has opened a credit of a cer tain amount sterling, and whose drafts to that extent on Be it engages will meet with due honor if negotiated with:n a certain time. Each agent bank cashing such draft for the traveler enters on the letter its name and the amount paid by it. When the sum so paid by all the banks equals the face amount of the letter of credit, the letter is attached to the last draft paid and remitted by the paying bank to the issuing bank.