10. Letters of credit.—There are two forms of letters of credit: 1. Circular letters of credit, to be used by travelers and tourists. These are addressed to the foreign correspondent of the issuing bank in favor of the holder.
2. Commercial letters of credit, to be used in trade. These take the form of a letter addressed by a bank to a foreign merchant, authorizing him to draw on the issuing bank's cor respondent in a certain place (generally a financial center such as London or New York) for a specified amount repre senting the cost price of certain goods ordered by the bank's customer, on whose behalf the credit is issued. The letter designates a time-limit and specifies that all drafts shall be accompanied by the relative invoice, bill of lading, insurance policy, consular certificate, etc.
Before issuing a commercial letter of credit the bank requires the customer to sign an application form (Fig. 14 on page 103) setting forth the par ticulars and terms of the shipment and giving instruc tion in regard to terms, insurance, etc., all of which are embodied in the letter of credit, which is issued by the bank in four parts, namely, one original and three copies (these copies however vary but slightly from the original).
1. The original is addressed to the foreign merchants in whose favor the credit is issued (Fig. 15). This is handed
to the customer, who forwards it to his correspondent.
2. A copy is addressed to the London or New York bank on which the credit is issued, authorizing it to protect the drafts against the credit when drawn in accordance with the terms and conditions thereof.
3. A copy of the original is delivered to the customer for his files.
4. A copy is retained by the bank issuing the credit.
On the reverse side of the last two copies is a receipt, signed by the customer, incorporating an agreement regarding the basis on which the bank is to be re imbursed, and the amount of its commission (which varies according to the currency of the bill drawn).
The bank's rights in case of default in payment or other difficulties is also defined (Fig. 16).
Commercial letters of credit are invaluable factors, and in the promotion of international trade and com merce greatly facilitate the negotiation of bills of ex change, not only in the import business of a country but also in the export business. Letters of credit, tho not themselves negotiable, render valuable service to commerce by facilitating the drawing and negotiation of bills of exchange thruout the world. These two phases are dealt with fully in later chapters.