The method of using the commercial bill of ex change can be most conveniently explained by means of a concrete example. Suppose a cotton merchant in New Orleans sells one thousand bales of cotton to a Liverpool firm against draft with documents at tached. The merchant draws a sixty-days draft in duplicate for the amount of the invoiced goods, say £10,000, and takes it, with the relative documents attached, to his banker in New Orleans, who credits him with $48,500 at the rate of the day ($4.85) . The merchant has sold his cotton, received his money and is ready for a new transaction.
The New Orleans bank sends the original bill and documents to its London correspondent, the dupli cates following by the next mail. What happens in London to the bill depends upon its nature and whether the documents are to be surrendered on pay ment or on acceptance. (See Chapter VI, Section 5.) If the documents are to be delivered on acceptance, the bill becomes a "clean" bill and can be discounted in the London discount market and the proceeds placed to the credit of the New Orleans bank. If the docu ments are deliverable on payment only, acceptance of the bill is obtained, but the document remains attached to the bill until maturity, unless the acceptor takes up the draft under a rebate of interest for the unexpired time.
In the case of an "acceptance" bill, the proceeds be come available as soon as the bill can be accepted and discounted. In the case of a "payment" bill the American banker cannot count on having the amount available until the maturity of the bill, tho prepay ment under rebate may place the funds to his credit long before that time. If the New Orleans bank has no London correspondent it would sell the draft to its New York correspondent, who would remit it to London in due course. All obligants on these bills re main liable until payment.
5. Financing exports by means of dollar credits.— Every shipment of merchandise to a foreign country involves an operation in foreign exchange, but it does not necessarily follow that the exporter must under stand all about foreign exchange in order to do a successful export business. Many goods are ex ported against dollar credits opened with some New York bank, and the exporter has a simple dollar trans action on his hands. Even when the credit is opened in London in pounds sterling the transaction offers no very difficult problem in exchange.
There is always a risk incurred in purchasing docu mentary exchange, unless it is supported by satisfac tory names, and is drawn against staple and non-per ishable merchandise. We shall consider a case in
which an American exporter, say, Mr. Brown, of Bal timore, is not satisfied with the standing of his foreign customer. He is unwilling to risk a shipment against unsupported documents and advises the purchaser to arrange a credit in New York in dollars for the amount of the invoiced goods, to be paid on delivery of the bill of lading and relative documents. The buyer, say, in Paris, goes to his banker, specifies the amount and the terms of the credit required, and the latter writes or cables to his New York corre spondent to open a credit for so many dollars in favor of Brown. In this credit are set forth the terms in which Brown is to be allowed to draw the money, and the various documents which are to accompany the drafts. In due course Brown is notified that the credit has been opened. Accordingly, he draws a draft on New York and deposits it in his local bank. The draft is paid within a few days and, as far as Brown is concerned, the transaction is closed.
The New York bank having paid the draft and taken over the documents forwards them, debiting its Paris correspondent who opened the credit. If the customer of the Paris bank is of high financial stand ing the bank will probably turn over the documents to him at once, even before full payment is made. Otherwise the goods will be stored by the bank on their arrival and released when payment is received. This is purely a matter of arrangement between the Paris bank and its customer and does not concern the American exporter or banks. The Paris bank might perhaps have been unable to arrange a dollar credit on New York and so issued instead, a credit on Lon don in pounds sterling against either time or demand drafts with documents attached. An explanation of the procedure in this connection with a history of the bill, is given in the next chapter.
6. Dollar the establishment of the Federal Reserve banks, American foreign trade had been financed chiefly thru the medium of letters of credit issued on London banks. The reason for establishing a credit in London, and thereby provid ing an English acceptance, Was no reflection on the high standing of the New York banks; it was due to provisions of the National Bank Act, which prohibit national banks from doing an acceptance business.