Furthermore, the absence of an open discount market in New York was another serious obstacle in the free movement of foreign credit. This inability to finance foreign trade, except thru London, has proved a serious handicap to the United States in its exchange relations with other countries. Spain, for instance, could never settle in dollars for imports from the United States because her imports from that country were paid for by credits opened in London, and these in turn had to be utilized to pay for credits opened in London in favor of the United States.
Mr. Laurence Merton Jacobs in "Bank Accep tances• refers to this feature as follows : As a result of the inability of our banks to finance imports thru the acceptance of time bills, American importers are, then, made dependent to a large extent upon London, and are required to pay London a considerable annual tribute in the way of acceptance commissions. This practice not only adds to the importance of London and militates against the development of New York as a financial center, but it at the same time works serious injury to our export trade. Since time bills cannot be drawn on our banks from foreign points against shipments of goods to the United States, there are consequently in such foreign countries very few bills which can be purchased for remittance to the United States in payment for goods which have been bought here. In other words, under our present banking system our im ports do not create a supply of exchange on New York, for example, which can be sold in foreign countries to those who have payments to make in New York. This means that our exporters are also, to their great disadvantage, made dependent upon London. It means that when they are ship ping goods to South America and to the Orient they cannot, when they are subject to competition, advantageously bill them in United States dollars. They, naturally, do not care to value their goods in local currency—that is, in the money of the country to which the goods are going—so their only alternative is to value them in francs or marks or sterling, preferably the latter, owing to the distribution and extent of British trade, creating thruout the world, as it does under the English banking system, a fairly constant supply of and demand for exchange on London. When we come to
bill our goods in sterling, however, it is at once seen that our exporters are obliged to take a risk of exchange, which is a serious handicap when competing with British exporters. Our exporters who are to receive payment for their goods in sterling must previously decide on what rate of exchange will make the transaction profitable. If, in an effort to safe guard themselves against a loss in exchange, they calculate on too low a rate for the ultimate conversion of their sterling into dollars, their prices become unfavorable compared to those made by British exporters and they lose the business. If they do not calculate on a sufficiently low rate they get the business but lose money on the transaction thru a loss in exchange.
Under the Federal Reserve Act, however, national banks are now permitted to accept drafts based on the importation or exportation of merchandise and the Federal Reserve banks stand prepared to dis count satisfactory paper created by this class of busi ness. Under these conditions, the Paris bank, re ferred to in the preceding section, could have issued a letter of credit instructing its New York correspond ent to accept Brown's sixty or ninety-day bill against delivery of the documents, which bill after acceptance could be discounted by Brown's bank or its New York correspondent in one of the Federal Reserve banks. In other words, the procedure would have been exactly the same as in the London case, except that the New York and not the London discount market would have carried the bill until maturity.
The Federal Reserve Act has provided the ma chinery and it remains to be seen whether the oppor tunity will be freely availed of by the international financial world. It is too soon to express any defin ite opinion as to the ultimate success New York will attain as an international acceptance market. Noth ing is more sensitive to restrictive conditions than international credit—it must ebb and flow freely or cro elsewhere. Paternalistic in all things concerning banking and finance, the United States has already surrounded this concession to modern requirements with restrictions and definitions that tend to hamper that freedom of operation which is so essential in an international money market.