FOREIGN EXCHANGE AND IMPORTS 1. Commercial letters of credit and importing.—Al tho merchants importing goods into a country can set tle for them direct either by remitting or by accepting a draft drawn by the foreign merchant, these methods are now seldom followed except in the case of minor transactions. The employment of letters of credit as a medium of settlement for imported goods offers greater advantages than any other method of pay ment, to both the exporter and importer.
In America, import credits are much more import ant than export credits and are issued in much larger volume. Commercial letters of credit are of ad vantage to the importer of merchandise because they enable him to buy goods on a cash basis in any part of the world, tho the actual payment is deferred sixty or ninety days, giving him a chance to dispose of the goods in the meanwhile. They insure for him ship ment of goods within a stipulated time, exactly as described in the credit. He is also able to order, in advance, goods to be manufactured according to his specifications and requirements without prepayment of any sort, the letter of credit being sufficient se curity for the exporter. The majority of the letters of credit have hitherto been issued on London, but the European war and the Federal Reserve Act have brought dollar credits issued on New York into more general use, especially for South American business. The acceptance and discounting of international bills are such new departures for the New York banks that it is too early to consider them as fully estab lished conditions. For the purposes of illustration we will therefore follow the history of a credit es tablished in London.
2. British acceptances under letters of credit.— The enormous credits accorded by London to bankers and merchants thruout the world generally take one of two forms—acceptances granted under letters of credit, or finance bills. The following illustration will show the operation of an acceptance under a letter of credit.
When a merchant in Holland, France, the United States or any other country wishes to buy goods in any other part of the globe, he generally obtains a credit thru a London banker direct or thru a banker in his own country. In the latter case, he instructs
the foreign merchant from whom he purchases goods to draw on the London banker at so many months, sight. Take the case of a tea merchant in New York, Mr. Brown, who negotiates with Napier & Company, tea growers in Ceylon, for a consignment of tea. Napier & Company probably know little or nothing about the financial standing of Brown, and even if it were excellent, would not be willing or able to await a remittance from New York for the shipment. Na pier therefore asks Brown to arrange for a credit on London in his favor for the amount of the invoice, say £1,000. Brown goes to his bankers, the Bank of New York, and requests them to open up a credit in London in favor of Napier & Company against ninety-days bills with documents attached. The Bank of New York instructs Parr's Bank, their Lon don correspondent, accordingly, and Brown is fur nished with a letter of advice to send to Napier & Company stating that the credit has been opened in London on the terms set forth. On receipt of the letter, Napier & Company fill the order and place the tea on shipboard, receiving a bill of lading there for. Napier then draws a draft at ninety days, sight, for £1,000 and attaching the bill of lading, insurance policy, invoice, etc., thereto, takes it to his banker, the Bank of Madras, Colombo, who purchases the bill from him at the current rate of the day on Lon don. Thus Napier & Company obtain their money immediately. The Bank of Madras forwards the draft and documents to its correspondents in Lon don, the Bank of Commerce, who present it to Parr's Bank without delay. The latter accept it, but retain the bill of lading and other documents. These they forward to the Bank of New York, which is thus en abled to obtain possession of the tea when it arrives and either store it for their customer Brown, on ac count, or deliver it to him on a trust receipt until he finally pays for it.