8. History of the draft in London.—To return to the draft—this is now an accepted bill with first-class names on it and has an international currency. It is salable in any country in the world, because every country finds it necessary to remit constantly to Lon don and every foreign bank has a London office or correspondent.
The bill can be held until maturity and the pro ceeds can then be placed to the credit of the Bank of Madras, but the more usual course is for the latter bank to instruct its London agent, the Bank of Com merce, to discount the bill in the open market and place the proceeds to its credit., or the bill may be remitted by the agent to another foreign center to settle some account there. In either case, the bill re turns to London at its maturity and is paid to the holder on that date by Parr's Bank, tho in the mean time, it may have been bought and sold several times and have passed thru half a dozen hands.
Parr's Bank depends on the Bank of New York to provide funds to meet the bill at maturity and would not have issued the credit unless it had had confidence in the Bank of New York. The Bank of New York in its turn has confidence in its customer's ability to reimburse it and of course it insures that he provides the necessary funds for transmission to Lon don in time to discharge the obligation.
4. Positiow of the obligants on the bill.—To sum up the results of the transaction : 1. Brown, the actual debtor, had the use of £1,000 for three months and yet he himself would probably have some difficulty in naming his actual creditor at any particular moment.
'2. Napier 8: Company in Colombo received their money as soon as the tea was delivered on shipboard, tho as drawers of the bill, they remain obligants until payment.
3. The Bank of Madras bought the bill from Napier R. Company and were only out of its money until the bill had reached London, was accepted, discounted and placed to the bank's credit. It, however, remains liable as indorser of the bill until its payment.
4. The Bank of Commerce advanced no money. They acted only as agents of the Bank of Madras in obtaining acceptance of the bill, selling it in the discount market and crediting the proceeds ; therefore their name does not appear en the bill. For their services they receive a com mission.
5. Parr's Bank is primarily liable on the bill as acceptor hut as the Bank of New York must provide the funds for payment it advances no money on the transaction. It merely makes a small commission for the use of its name.
The above are all interested, directly or indirectly, in the bill but not one of them, with the exception of the Bank of Madras, has advanced a single cent. The question still remains, "Who paid for the tea during the three months' currency of the bill?" The answer is "Those firms which discounted and purchased the bill in the open discount market of London." 5. The part London much the same way, merchants in every country in the world have been accustomed to arrange credits in London for every other country in the world and for every con ceivable class of goods. On the outbreak of war, it
was estimated by Mr. Lloyd George that British banks and accepting houses were liable for over 350,000,000 of these acceptances, the greater part of which had been discounted on the London market. Altho British signatures were primarily liable for this huge amount, it was not really for their own account, for they looked to those on whose behalf they had ac cepted the bills, to provide the funds. The unprece dented demand for sterling exchange at the begin ning of the war was due to the attempt on the part of foreign obligants to provide funds for the maturing liabilities incurred by the British banks for their ac count, and under their instructions. Exchange rates on London the world over rose far above the gold point. If Great Britain had insisted on these debts, it would have been impossible to obtain the necessary sterling funds except at a most ruinous figure. Even if the English banks could have met the acceptances as they matured out of their own funds, disgrace if not ruin would have befallen a number of the foreign banks. It was to protect this vicarious liability of the English banks that a moratorium was proclaimed and there is no doubt that this wise step saved the neutral countries, indebted to London, both financial loss and worry. Mr. Lloyd George in referring to this class of note says : There was that amount of paper out with British signa tures at that time. Most of that had been discounted. The cash had been found by British sources, and the failure was not due to the fact that Great Britain had not paid her creditors abroad. It was due entirely to the fact that those abroad did not pay Great Britain. I think that it is very important from the point of view of British credit, to have that thoroly understood, for when the "moratorium" came, and there appeared something like a failure of British credit, it was not a British failure at all. It was because we could not get remittances from other countries. We had already paid, but it was vital to the credit and good name of this country that these bits of paper, which are circulated thru out the globe, with British names upon them, with names that have been associated with British trade and commerce— it was vital to the good name and credit of this country, to its continuity of trade and its character, that they should not be dishonored. What really happened was that there was a complete cessation of credit, a breakdown of the exchanges. It was exactly as if a shell had broken an arch in an aqueduct, and there was a cessation of the flow that had been going on before, and what we had to do was tem porarily to repair the arch so that the flow should continue.
Acceptances under "letters of credit" are not of course confined to London; they are drawn on other large financial centers such as Paris and New York, but owing to the special facilities afforded by London the bulk of these credits were, before the war, drawn in sterling.