CHAPTER XVII. THE PROBLEM OF FOREIGN CREDITS (concluded). E. THE USE OF CREDIT INSTRUMENTS IN AMERICAN PRACTICE. 1. Drafts and Credits. We dealt in Chapter XIV with the use of credit instruments in German and in British banking practice. In Chapter XV we reviewed the facilities of American banks for negotiating drafts for American shippers under the restrictions of American banking regulations which prevailed before the enactment of the Federal Reserve Act. In Chapter XVI we discussed the effects of the Federal Reserve System upon the operations of American banks and the development of their service to American exporters under the broader regulations of the Federal Reserve Act and its various amendments. We have not yet reached by any means the ideal stage of banking practice in dealing with credit instruments. But the Act provides for a supervision of banking practice and for the introduction of desired improvements, and very great progress has certainly been made, with every prospect of the perfecting of a fully adequate mechanism, adapted to the needs of America's trade with the world, in the course of time. Our present consideration will be given to a review of the various credit instruments which are used in the American banking practice to-day. Of these the negotiation of drafts, documentary (with shipping documents attached) and "clean" (not attached to shipping documents) and the opening of commercial credits with the bank upon the initiative of the buyer, either in the shape of "confirmed" credit or an authority to negotiate drafts, have been already described from the point of view of the European practice and of the American pre-war practice. There is no difference in principle between any of these practices and the present day practice, though there are the natural minor differences of rates and charges, and principally in the scope of operations by the banks in dealing with these instruments. It will suffice, therefore, to review briefly the principal characteristics of these credit instruments. We have, however, before us two important credit instruments, the bank acceptance and the trade acceptance, which are new to American banking practice. The bank acceptance plays an important part in the financing of foreign shipments and this we will consider at length. The trade acceptance is limited to domestic usage. The documentary draft discounted by the bank. This is a draft to which the shipping documents are attached. The exporter has sold certain goods to a customer abroad whose credit standing he had investigated and found satisfactory. When shipment is made, he draws a draft on his customer, attaching to it the proper shipping documents, generally the original bill of lading with any negotiable copy; the marine and war risk insurance certificate, the certificate of origin and other certificates which the laws of the country of destination may require, invoice, etc. Drafts may be either sight drafts, likewise called demand drafts, being payable upon presentation to drawee by the branch or correspondent abroad of the bank in America to which the drawer turns over the draft for collection or for discount; or they may be time drafts, payable a certain period after presentation, usually at 60, 90 or 120 days. Time drafts may be drawn either a certain period after sight or after the date of the draft. The draft on arrival at destination is presented to the drawee for acceptance. When the draft is drawn in dollars, it should bear the note "payable at bank's drawing rate on day of payment for........ drafts on New York." When the draft is presented to the bank for collection, the drawer must wait for the collection to be effected and receives the proceeds in due course. But if he wishes to use the money at the time of shipment, he may turn over the draft to the bank for discount. Here the bank will undertake to discount the draft when the credit standing of the drawer warrants it. The bank loans the money to the drawer while waiting for the proceeds. Naturally the discounting is done with recourse to the drawer, in other words if the drawee fails to honor the draft, the drawer must return the amount loaned by the bank on the draft with accrued interest and expenses. The branch of the American bank or its correspondent presents the draft, whether taken for collection or for discounting, to the drawee. The shipping documents attached to it are as a rule marked "to order" (where foreign regulations do not forbid this) and are surrendered to the drawee upon compliance with instructions issued by the shipper, which means generally that in the case of sight drafts the documents placing the drawee in possession of the shipment are surrendered after payment, and in the case of time drafts after "acceptance." The acceptance is effected by the drawee writing or stamping the word "Accepted" with his signature and the date across the face of the draft. The accepted draft is held until maturity and then at maturity it operates as a sight draft. If the amount is drawn in dollars, the draft bears the note "payable at the bank's drawing rate on date of payment for..........days (or for sight) drafts on New York." The drawee must then procure a draft for New York funds. According to country and to the usance of drafts a charge of 1-1/8 to 3 per cent is made for discounting and interest is added for the time between the payment of the discounted draft to the drawer and the arrival of the proceeds in New York, as well as revenue stamp charges on bills of exchange abroad. The charge for collecting drafts is much smaller, generally running from 1/8 to 1%. The proceeds may be cabled, if the drawer so instructs the bank. The drawer may also make provisions for protesting the drafts in case of non-payment. Drafts accompanied by documents are referred to as D.A. drafts, if the documents are to be surrendered against acceptance, and D.P. if they are to be surrendered against payment. It is highly important in every case to give complete instructions to the bank with regard to various emergencies. In the case of D.A. drafts it is usual to instruct that the draft after acceptance be held until maturity and payment by the bank at the point of destination; only rarely the drawer instructs that the draft be returned to the bank in America. Instructions as to how to proceed if the draft is not accepted and what to do with the documents in that case are exceedingly important. It might be well to instruct the bank to notify someone in the case of non-payment, which wise precaution sometimes can save much loss. The exporter should have a clear understanding with his customer as to the payment of commissions, exchange costs, etc. The clean draft discounted by the bank. The proceeding is the same as in the foregoing case, only the element of security, as far as the bank is concerned, is lessened by the absence of documents giving control over the shipment. The discounting of such drafts is based entirely upon the solvency of the exporter. Confirmed credits. The foreign customer may arrange with a bank or a business house in United States to confirm his orders and to accept drafts of the exporter covering his purchase. The confirmed credit is called an irrevocable credit, because it cannot be cancelled without the consent of the vendor. Credits are accompanied by instructions with regard to the vendor's acts prerequisite to payment, which the bank must see that the vendor effects correctly. Payment is generally made against the surrender by the exporter of a full set of shipping documents within the expiration limit of the confirmed credit or before the cancellation of the unconfirmed credit. Authority to negotiate with or without recourse. Occasionally the customer arranges with his bank to instruct an American bank to negotiate the exporter's drafts up to a specified amount either with recourse (when the vendor's liability is maintained until the draft is met) or without recourse. The former proceeding is naturally permissible only when the customer is a concern of the highest standing and enjoys the utmost confidence of the vendor. Other forms of credit established by foreign customers for the payment of their purchases in America are the foreign bank's credit or the buyer's export credit. A foreign bank occasionally issues a credit on itself in favor of the American shipper authorizing him to draw on it to a certain amount. It advises the shipper the name of the American bank with whom the draft may be negotiated against the sur render of shipping documents. The shipper's draft may be at sight or a time draft. Or the customer may arrange with his bank to open an export credit in America, authorizing the bank to pay the shipper a certain amount of money against the presentation of the documents covering a certain shipment or to accept his draft. Revolving credits are customary where the relations between the vendor and the buyer are currently continuous. The buyer, the vendor and the bank agree on the conditions under which the credit after being used once may become again available, without the necessity of exchange of cables or correspondence between the contracting party. In its "Handbook of Finance and Trade with South America" the National City Bank cites three classes of revolving credit: "A" in foreign country opens a credit in favor of "B" in this country up to say $20,000, the conditions of which permit "B" to draw, as shipments are made, upon bank through which credit is made available, the said bank honoring such drafts when accompanied by documents covering a specific shipment. Upon liquidation by "A" of the amount or amounts drawn by "B," the amount or amounts so liquidated again become available to be drawn against by "B" under the original conditions. Should the total amount of the credit become exhausted, no further drawings thereunder may be made by "B" until liquidation by "A" of all or of a portion of the drafts drawn by "B." This explains the revolving feature of this credit, inasmuch as the full credit, or such portions thereof as have been liquidated by "A," again become automatically available to be drawn against by "B." The second class of credit under this revolving form permits "B," upon "A's" instructions to bank, to draw a specified sum in one draft. Upon maturity and payment of this draft by "A," the same amount again becomes available to be drawn against by "B" upon the same conditions which governed the original drawing. Under the third class of revolving credit, "A" in a foreign country permits "B" in this country to draw in one draft for the full amount involved, whereupon the credit again becomes automatically available for a similar amount and so on indefi |