This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 87.— In many instances demand letters of credit drawn in Great Britain payable at the "current rate of exchange" are redeemed in Canada at the 60-day rate. I can see nothing to justify this. The usance between Canada and Great Britain is a thing of the past. In the old days of sailing vessels the interpretation of "payable at the current rate of exchange" referred to the 60-day rate, but the Atlantic Cable or " Ocean Greyhounds " were not thought of in those days.
The question I would like answered is this: " Would the courts sustain the action of the banks in only paying the 60-day rate for demand bills payable at the current rate of exchange ?"
Answer.—There are two distinct aspects from which this question can be considered; the first is the legal meaning of the phrase "current rate of exchange;" the second is the fairness or otherwise of the contract when so interpreted. We have already discussed the first aspect fully, and can only say that we think the court would find the meaning well established, and would not discuss its abstract fairness. The phrase has been in use for a century or so; its universally accepted meaning, up to recent years at any rate, is well known; it is very generally accepted now as meaning the 60-day rate; and it is difficult to see just at what point it could have ceased to have that meaning.
As to the fairness of such a rate, that depends on the circumstances. One who buys a sterling draft in England, and through ignorance expects to get as much Canadian money in exchange as if he had brought sovereigns, is no doubt disappointed, but why should he expect this ? He gets his £100 bill or credit for £100; even if he buys it at an inland point the commission to the local bank is (usually) paid by the bank which draws the bill or issues the credit. When the English market rate for money is low and the difference between the sight and 60-day rate narrow, there does not seem to be any hardship in the bank getting that difference for the use of the facilities it furnishes. It may be an unreasonable charge when the difference is large, but credits are usually for small amounts and the result in money is not usually unreasonable.
As regards bills drawn in Great Britain against sales of goods, the drawer can (and usually does) fix the rate according to his understanding with his Canadian customer.
Our view briefly is that the phrase " current rate of exchange" means the 60-day rate; that this for letters of credit for moderate sums affords only a reasonable profit; that for larger amounts the charge is, under the altered conditions, more than the service warrants and that the difficulty is one to be met with by reasonable concessions, as has been done at Montreal and Toronto.