203. Value Of Implicit Trust

Meantime the slow freighter is steadily carrying the goods toward New York, and as it is impossible for anyone to get them out of the ship without the bill of lading, the cashier of the London City and Midland Bank loses no time in sending the bill of lading to his banking correspondent in New York who originally issued the credit. From this time on the London banker is unprotected. He has put his name on a bill which obligates him to pay it in four months; and relying solely on the good faith and solvency of his New York correspondent has sent the shipping documents to him. In a business which involves such an operation as this it may be readily imagined how intimate the relations must be between the bank that issues the credits in New York and the bank in London on which they are issued. No bank in London would ever agree to "accept" bills unless it has the most implicit trust in its New York correspondent and was sure that before the four months were up and the bill came due the necessary remittance would arrive from New York.

Before going on with the transaction and seeing how the goods arrive in New York and are finally delivered into the hands of the buyer, it is worth while to note what the usual relations are between the issuer of a commercial credit and the bank in Europe on which the credit is drawn. Very often it happens that a New York bank issues credits on its own branch in London, as for instance the Guaranty Trust Company of New York on its London office. Then again a great deal of the business is transacted on joint account both as to risk and commission realized - in which case the relationship has to be very close. Lastly, credits are issued strictly for a consideration - that is to say, the banking house of John Jones and Company in London being satisfied that the banking house of John Smith and Company in New York is all right, agrees, for a stipulated commission, to "accept" drafts drawn under John Smith and Company's credits up to a certain amount. Any good bank in the United States can easily make such arrangements.

204. Banker's Only Security

Going back now to the typical transaction whose course we have been following, let us assume that the bristles have arrived in New York and that the bill of lading has been received by the New York banker who issued the credit, together with advice from his London correspondent of the York. It is understood, however, that if such proceeds be in notes or bills receivable, they shall not be so applied until paid, but with liberty meanwhile to the Guaranty Trust Co. of New York to sell or discount, and so apply let proceeds.

Trust Receipt

(for delivery to purchaser)

Received from the Guaranty Trust Co. oF New York the following goods and merchandise, their property, specified in the Bill of Lading per

............................................................, dated................................................................

marked and numbered as follows:

In trust to deliver the same to.......................................................................

who have purchased the same for............................................................................

payable in....................................................................................................................

and to obtain from the purchaser the proceeds of the sale of the same.

In consideration of the delivery of said goods to me us in trust as above,

I we agree to deliver them immediately to the said purchasers, and to collect the proceeds of sale, and immediately deliver such proceeds to the Guaranty Trust Co. of New York in whatever form collected, to be applied by them against the acceptances of the Guaranty Trust Co.

of New York on my our account, under the terms of Letter of Credit

No.............................issued for my our account, and to the payment of any other indebtedness of mine ours to the Guaranty Trust Co. of New

The said goods while in my our hands shall be fully insured against loss by fire.

The Guaranty Trust Co. of New York may at any time cancel this trust, and they may take possession of said goods until the same have been delivered to said purchasers and the proceeds of sale received from them, and thereafter of such proceeds, wherever the said goods and proceeds may then be found, and in the event of any suspension or failure or assignment for the benefit of creditors on my our part or of the non-fulfillment of any obligation or of the non-payment at maturity of any acceptance made by me us under said credit, or any other credit issued by the Guaranty Trust Co. of New York on my our account, or of any indebtedness on my our part to them, all obligations, acceptances, indebtedness, and liabilities whatsoever shall thereupon (with or without notice) mature and become due and payable.

Dated............................................................................191

Trust Receipt

Received from the Guaranty Trust Co. oF New York the following goods and merchandise, their property, specified in the Bill of Lading per

S.................................................................Dated......................................................

marked and numbered as fellows: and, in consideration thereof,

I we

Hereby Agree To Hold Said Goods IN trust for them, and as their property, with liberty to sell the same for their account, and further agree, in case of sale to hand the proceeds to them to apply against the acceptances of the Guaranty Trust Co. of New York on my our account, under the terms of the Letter of Credit No.....................issued for my our account and for the payment of any other indebtedness of mine ours to the Guaranty Trust Co. oF New York.

The Guaranty Trust Co. oF New York may at any time cancel this trust and take possession of said goods, or of the proceeds of such of the same as may then have been sold, wherever the said goods or proceeds may then be found and in the event of any suspension, or failure, or assignment for the benefit of creditors, on my our part, or of the non-fulfillment of any obligat ion, or of the non-payment at maturity of any acceptance made by me us under said credit, or under any other credit issued by the Guaranty Trust Co. oF New York on my our account or of any indebtedness on my our part to them, all obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon (with or without notice) mature and become due and payable. The said goods while in my our hands shall be fully insured against loss by fire.

Dated, New York City,........................................................191

(Signed)......................................................................

£........................................Stg.

Trust Receipt

(Documents for Warehousing.)

Received from the Guaranty Trust Co. of New York Bill of Lading ................................................... for the following goods and merchandise, their property, marked and numbered as follows: imported under the terms of Letter of Credit No............issued by them for my our account, the said Bill of Lading to be used by me us for the sole purpose of entering the above described property at the United States

Custom House at the Port of........................................................................, and of storing the same in the name, and as the property. of the said the Guaranty

Trust Co. of New York, and subject only to their order,

I we hereby agreeing to so store the said property and to hand the storage receipt for the same to the said the Guaranty Trust Co. of New York, when obtained.

I/We also agree to fully insure said property against fire, the loss, if any, payable to said the Guaranty Trust Co. of New York, and to hand to them the policies of insurance thereon.

Dated....................................................191

(Signed).................................................................................

£............................................

amount of the draft drawn and its maturity. The next step is to put the bristles into the importer's possession. But by doing so, the banker is doing nothing less than handing over the only security he has. How can he let the importer have the bristles and still remain protected himself?

He cannot, unless the "trust receipt" he receives when he gives up the bill of lading to the importer can be called protection. The "trust receipt" is simply a paper signed by the importer stating that he has received the merchandise and that he will sell the same and apply the proceeds toward paying off the four months' sight draft before or at maturity. Most trust receipts specify that the merchandise is to be kept separate, earmarked as it were, and that the proceeds are to be kept strictly distinct from the firm's other assets and handed over to the banker as the bristles are sold.

Having the actual merchandise in his hands, the importer is now in a position to sell it and begin to make pre-payments to the banker who issued him the credit. As these are received by the banker he sends them to the London bank which holds them against the maturity of the bill it accepted. Presumably, before the four months are up, the bristles will all have been sold and enough money out of the proceeds remitted to London to cover the whole amount of the maturing draft. What is left constitutes the importer's profit.