Dollar Acceptances drawn on National Banks against imports are generally drawn against what is known as a Commercial Letter of Credit. A commercial credit is an undertaking on the part of the bank to loan its credit (not its funds) to a customer. The customer, who is the original recipient of this extension of the bank's credit, utilizes it by making it available in favor of the foreign shipper. He, therefore, requests the bank to notify the shipper that the latter may draw on the bank, up to a certain amount and within a certain time, provided certain specified shipping documents are attached to the draft.

For example: A and Co. of New York have bought from B and Co. in Buenos Aires, forty-eight bales of wool at thirty cents a pound, cost and freight New York; marine and war risk to be covered by A and Co. in New York, at their own expense. As this contract is subject to the opening of a ninety days' sight bank credit, A and Co. file with their New York bank the proper application for a commercial credit. (This application is to the following effect.)

Application For Commercial Letter Of Credit

The----------------------------Bank

Foreign Department

New York City ----------------------------19------

Gentlemen:

Buenos Aires Please open a confirmed documentary credit by mail on----------------------

(name of city) Ourselves about $16,000.00 for account of----------------------not to exceed the sum of-----------------------

(purchaser) B and Company, Buenos Aires Full in favor of-------------------------------------------available by drafts for---------

(shipper) 90 days invoice value drawn at----------------------------------------sight covering ship-

(specify time) 48 bales of wool at 30 cents per lb.

ments) of-----------------------------------------------------------------------------------

Cost and freight, New York

New York to-----------------------------------------------------------------------------------------------

(destination) against delivery of the following documents:

Invoice, Consular Invoice, Bills of Lading to the order of

The..................Bank

Marine &

War risk - insurance is to be covered by ourselves in N. Y.

(shipper or purchaser)

Credit to be available until-------------------------------19------

(state expiration of time)

Special Instructions:-----------------------------------------------------------------

Bills of Lading Must Show Freight Prepaid

Yours truly

B and Company

The bank, having passed favorably on the application, thereupon issues its "Letter of Credit" in favor of B and Co. (Form of Letter of Credit follows.)

Form Of Letter Of Credit

Letter Of Credit No.......

New York February 16th 1920 Messrs. B. & Company Buenos Aires Argentina

Gentlemen:

We hereby authorize you to value on us at ninety days' sight for account of Messrs. A. & Company, New York, for any sums not exceeding in the aggregate amount of

U. S. $16,000. Sixteen Thousand Dollars U. S. Currency, against shipment of eight bales of Wool at 30c per pound cost and freight New York.

Full set of bills of lading for such shipment made out to the order of the...................Bank, together with invoice and consular invoice, must accompany draft. Marine and war risk insurance are covered in New York. Bills of lading must show freight paid.

All drafts drawn against this credit to be drawn and negotiated on or after (date) and to contain the clause

"Drawn under your letter of credit No......"

The amount so drawn is to be endorsed on this letter of credit. We hereby agree that such drafts as you may draw by virtue of this credit, and, in accordance with the above bills, shall be accepted on presentation and paid at maturity.

Yours respectfully,

..........................Bank A and Co., upon receiving the instrument, forward it by mail to B and Co. in Buenos Aires, or, if necessary, have its contents communicated to the beneficiaries through the bank by cable.

In order to protect the Bank, A and Co. sign an agreement as follows:

New York,........................19___

To the

........................Bank of the City of New York

Gentlemen:

Letter of Credit having been issued at (my or our) request of which a true copy is on the other side, (I or we) hereby agree to its terms, and in consideration thereof (I or we) agree with you to provide in New York, one day previous to the maturity of the bills drawn in virtue thereof, sufficient funds in cash, to meet the payment of the same with...........

per cent commission, and (I or we) undertake to insure or have insured at (my or our) expense, for your benefit, against risk of Fire, Sea and War, all property purchased or shipped pursuant to said Letter of Credit, in Companies satisfactory to you.

(I or we) agree that the title to all property which shall be purchased or shipped under the said Credit, the bills of lading thereof, the policies of insurance thereon and the whole of the proceeds thereof, shall be and remain in you until the payment of the bills referred to and of all sums that may be due or that may become due on said bills or otherwise, and until the payment of any and all other indebtedness and liability now existing or now or hereafter created or incurred by (me or us) to you on any and all other transactions now or hereafter had with you, with authority to take possession of the same and to dispose thereof at your discretion for your reimbursement as aforesaid, at public or private sale, without demand or notice, and to charge all expenses, including commission for sale and guarantee.

Should the market value of said merchandise in New York, either before or after its arrival, fall so that the net proceeds thereof (all expenses, freight, duties, etc., being deducted) would be insufficient to cover your advances thereagainst with commission and interest, (I or we) further agree to give you on demand any further security you may require, and in default thereof you shall be entitled to sell said merchandise forthwith, or to sell "to arrive," irrespective of the maturity of the acceptances under this Credit, (I or we) being held responsible to you for any deficit, which (I or we) bind and oblige (myself or ourselves) to pay you in cash on demand.

In case (I or we) should hereafter desire to have this Credit confirmed, altered or extended by cable (which will be at (my or our) expense and risk), (I or we) hereby agree to hold you harmless and free from responsibility for such confirmation, alteration or extension and from errors in cabling, whether on the part of yourselves or your Agents, here or elsewhere, or on the part of the cable companies.

This obligation is to continue in force, and to be applicable to all transactions, notwithstanding any change in the composition of the firm or firms, parties to this contract or in the user of this credit, whether such change shall arise from the accession of one or more new partners, or from the death or secession of any partner or partners.

It is understood and agreed that if the documents representing the property for which the said Credit has been issued are surrendered under a trust receipt, collateral security satisfactory to the....................

Bank of the City of New York, such as stocks, bonds, warehouse receipts or other security, shall be given to the......................Bank of the City of New York, to be held until the terms of the Credit have been fully satisfied and subject in every respect to the conditions of this agreement.

It is further understood and agreed in the event of any suspension, or failure, or assignment for the benefit of creditors on (my or our) part, or of the non-payment at maturity of any acceptance made by (me or us), or of the nonfulfillment of any obligation under said Credit or under any other Credit issued by the........................Bank of the City of New York on (my or our) account, or of any indebtedness or liability on (my or our) part to you, all obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon, at your option then or thereafter exercised, without notice, mature and become due and payable.

It is understood and agreed that you shall not be held responsible for the correctness or validity of the documents representing shipment or shipments, nor for the description, quantities, quality or value of the merchandise declared therein.

..........................................................

..................................................

B and Co. in Buenos Aires, upon receiving the credit, and having ascertained that the terms of the credit agree with the terms of sale, place the shipment aboard steamer, prepaying the freight according to contract, and taking out the bill of lading in the name of the New York bank, according to the terms of the credit. B and Co. then draw up their draft for the invoice amount. (For form of a draft used for similar purpose, see Part IV.)

To this draft are attached the invoice, consular invoice and full set of bills of lading. B and Co. take these to their banker in Buenos Aires, producing at the same time the Letter of Credit of the New York bank. The Buenos Aires banker thereupon buys the draft with the documents attached, at the current rate for bank drafts at ninety days sight on New York, paying B and Co. the equivalent in Argentine currency.

B and Co. get a high price for their dollar draft, because:

1. The discount for the ninety days, which the draft has to run after it is accepted, is figured according to the New York discount market, which on the average is likely to be considerably below that of any other money center.

2. No bill stamp is charged in New York, as is the case in London or the continent.

B and Co., the shippers, having knowledge of these advantages, are therefore able to quote to A and Co. a lower selling price for the merchandise than would have been possible had A and Co. offered a pound sterling or other credit. In other words, the American importer is enabled to derive the full benefit growing out of the use of the dollar credit.

The Buenos Aires banker in the meantime has forwarded the draft and documents to his New York correspondents, who, upon arrival, present them to the drawee bank for acceptance. The latter, upon verifying the draft and documents with the terms of the credit, "accepts" the draft by affixing its stamp and signature and returns the same to the party that presented it, retaining, however, the shipping documents. (For form of accepted banker's draft used for similar purpose, see Part IV.)

The presenting bank either holds the draft until maturity or discounts it in the open market, in accordance with the instructions of the South American banker. In the meantime, the steamer carrying the wool has arrived, and A and Co. request delivery of the shipping documents in order to enable them to make custom house entry and take possession of the goods. It will be readily understood that by giving up the shipping documents the New York bank is giving up its only collateral. The bank's interest must be protected, and the documents are therefore surrendered against cash, under rebate for the unexpired time the draft has to run, or against approved security; or, if the client is of good financial and moral standing and has the confidence of the bank, against what is called a "Trust Receipt." (See Form of "Trust Receipt," Part IV.)

According to the Trust Receipt the customer is obligated to hold the goods in trust for the bank, and, when sold, to turn the proceeds over to the bank immediately upon collection of the money, which is to be used in liquidation of the amount of the acceptance. As we have seen from the "Agreement," the money to meet the acceptance must be paid to the accepting bank at the latest one day before the maturity of the draft. By that time (after ninety days) the goods have usually been disposed of, and these acceptances are therefore essentially self-liquidating.