Letters of credit issued by bankers to their customers are of two kinds: travelers' letters of credit and commercial letters of credit. The demand for letters of credit by the great and increasing number of Americans who travel in foreign countries is so large that many banks as well as private bankers now issue them. A letter of credit is a circular letter addressed to the correspondents of the issuing bank introducing the holder, certifying that he is authorized to draw a certain sum of money, and requesting that his drafts be honored up to that amount. A list of the foreign correspondents is added on a separate leaf of the letter. The signature of the traveler is written at the bottom of the letter. Every time he draws money at one of the correspondent offices he signs a draft or receipt for the amount drawn and his signature is carefully compared with that on his letter. Each time money is thus drawn the amount is indorsed by the paying agent on a sheet of the letter, with the date, the amount both in writing and in figures, and the name of the bank or agent making payment. Letters of credit are usually drawn in pounds sterling, and the amount of each draft is converted into marks, francs, or whatever kind of money the traveler needs where he happens to be. Whatever balance may remain when the traveler returns will be redeemed by the banker issuing the letter.
1 Ibid., p. 101.
Letter of Credit - Front.
Letter of Credit - Back.
Generally the tourist buys the letter outright at the ruling rate of demand exchange plus 1 per cent commission. If the buyer is a depositor enjoying high credit the bank may issue a letter of credit to him without payment until the customer's drafts have been received from abroad. Sometimes where the amount of the letter is large and the period of absence considerable no commission is charged, the use of the undrawn funds being regarded as sufficient compensation.
A modified form of the letter of credit is the traveler's check which is issued by the American Bankers' Association and several of the large express companies. These express checks are made out in even amounts of dollars, ten, twenty and so on, and state on the face the equivalent value in pounds, francs, marks, etc., so that the traveler knows the exact amount he should receive when he cashes a check in a foreign city. The user of the checks writes his name on the face of each, and on a space below he signs his name again when he cashes them. These express checks are readily cashed all over Europe by bankers and hotel keepers either at par or for a small commission. Banks are generally willing to cash letters of credit and travelers' checks because they furnish exchange on London, which is always and everywhere in demand.