CHAPTER XXXI

FOREIGN CREDIT

Distance and the Credit Relation. The development of transportation facilities and the widening of markets have resulted in the growth of commerce between nations and in the economic interdependence of all parts of the earth. International trade has become a distinct and important branch of business.

Trade between nations is in reality carried on between individuals. The fact that one debtor is a thousand or two thousand miles farther away from the creditor than is another debtor ought not to make great differences in the manner of doing business. Under ordinary circumstances, however, such differences do arise. Distance is not entirely to blame, but it is distance which makes the transactions commerce between nations, and international trade gives rise to different sets of laws, to different standards of business, to different monetary systems and credit documents.

It is not within the scope of this volume to include an explanation of the theory of international trade or of the intricacies of international exchange, but merely to point out some of the problems connected with them from the standpoint of the credit situation.

Foreign commerce is carried on principally through credit. Credit is even more necessary here than in domestic transactions. In the long run, a country's exports and imports tend to balance each other. There is as little actual transportation of gold as is possible. This is, of course, due to the inconvenience caused by transportation, to the expense, and to the loss of interest during the time the gold is in transit. So a

country's debts to other countries (including debts due both to transfer of commodities, and also to the "invisible items" of exchange) tend to be offset by that country's credits. In the case of individual transactions, banks keep balances with banks in other countries, and through these, money owed is paid, and money due is collected-with the result that actual transfer of gold is reduced to a minimum.

The various monetary systems prevalent throughout the world further complicate trade relations between countries. When business is transacted with an English manufacturer, the value of the dollar in terms of the pound sterling must be taken into consideration. When exchange is "at par," the pound is worth 4.866 times the American dollar. But trade conditions are constantly changing, and exchange is rarely at par. The price of foreign exchange depends upon a country's balance of debit or credit, and so is always fluctuating. Many times fluctuating currencies affect seriously the profits of buyer and seller and tend to encourage the customer to gamble on the fluctuations of exchange.

If credit is necessary in the domestic exchange of commodities, it is easy to see how much more necessary it is to the conduct of business between individuals of different countries.

The exporter benefits by the disposal of a greater quantity of goods than would be possible on a cash basis and is able to secure greater working capital by discounting foreign drafts. He can keep his factory running more regularly than when dependent upon domestic demands which are oftentimes seasonal.

The importer is enabled to keep in a liquid form investments which would otherwise be tied up for months before merchandise could be turned into cash; he can avoid higher costs which would be necessary if he had to pay high local interest rates in order to pay cash; and he can transact a larger

business in proportion to his invested capital than would be possible on a cash basis.

Special Sources of Foreign Credit Information.-Credits abroad can not be made as safe, as exact, and as scientific as they are in this country. Though the very factor of distance eliminates many who would otherwise be undesirable applicants for credit, the factors of time and distance create some difficulties. New sources of information must be sought out in order that the sale to a foreign buyer may be entirely satisfactory.

In conducting an export business, a firm wants steady customers, who repeat orders continuously for years, and whose every order is a basis for another. In order to accomplish this, the foreign credit manager must of necessity study the nations of the earth, their peoples, their commerce, their ways of doing business. He must know intimately the markets of Africa, the Far East, Russia and India. He must know geography. A knowledge of language is often a great aid in understanding other peoples, and their customs, and often establishes a contact to be gained in no other way. The credit man must know about ocean shipping, marine insurance, international banking and exchange.

Sources of information must be developed in such a way that he can get the information which he needs. For instance, the foreign credit man ought to know at the time he receives an order whether or not the customer can buy wisely at the rate of exchange then prevalent, and he ought to demand that the customer cover his exchange position at the time that he places the order. There is no need to allow the foreign customer to use the capital of the seller for a gamble as to the possible fluctuation in exchange.

Again, it is often difficult to get a complete financial state

ment from a foreigner, for in many countries that is not a part of credit information.

The foreign customer is generally willing to give a list of mercantile houses in the United States from whom he has purchased. This is one way of getting credit information, though it is not always very valuable.

Special sources of information include the National Association of Manufacturers, the mercantile agencies, American Express Export Department, the American Exporter, large banks of the large cities, the Commercial Intelligence Division of the Government Bureau of Domestic and Foreign Commerce, and the Foreign Credit Interchange Bureau of the National Association of Credit Men.

The government Commercial Intelligence Division bases its information on reports of the representatives of the Departments of State and Commerce, most of whom are stationed in foreign countries and whose information is first-hand. From the World Trade directory, there are compiled trade lists, which may be obtained upon request. During 1921, the Bureau furnished 100,000 trade lists.

The Foreign Credit Interchange Bureau of the National Association of Credit Men has been developed on the same plan that ledger interchange in connection with domestic business has been used. It is a non-profit making organization which gathers information from those who sell to foreign customers and gets larger experience for buyers in various parts of the world. A customer can, by giving information which he already possesses, and pooling it with the rest, receive the benefits of the pooled information already gathered concerning particular accounts. This bureau has been in operation since the middle of September, 1919.

Credit Documents in the Foreign Credit Relation.-Foreign buying and selling creates a need for various methods of

handling such transactions. Sometimes cash is sent with the order, or the buyer is required to pay for merchandise before the shipping documents are surrendered. In many cases a system of open credits is used, which is equivalent to the open account in domestic transactions, and is based on the confidence of the seller in the buyer, which induces him to deliver merchandise without documentary acknowledgment of obligation.

The usual method of payment is through bills of exchange (drafts) drawn on the importer, or drawn on a banker under authority of commercial letters of credit. The importer arranges with his bank to allow the exporter to draw a bill of exchange on the bank at a certain time and under certain conditions. The "letter of credit" explaining conditions, is sent to the exporter and under the authority of this letter the exporter may at once receive his money by drawing a bill of exchange on his customer's bank and having it discounted at his own bank. The letter of credit merely acts as an assurance to the exporter and the discounting bank that bills of exchange will be honored.

REFERENCES

Edwards, George W. Foreign Commercial Credits. New York, McGraw-Hill Book Co., 1922.

Ward, Wilbert. American Commercial Credits. New York, Ronald Press Co., 1922.