When the traveler desires to provide himself with local currency he applies to the proper bank and signs a sight draft on the issuing bank or its central correspondent abroad. Identification takes place through reproduction of the signature on the letter of identification on the sight draft. An appropriate page, ordinarily the back of the sheet, is used to record all payments made.

The commercial letter of credit is used in the same way, but instead of merely taking care of the personal needs of an individual it is used to facilitate the purchase and sale of merchandise. Merchants receiving the letter of credit can immediately ship their goods to any part of the world knowing that, if conditions are met, they can have drafts on their local bank honored at once on presentation of the credit letter with the proper accompanying documents. It is not to be inferred that these letters of credit are all the same. Their usefulness arises out of the fact that all of the variations in trade practices and differences in trade terms can be reflected in the instruments themselves.

Letters of credit are revocable or irrevocable depending on whether or not the bank which opens the credit reserves the right of withdrawal before a certain date.

Letters of credit are confirmed or unconfirmed depending on whether or not, by the terminology of the instrument, it is intended that the bank notifying the beneficiary makes the opening bank's obligation its own. If the notifying bank accepts this commitment, it is a confirmed letter of credit.

The Trade Acceptance System.-Another credit instrument, more commonly used before the Civil War and after the time of the establishment of the Federal Reserve System, than in the intervening period, is the Trade Acceptance. Originally, the plan developed from the custom of asking the buyer to look over the itemized bill and write his acceptance of the goods

FORM B

THE NATIONAL CITY BANK OF NEW YORK
55 WALL STREET

BILLS OF LADING MUST BE DATED NOT LATER THAN
BILLS OF EXCHANGE MUST BE NEGOTIATED NOT LATER THAN

A COPY OF THE CONSULAR INVOICE, COMMERCIAL INVOICE, AND ONE BILL OF LADING MUST BE FORWARDED BY FIRST MAIL DIRECT TO

ATTACHING TO THE DRAFT A STATEMENT TO THAT EFFECT. ALL REMAINING DOCUMENTS MUST ACCOMPANY THE DRAFT.

THE AMOUNT OF ANY DRAFT DRAWN UNDER THIS CREDIT IS TO BE ENDORSED ON THE REVERSE SIDE HEREOF.

WE HEREBY AGREE WITH THE DRAWERS, ENDORSERS AND BONA FIDE HOLDERS OF DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT THAT THE SAME SHALL BE DULY HONORED ON DUE PRESENTATION TO THE DRAWEE.

YOURS VERY TRULY,

THE NATIONAL CITY BANK OF NEW YORK

Figure 5. Commercial Letter of Credit

and terms, arranging for payment at a certain date and place. Later a separate document was used to record the obligation and make convenient the "banking" of the paper. Before the Civil War it was customary in the trade to use acceptances in the payment of trade obligations. The type of competition prevalent after that time led to the encouragement of the use of open book accounts. Since 1914 a strenuous effort has been made to revive the use of trade acceptances, although with only limited success. A trade acceptance arises when, in payment for a current merchandise sale, a draft is drawn to order with a definite maturity date, and the firm or person upon whom it is drawn acknowledges by signature and writing that it recognizes the debt and agrees to the terms on the face. Thus it becomes two-name paper. Indorsers also become responsible.

The use of the trade acceptance may be illustrated as follows: X, who is a manufacturer in Chicago, sells goods to Y. who is a wholesaler in New York. When X sends his invoice, he also sends to Y a sixty or ninety day draft drawn on Y. If Y wishes to pay X at once by means of cash, he tears up the draft; if he wishes to pay X later (if he is buying on "time") he accepts the draft by writing "accepted" across the face of the instrument, indicating the bank at which he wants to pay the draft when it comes due. He then signs it and returns it to X. X can either have it discounted at his bank, or hold it until it is due, and then present it at Y's bank for payment.

If X desires to discount the paper, he must be able to show that it has arisen out of an actual commercial transaction, either domestic or foreign. That is to say, the financing must have taken place through the movement of goods from original producer to ultimate consumer, and each situation which has given rise to the existence of commercial paper must have been such that the paper is self-liquidating in character. This phrase means that as the goods have been passed on down the

credit chain the paper in each transaction has been capable of liquidation through the respective transfers themselves.

An example of the Trade Acceptance is shown in Figure 6. One distinctive and important feature of the Trade Acceptance is that it indicates the source from which each item arises, namely, that of a current transaction in the sale and purchase of goods. The Trade Acceptance is not intended to be given for old debts, for the purchase of fixed assets, or in any way to be the instrument of credit in a transaction which is not liquid in character. The regular course of business must

make the paper self-liquidating, the sale of the goods themselves providing the money for the retirement of the paper. It is not "sight draft and bill of lading attached." It does not imply "cash on delivery." It should not be used as a note. If it does not conform to specifications it cannot be discounted by a bank in the hope that rediscount with the Federal Reserve Bank can take place.

In the enthusiasm to revive the use of this system, many exaggerated claims were made for it, and its supporters intimated that many evils of credit misuse would be eliminated by the mere adoption of a new system. This has led to a great deal of opposition, which has hindered development. Never

theless, it is undoubtedly true that this plan can be used advantageously in many more situations than is now the case.

In substituting for the open book account a written statement signed by the buyer that at a certain time a certain amount of money is to be paid, much is done to insure accuracy in collection policy. It is also argued that simplicity is gained, for all records are concentrated in one instrument, and letter of transmission, collection letter, reminders, statement, are combined. The credit manager can more easily estimate his collections, assuming that the majority of accounts are handled on a Trade Acceptance basis. The definite date of payment also makes it possible to be more careful in over-extensions of credit. The seller also finds in his hands orders to pay accepted by his customers. After receiving his regular line of credit on his own statement, he can present this two-name paper for discount to his bank, and, according to the indications of the Federal Reserve Board, he ought to be able to secure more funds for his business purposes. Under the open account system, the seller's funds are tied up until the accounts are paid.

On the other hand, there is a danger of using trade acceptances as a means of establishing credit where it is unjustified. Acceptance credit should be measured on the same basis as open book account credit. Sellers sometimes object because of the contingent liability involved, in that the name of the seller is liable if the acceptor fails to meet the obligation.

Many of the advantages of the trade acceptance could be secured on the open book account plan, if the proper education as to sound credit methods could be carried on. The trade acceptance seems to emphasize some fundamental considerations, and makes more likely an adherence to them.

Most banks have been in favor of the plan. Where discount takes place, more business is brought to the bank, and the trade acceptance itself forms an addition to the reserve readily