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LETTERS OF CREDIT AND EXCHANGE CONTROL Other conditions enter into a decision on the question. For several years many countries have controlled the sale of foreign exchange to cover imports of goods, etc., in such a way as to make it uncertain when payment in dollars may be received or even whether payment can be made in dollars. The regulations governing the sale of foreign exchange are subject to change on short notice, which has added greatly to the uncertainty of payment. In fact, exchange difficulties in several countries have been so great as to warrant the American exporter in demanding cash with order or the opening of a letter of credit in his favor. And yet it must be recognized that where the exchange situation is very difficult and the control most severe it has been next to impossible, if not forbidden, for banks in those countries to open letters of credit in dollars or in any other foreign currency. The American exporter has, however, no other means of assuring himself against the tying up of his funds in such countries, for it should be known that the laws of most, if not all, of the Latin American countries apparently permit an obligor to meet a foreign draft by tendering local currency at the official rate of exchange ruling on the date of maturity, if foreign exchange is not then available at the official rate.

AUTHORITY TO PURCHASE (ORIENTAL LETTER OF CREDIT) An authority to purchase is similar to a commercial letter of credit, in that the buyer authorizes the seller to draw documentary drafts on him and at the same time requests his bank to inform the seller of that fact and to arrange for the purchase of the drafts, which the buyer agrees to accept. As stated by Mr. Wilbert Ward,ío "the issuance of such an authority constitutes no engagement whatsoever on the part of the bank (the buyer's bank) to the beneficiary, but indicates the belief of the bank that the drafts will be duly cared for by the buyer. If it may be regarded as a true credit in revocable form, the undertaking runs, not to the seller, but to the correspondent bank, and is an undertaking, not that the seller's draft will be paid, but that the correspondent bank will be reimbursed for any outlay it makes thereunder.”

As the title to this section indicates, this form of credit is used only in trade with the Orient, and is confined largely to Chinese trade.

ACCEPTANCE AGREEMENT The banker's acceptance is a device for substituting for the credit of an importer or holder of merchandise, the credit of a bank or other accepting institution in such measure as to provide a readily marketable, negotiable instrument. For the promise of an individual businessman, company, or corporation to pay a certain sum at a certain date the institution substitutes its own promise, but on the basis of an agreement with the former to make payment to the accepting institution (i. e., put it in funds) prior to maturity of the acceptance. The “standard commercial letter-of-credit agreement” recommended by the American Acceptance Council reads as follows: We agree

(6) in the case of each acceptance, to furnish you, at your (New York) office, on demand, but in any event in time to reach the


10 American Commercial Credits, p. 43.

FX 256-IM-9-34


For and in consideration of the acceptance from time to time by

TRUST COMPANY (hereinafter called the Bank) of draft or drafts of the undersigned, the undersigned hereby agree(s) to place the Bank in possession of sufficient funds in cash one day previous to the maturity of each draft which the Bank may hereafter from time to time accept, to meet the maturity of said draft or drafts respectively, together with commission as agrced and any interest which may accrue thereon calculated at the rate of..-

-..per cent (%) per annum, and pledge(s) with the Bank as collateral security for the payment of any and all such drafts and/or other obligations of the undersigned now or hereafter 'accepted, owned or held by the Bank and the performance of this agreement by the undersigned, the following property:

with such additions thereto and substitutions therefor as may from time to time be required or permitted by the Bank,

In consideration of the premises, the undersigned hereby agree(s) that whenever the undersigned shall become or remain, directly or contingently, indebted or liable to the Bank upon any draft or drafts aforesaid or in any other manner whatsoever, the Bank'shall then and thereafter have the following rights against the undersigned in addition to those given by law, namely:

1. All securities at any time deposited by or for the account of the undersigned with the Bank as collateral to any such obligations or liabilities, together with any additions thereto and substitutions therefor and all other property now or hereafter held by the Bank on deposit, in safekeeping, or otherwise, for the account of or to the credit of or belonging to the undersigned or in which the undersigned shall have any interest (all of which is hereinafter termed the collateral security), shall be subject to the terms of this agreement and held by the Bank as security for any obligations or liabilities, direct or contingent, of the undersigned to the Bank whether then existing or thereafter arising; and the Bank shall have a lien upon any balance of the deposit account of the undersigned with the Bank existing from time to time, and upon all property of the undersigned of every description coming into the hands of the Bank in any way, or in transit to or from the Bank, as security for any obligations or liabilities of the undersigned to the Bank now existing or hereafter contracted.

2. Upon demand and whenever required by the Bank the undersigned will deposit and pledge with the Bank additional collateral of a kind and of a market value required by the Bank further to secure any indebtedness or liabilities aforesaid. Upon failure of the undersigned to comply with any such demand, or to make such deposit or pledge when required, or in case of the cleath or insolvency of, the filing of a petition in proceedings in bankruptcy or for the relief of debtors or for the reorganization of corporate debtors under the bankruptcy laws by or against the undersigned or the making of an assignment for the benefit of creditors by the undersigned, or the appointment of a receiver, conservator, rehabilitator or similar officer for, or the failure in business of the undersigned, or upon the non-payment of either principal or interest of any indebtedness or liabilities of the undersigned to the Bank when due, or the failure to perform any of the terms of this agreement, then and in any such event all indebtedness and/or liability of the undersigned to the Bank aforesaid, whether or not then due and payable, shall, at the option of the Bank, without further demand, become immediately due and payable by the undersigned notwithstanding any later maturity of such indebtedness or liability specified in any instrument or agreement evidencing the same, and notwithstanding any delay, extension or grace allowed to the undersigned by any such instrument for agreement or by law. Upon default in the payment of any indebtedness or liability of the undersigned to the Bank whenever the same shall become due in accordance with any of the provisions hercof, or otherwise, the Bank shall have the right to salt, assign and deliver the whole or any part of the collateral security held by it or of any substitutions therefor or of any additions thereto or of any other property of the undersigned then in its possession, at any time or times, either at any brokers' board or at public or private sales, either for cash or on credit or for future delivery, without demand, advertisement or notice, which are baseby waived, and to apply the net proceeds thereof and all balances of any deposit account of the undersigned with the Bank to the reduction or payment of any and all indebtedness and liabilities of the undersigned and of any expenses, accounting for any surplus, the undersigned remaining liable for any deficiency. lipon any sale of the collateral security held by it, or any pary thereof, at public auction, the Bank may purchase and hold the whole or any part of the property sold, free from any claim right of redemption of the undersigned, which is hereby waived and released. The Bank shall have at any time in its discretio the right to enforce collection and paynient or liquidation of any of the collateral security by appropriate action or proceedings, and the net amounts received therefrom, after deducting all costs and ex. penses incurred in connection therewith, shall be applied on account of any indebtedness or liabilities of the undersigned aforesaid. all without notice to the undersigned. No delay, lute or omission by the Bank upon any default of the undersigned to exercise any right or remedy hereby granted to the Bank or allowed to it by law shall constitute a waiver by the Bank of the right to exercise any such right or remedy upon such fault or upon any subsequent default. Any demand or notice, if made of given, shall be sufficiently made upon or given to the undersigned if left at or mailed to the last address of the undersigned known to the Bank or if made or given in any other hanner reasonably calculated to come to the attention of the undersigned or the personal representatives, successors, associates pr assigns of the undersigned, whether or not in fact received by them respectively.

3. The Bank may at any time tjanster into its own name or that of its nominee securities in registered form held as coi. lateral security.

4. The Bank may, in its a sollte discretion, and for its own benefit, transfer or repledge with any person, firm or corporation all or any of the collatera security hereby pledged, either by itself or mingled with the property of others in bulk or. otherwise, for any sum not in arces of the amount due the Bank from the undersigned at the date of such transfer or repledge by thc Bank, and the Bank n assign and transfer this agreement or any interest therein to any other person, firm or corpora tion, and may deliver the coastal security and any substitutes therefor and additions thereto to the transferee.

5. Any and all drpets pr bills of exchange now or hereafter delivered by the undersigned to the Bank to be collected shall be delivered b and received by the Bank as security for the aforesaid obligations of the undersigned to the Bank without impairing in any way the obligan at the undersigned hereunder, to place the Bank in funds before the maturity of the said acceptance or 'acceptances as aforesaid and all documents relating to such bills for collection shall likewise be held and received by the Bank as security with the price of delivering same to drawees upon acceptance or acceptances, unless instructions to the contrary are attached to any bill.

6. It is exprchy agreed that the undersigned assume(s) all responsibility for the collection of drafts or bilis delivered as aforesaid, and for any loss, costs or expense suffered or incurred by the Bank in connection therewith, and that the Bank shall be held free of pespons pility for, and the obligation of the undersigned to place the Bank in funds, as aforesaid, shall not be affected o impared by alay default, neglect, suspension, insolvency or bankruptcy of any correspondent or sub-agent to whom said bills or d may be entrusted for collection, or for any delay in remittance, loss and exchange, or the loss of said drafts or bills or their proceeds during transmission or in the course of their collection, and the undersigncd expressly agree(s) to assume all responsibility for, and that the obligation of the undersigned to the Bank shall not be affected or impaired by, the non-payment of any' bills of exchange which may be received by the Bank or by any collecting Bank, agent or sub-agent in payment of such. draft or pills of exchange.

1. The undersigned also assume(s) all responsibility of, and the obligation to place thc Bank in funds shall not be affects or impaired by, any risk or error in the course of transmission of telegrams and cablegrams or the loss of letters or other documents which may be sent in connection with said drafts or bills for collection.

8. The undersigned also agree(s) that in the event that any of the Bank's correspondents, agents or sub-agents for collection of said drafts or bills shall advise it that any of said drafts or bills are not promptly accepted or.paid, or in the event of the suspension, failure, insolvency or assignment for the benefit of creditors by, or the filing of a petition in bankruptcy or for the relief of debtors, or for the reorganization of corporate debtors under the bankruptcy laws, by or against the drawee or drawees of any of said bills for collection, or the appointment of a receiver, conservator, rehabilitator or similar officer for any said drawee or drawees, the undersigned will immediately upon receipt of notice thereof, waiving protest and notice of protest, pay or cause to be paid to the Bank in cash the face amount of any such draft or bill for collection which has not been accepted, or the drawee of which has been suspended, failed, made an assignment for the benefit of creditors, become insolvent, by or against whom a petition in bankruptcy or for the relief of debtors or for the reorganization of corporate debtors under the bankruptcy laws has heen filed, or for which a receiver, conservator, rehabilitator or similar officer has been appointed as aforesaid.

9. It is further agreed that these presents constitute a continuing agreement applying to any and all future as well as to existing transactions betwecn the undersigned and the Bank.

10. The undersigned, if more than one, shall be jointly and severally liable hereunder and the term "undersigned" shall mean the undersigned or any one or more of them and the heirs, executors, administrators, successors or assigns thereof. 11. This agreement is limited to the extent of $...

outstanding at any one time. 12. The Bank shall at no time be under any obligation to accept any drafts under this agreement. The terms hereof shall apply only to such drafts as in the sole discretion of the Bank may be accepted by it. 13. All rights arising under this agreement shall be determined according to the laws of the State of New York.

Figure 23.--Acceptance agreement (face).

place of payment in the course of the mails not later than one business day prior to maturity with first-class bankers' demand bills of exchange to be approved by you for the amount of acceptance, payable in the currency of the acceptance and bearing our endorsement, or, if you so request, to pay to you, at your (New

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NOW, IN CONSIDERATION OF THE PREMISES and the sum of One Dollar to the undersigned in hand paid, the receipt whereof is hereby acknowledged, and of the acceptance from time to time by said

Bank and Trust Company of drafts in accordance with said acceptance agreement, the undersigned does hereby unconditionally guarantee to the said

Bank and Trust Company, its successors, endorsees and assigns, the prompt payment at maturity of any and all drafts accepted by the

Bank and Trust Company, pursuant to said acceptance agreenient, and any and all renewals and extensions thereof, the prompt performance by

--of all the terms, conditions and covenants contained in said acceptance agreement, and the payment of every debt and liability of

to the

Bank and Trust Company.

The undersigned hereby consents to any renewals and/or extensions of time of payment of all or any part of any draft, drafts or other indebtedness that may be granted by

Bank and Trust Company, and does also consent that any securities pledged under said acceptance agreement may be exchanged or surrendered from time to time without notice to, or further assent from the undersigned, and that the undersigned will remain bound upon his guarantee notwithstanding any such renewals, extensions, exchanges or surrenders.

The undersigned expressly waives presentment, demand of payment, protest and notice of dishonor of said drasts and acceptances thereof, and does also waive notice of the non-performance on the part of...

Lof any of the provisions or covenants of the aforesaid acceptance.agrecment on its part to be performed and notice of any sale of the collateral securities aforesaid.

This guarantee is made without any limitation as to duration or amount, and the undersigned agrees that it shali continue and that said

Bank and Trust Company may continue to act on the faith thercof to any extent until such time as the said Trust Company shall receive from the undersigned written notice of its withdrawal; which notice, however, shall not in any wise affect any draft drawn and/or acceptance theretofore made or any other liability theretofore incurred, whether then due and payable or thereafter to become due and payable, and not fully paid at the time of the receipt by the said Trust Company of said notice.

The undersigned declares to and covenants with the said

Bank and Trust Company, its suc. cessors, endorsees, and assigns, that the undersigned has no defense whatever to any action, suit or proceeding at law, or otherwise, that may be instituted upon his guarantee.

This guarantee shall be construed in accordance with the laws of the State of New York.

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York) office, on demand, the equivalent of the acceptance in United States gold coin at the rate of exchange then current in (New York) for cable transfers to the place of payment in the currency in which the acceptance is payable.

(See figs. 23 and 24.)


In the United States the banker's acceptance is a time draft or bill of exchange which has been accepted by "a bank or trust company, or a person, firm, company, or corporation engaged generally in the business of granting bankers' acceptance credits." Upon acceptance a draft becomes an unqualified promise to pay at maturity, and, under certain conditions, it is eligible for purchase or discount by the Federal Reserve banks. The acceptance is either discounted for the drawer by the accepting bank, or is returned to him for disposal in the market through a discount house. In either case, the funds are quickly obtained.


Two categories of acceptances are used in our foreign trade, to finance, respectively, (1) the shipment of goods between two countries and (2) the storage of readily marketable staples.

Under the first category, acceptances may be made (a) against export or import shipments with delivery to the bank of shipping documents or other evidence of shipment; (b) against goods in course of manufacture, if sold for delivery abroad, provided evidence of such sale and other documents is supplied to the accepting bank; (c) against sale and distribution into channels of trade of the imported or exported goods while the merchandise is still afloat or after its arrival at port of destination. Each of these steps may be financed successively by means of acceptances.

Acceptances may run up to 6 months, and, upon maturity, renewals may be agreed upon, if necessary, within the period of the customary sales terms of the commodity involved.

ACCEPTANCES AGAINST STORED GOODS Under the second category of transactions, the storage of staples abroad, merchants and producers can finance the marketing of their products. Drafts drawn for reasonable periods pending sale are eligible for acceptance. The drafts must be secured by warehouse receipts until sales are made. The buyer of the goods must sign a trust receipt stipulating the time when, according to the terms of sale, payment will be made.


There are various provisions for the protection of the accepting bank in the event the goods concerned are moved from one warehouse to another. Under certain conditions, the goods may be stored on the premises of the borrower. Drafts against staples are limited to short periods of not more than 6 months. Generally, they may not be renewed.

CONVERSION OF CREDITS A warehouse credit may be converted into an export credit, as when a shipment is made out of storage. Or a shipment held in a foreign warehouse and being financed by acceptance credit may be sold, and a new acceptance credit arranged, based upon the sale.

A large part of America's cotton crop is financed by acceptances secured by warehouse receipts while the cotton is in storage in the South. Similar use of acceptances is made in the case of grain, food products, and other staples.

Acceptance credits can be advantageously established abroad in foreign currencies whenever money rates and exchange rates are favorable. Conversely, foreigners sometimes find it profitable to secure acceptance credits in the New York market.


In cases where the exporter does not wish to send his draft on a foreign buyer through his bank for collection, or to negotiate a loan from his bank against such draft, he can arrange to have the bank accept the draft covering the shipment. Under this arrangement, the exporter draws two drafts, one on the bank for acceptance and the other on the foreign buyer for collection.

When the bank accepts the draft drawn on it, it receives the draft on the buyer and forwards it for collection to its correspondent in the buyer's country. The draft drawn on the bank is, of course, for a longer period than that on the foreign buyer, so as to cover the time required for the funds on the latter to reach the accepting bank.


After his bank has accepted the first draft, the exporter may have it discounted either by the accepting bank or in the discount market. In either case, he receives cash at once, and at a lower discount than would be otherwise obtainable. If, however, the accepting bank does not receive the funds before the maturity date of the draft accepted by it, the exporter must tender cash. For this, among other reasons, this type of acceptance arrangement can be effected only by exporters of good credit standing.

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