189. Loaning Foreign Money On Joint Account

This is another profitable form of activity for a foreign exchange department. Description of the bankers' long bills arising from operations of this kind has already been given, but for a clearer understanding of the matter it is necessary to know the theoretical as well as the practical end.

190. Ninety-Day Bill Operation

Underlying all operations in the loaning of foreign money in this market is the idea that a ninety-day bill of exchange drawn by a banker here upon a banker abroad can be readily converted into American money. A banker on the other side who makes up his mind to loan £10,000 in New York is not called upon to put up any real money; all he has to do is to "accept" a ninety-day draft drawn upon him. This is something which it is exceedingly important to bear in mind. The loaning banker is not limited by the amount of his deposits or even by the amount of his capital, except insofar as other bankers let these considerations govern them in the amount of his paper that they are willing to take on. But as long as the discount market absorbs the long bills he has "accepted," he can go on accepting up to any amount he chooses.

As previously explained, the foreign banker "accepts" these drafts drawn upon him on the understanding that before they fall due, demand exchange will have been sent him by the drawers of the long bills with which to pay them as they are presented. Suppose, for instance, that in one of these loaning operations, A in New York has drawn a ninety-day bill in pounds sterling on B in London, and that B has "accepted" the draft. B has not put out any real money; all he has done is to put his name on the draft, obligating himself to pay it at the end of ninety days. By that time, he well knows, his correspondent in New York will have sent him demand bills out of which to make the payment.

191. Loaning On Credit

In considering the question of loaning out foreign money from the standpoint of the bankers engaged who want to make money out of it, it is to be noted that neither the banker abroad nor the banker here are ever out of any actual cash at any time. The foreign banker, as has been seen, "accepts" a draft and later receives the medium with which to pay it. The American broker draws the loan-bills, puts out the money as agreed, and gets it back in time to remit the necessary demand exchange to the banker abroad who has done the "accepting." Neither party, then, has had to put up a cent of capital. Credit only has entered into the transaction, and anything that has been made out of it is clear profit. Sometimes the operation is transacted with the foreign banker taking all the risk and all the profit except the commission he allows to his American representative. Sometimes the operation is transacted on joint account. In that case the risk and the profits are equally divided. Such an arrangement works rather to the advantage of the foreign banker, assuring him as it does of the utmost care in the handling of the money. As for the commission, in order to get the business properly taken care of on this end, he has in any case to pay some American banker very nearly half of what he can make out of the transaction.