The commercial letter of credit (as distinguished from the traveler's letter) is used to pay for merchandise purchased from exporters in foreign countries. It authorizes an exporter to draw against the correspondents of the issuing bank for the amount named in the letter on account of specific shipments. Or suppose A wishes to take a trip visiting several cities to make purchases or payments. He buys or arranges for a "commercial letter of credit," upon which he will be able to raise money for his purposes at convenient points. Let us consider the case of the importer and exporter. A, living in Chicago, purchases goods from B, a merchant in Hongkong. He goes to his Chicago bank and gets a commercial letter of credit stating the terms of his purchase. Such a letter might be addressed to some London bank, to the London branch of an American bank or to a New York bank or its Hongkong branch, requesting it to "accept" the drafts of the Hongkong merchant up to a certain amount, provided he complies with certain conditions named in the letter, concerning bills of lading, consular invoices, and insurance papers. The Chicago bank gives this letter to its customer, who, in turn, sends the letter to the Hongkong merchant. After complying with the terms of the sale, he draws a draft on the bank named, attaching the papers that may be named in the letter of credit as having to accompany the draft. He takes this draft to his local bank and sells it, the local bank, of course, deducting the exchange charges. The Hongkong merchant has thus received his payment for the goods, and in case everything has been done regularly and he has properly fulfilled his part of the contract, he is out of the transaction. If the banker through whom the credit was opened accepts the draft, he hands it back to the presenting agent or correspondent of the Hongkong bank, who sells it, as a rule, using the proceeds to reimburse the Hongkong bank for the funds paid out in that city. When the documents, obtained by the accepting bank, are sent by it to the Chicago bank, it is then customary for A, the Chicago merchant, to obtain the goods by signing a "trust receipt," stating he will sell the goods and use the proceeds to pay the draft. Both the importer and exporter are benefited by the transaction, the exporter getting his money when he ships the goods and the importer being able to sell the goods before he has to pay for them. If his credit had not been quite as good with his Chicago bank the latter might have stored the goods and turned them over to him only when he showed he had sold them and needed them to make delivery and receive payment. In this case the bank might release the goods to him in small lots. The Chicago bank gets a commission from A, and the accepting bank receives a commission for accepting the draft.

Travelers' Letter Of Credit

Minneapolis, Minn., June 30, 1922. Messrs. Kane and Nickert, Paris, France.

Gentlemen:

We take pleasure in introducing to you Mr. Clarence Thomson, who intends visiting France and Italy. He desires us to open a credit with you for him for twenty thousand francs. You will please honor his drafts to the above-named sum, and charge the same to us, with advice.

Mr.Thomson's signature accompanies this.

Very truly yours,

Federal National Bank.

(Signature of Clarence Thomson). J. Cameron Chaney,

Cashier.

This letter would be given to Mr. Thomson. The Federal National Bank sends to

Kane and Nickert (French bankers), a letter informing them of the transaction

(probably enclosing duplicate of the letter given Mr. Thomson and giving a brief physical description of Mr. Thomson).

Commercial Letter Of Credit

Front

Institute National Bank Of Chicago

Foreign Department

Credit No. 462. £2,000 Sterling.

Messrs. Stevens and Mullen, Chicago, June 14, 1922.

Hongkong.

Gentlemen:

We hereby authorize you to draw on the Institute National Bank of Chicago, 182 Bowdoin Street, London, for account of Ralph Steiner, Chicago, I11., up to an aggregate amount of Two Thousand Pounds Sterling available by your drafts at three (3) months' sight against shipment of silk from Hongkong to Chicago. Insurance effected in the United States.

Bills of Lading for such shipments must be made out to the order of the Institute National Bank of Chicago, unless otherwise specified in this credit.

Consular Invoice And One Bill Of Lading Must Be Sent By The Bank Or Banker Negotiating Drafts, Direct To The Institute National Bank Of Chicago, At Its Chicago Office, With Notice To The Institute National Bank Of Chicago's London Office.

The remaining documents must accompany the drafts drawn on the Institute National Bank of Chicago, London.

The amount of each draft negotiated, together with date of such negotiation, must be indorsed on the back hereof.

We hereby agree with bona fide holders that all drafts drawn by virtue of this credit, and in accordance with the above stipulated terms, shall meet with due honor upon presentation at the office of the Institute National Bank of Chicago, London, if drawn and negotiated prior to September 13, 1922.

Institute National Bank Of Chicago,

By Max Spaulding,

Cashier.

N. B. - Drafts drawn under this credit must state that they are "drawn under Letter of Credit No. 462, dated June 14, 1922."

The Indorsements Will Appear on the Back. All the Above Letter Except the Names of the Parties, Amounts, Dates and Terms of the Particular Transaction Involved

Will Probably Be Printed. The Larger Banks Doing This Business Have

Regular Forms. Steiner, the Importer, Will Send This to Stevens and Mullen, the Exporters in Hongkong.