LETTERS OF CREDIT

New Zealand Herald, Volume LXIX, Issue 21324, 27 October 1932, Page 15

LETTERS OF CREDIT

HISTORY AND USAGE GROWTH OF MODERN TRADE FIRST USED BY KING JOHN " Letters of credit are notable as marking the somewhat rare occasions on which our bankers do give us what wo ask," said Mr. C. 11. Weston, in an address on the history and employment of letters of credit, given at the luncheon of the Auckland Creilitmen's Club at Milne and Ohoyce's Reception Hall yesterday. Mr. ,F. G. Baskctt presided. The use of lelteis of credit in commercial transactions to-day was a growth from the old practice of using bills of exchange, Mr. Weston said. These were first used in the Mediterranean towns during the 13th and 14th centuries and finally spread to England. Before 1914 a bill of exchange on London was a recognised form of international currency. London was the greatest discount market of the world, and traders were only too glad to draw bills on London, with the result that a good commercial bill was as good as cash. The system of financing trade by bills of exchange was really a cash on delivery system, but it had the disadvantage that payment had to be obtained in the country of the buyer. If anything went wrong with a transaction, the exporter or the holder of the document might have the expense of litigation in a foreign country. Between 1914 and 1920, when there was an unparalleled exodus of goods from the United States, the system underwent an entire change. Americans had not the money or the discount market to finance their transactions, and the letter of credit was brought into common use for trading purposes. Letters of credit were first heard of in 1202, when King John wished to buy goods in Rome and sent, emissaries there armed with letters of credit for 500 marks each. From then on they were used extensively by Jewish bankers and the Lombardy money agents, but their widespread commercial use was a modern development. Under the letter of credit system, a banker became paymaster for the time being. He contracted directly for himself with the seller of goods, and the independent contract between the banker and the seller was really more important than the contract between buyer and seller. The new system had not supplanted the bill of exchange, which still remained the currency of the transaction. However, a letter of credit was not negotiable, and the bank was only entitled to pay the person named in the text. It wis obligatory on the bank to pay the right person and if any mistake was made the bank was held responsible "It is the duty of every seller to scrulinise most carefully the advice he receivos from the bank," Mr. Weston said. " The credit depends on the observance of conditions, and the question of duration of credit and whether it is revocable or irrevocable must be determined. Letters of credit deserve from both importers and exporters the greatest of skill, the greatest of care and the greatest of experience, perhaps more than any other branch of commercial activity."