Interesting as the movement of gold and the international money markets may be, it is in its application to the every-day importing and exporting of merchandise that foreign exchange has its greatest interest for the greatest number of people. Every bale of cotton exported from the country, every pound of coffee brought in, is the basis of an operation in foreign exchange, such operations involving usually the issue of what is known as "commercial credits."

Broadly speaking, commercial credits are of two classes, those issued to facilitate the import of merchandise and those issued to facilitate its export. Considering the question from the standpoint of New York, import credits are so much more important than export credits and issued in so much larger volume, they will be taken up first.

Not all the merchandise imported into the United States is brought in under commercial letters of credit, but that is coming to be more and more the way in which payment for imports is being arranged. Formerly an importer who had bought silk or white-goods in France went around to his banker, bought a draft on Paris for the required amount of francs and sent that over in payment. In some cases that is still the method by which payment is made, but in the very great majority of cases where the business is being run on an up-to-date basis, a commercial letter of credit is arranged for before the importation is made. Of how great advantage such an arrangement is to the merchant importing goods the following practical illustration of how a "credit" works will show.

To exemplify the greatest number of points of importance possible in connection with the commercial credit business, the case of a shipment of raw silk from China will, perhaps, serve best. A silk manufacturer in Paterson, New Jersey, we will assume, has purchased by cable ten bales of raw silk in Canton, China. Understanding of the successive steps in the financing of such a transaction will mean a pretty satisfactory understanding of the general principles under which the financing of most of our imports is arranged.

The purchase of the silk having been consummated by cable, the first thing the purchaser would do would be to go to his banker in New York, lay before him an exact statement of the conditions under which the purchase was made, and get him (the banker) to open a commercial letter of credit covering those terms. Such a credit, of which a reprint is given herewith, would be in the form of a letter to the issuing banker's London correspondent, requesting him to "accept" the drafts of the sellers of the silk in Canton up to a certain amount and under certain conditions. These conditions, having to do with the "usance" of the drafts (whether they were to be drawn at three, four, or six months' sight) and with the shipping documents to accompany the drafts, are all very fully set forth in the letter of credit itself. If the silk has been bought on the basis of four months, for instance, the credit would read that drafts are to be drawn at four months' sight. Mention is also made as to whose order the bills of lading are to be made, as to where the insurance is to be effected, etc., etc.

The silk importer having received this letter of credit from the banker in New York, sends it by first mail (or, if the case be urgent, cables its contents) to the seller of the silk out in Canton. The latter, having received it, is then in a position to go ahead with his shipment. The first thing he does is to put the silk aboard ship, receiving from the steamship company a receipt (bill of lading) stating that the ten bales have been put aboard, and making them deliverable to the order of the banker in New York, who issues the credit. The bill of lading being made out to his order is useless to anybody else. He and he only can get the silk out of the ship when it arrives in New York.

The shipper in Canton having received this bill of lading from the steamship company and having properly insured the goods and received a certificate stating that he has done so, is then in a position to go ahead and draw his draft for the cost of the silk. The London correspondent of the New York banker, to whom the letter of credit is addressed, is, say, the Guaranty Trust Company of London. Upon that institution the Canton silk firm, therefore, draws his draft in pounds sterling for the cost of the silk, attaching to the draft the bill of lading, an invoice, and the insurance certificate.

A pertinent inquiry at this point is as to why the letter of credit for silk shipped from a city in China directs that drafts be drawn on London—‌as to why London figures in the transaction at all? The answer is that drafts on London are always readily negotiable, and that London is the only city in the whole world drafts on which are readily negotiable in all places and at all times. A draft on New York or on Berlin might be negotiated at a point like Canton, but to be sure that the exporter of the silk will get the best rate of exchange for his drafts, the drafts must be drawn on London, the financial center of the world. One of the chief points to the whole business of taking out a credit, in fact, is to provide a point on which the shipper can draw satisfactorily.