These are the "full rates"—naturally, few importers are required to pay them, actual rates being largely a matter of individual negotiation and standing. Where the drafts under the credits run for ninety days, for instance, as in the case of coffee imported from Brazil, the full rate would be three-quarters of one per cent., but very few firms actually pay over three-eighths of one per cent. Similarly with credits issued for the importation of merchandise of almost every other kind. Silk credits, with drafts running four months, ought at the regular rate to cost one per cent.; but as a matter of fact there are any number of good houses willing to do the business for five-eighths of one per cent. One large international bank in New York, indeed, is going so far as to offer to issue credits under which drafts run six months for a commission of five-eighths of one per cent. Such a commission is entirely inadequate and no fair compensation for the trouble and risk the banker takes. It means little more than that the bank is willing to take business at any price for advertising or other purposes.
Assume that an importer has taken out a ninety-day credit and is to pay three-eighths of one per cent. on all drafts drawn thereunder, what rate of interest is he actually paying, figured on an annual basis? The life of the draft is ninety days, and he pays three-eighths of one per cent.; in each year there are four ninety-day periods; figured on an annual basis, therefore, the importer is paying four multiplied by three-eighths of one per cent., equalling one and one-half per cent. interest. Not a very high charge, and made possible only because the banker lends his credit and not his cash.
For purposes of illustration, the financing of the import of silk from China was chosen because the operation embodied perhaps more points of interest in connection with commercial credit business than any other one operation. Commercial credit operations, however, are of great variety and scope. They may involve, for instance, the import of matting shipped from Japan on slow sailing ships and where the drafts drawn run for six months or more, or they may involve the import of dress goods from France, in which case the drafts are often at sight. Furthermore, all credits are by no means issued on London. In the Far East, where tea or shellac or silk is being exported to the United States, London is known as the one great commercial and financial center, but in the case of dress goods shipped from Marseilles or Lyons, for instance, the credits would invariably stipulate that the drafts be drawn in francs on Paris.
But whether the material imported be dress goods from France or tea from China, the principle of the commercial credits under which the goods are brought in remains identically the same. In every case there is a buyer on this end who wants to get possession of the goods without having to put up any money, and in every case there is a seller on the other end who wants to receive payment as soon as he lets the merchandise get out of his hands. The banker issuing the credit is merely the intermediary, and the naming of some foreign point on which the drafts are to be drawn is merely incidental to the conduct of the operation.
One last point remains to be cleared up. The seller of the goods in the silk-importing operation described gets actual money for the goods as soon as he ships them—where does this actual money come from? In the last analysis, from the discount market in London, from the man in London who discounts the draft after it has been "accepted". The exporter in Canton gets the money direct from his banker in Canton, but the latter is willing to let him have the money in exchange for the draft only because he (the banker) knows that he can send the draft to London and that some one there will eagerly discount it. In that way the Canton banker gets his money back. The only party who is out of any money during the time the silk is being manufactured and sold in Paterson, N.J., is the party in London who has discounted the shipper's draft.
The real function of the banker, then, in these Commercial Credit transactions is to open up the international loaning market to the importer. Through the system now in force this is accomplished by a banker in New York issuing a credit and by a banker in London putting his "acceptance" on drafts drawn under that credit. The combination makes the drafts good; makes the great discount market in London willing to take them, and absorb them, and advance real money on them. And for the opening up of this great reservoir of capital the importer here has to pay an interest rate of but from one to two per cent. per annum. Naturally the business has grown to tremendous proportions.