The silver standard is current in Salvador and Honduras.
Inconvertible paper is found in Chile, Colombia, Guatemala, Haiti and Paraguay.
The basis of exchange between countries depends primarily on the relation existing between the gold value of their respective moneys, the price paid being materially influenced by the condition of the balance of trade and the social or political state of the country. For example, with the balance of trade in favor of England, the price of exchange on that country would go up a fraction of a point or so, while if a country is in a state of political or economic unrest, or at war, the price of exchange on it goes much higher than if conditions were normal. For these reasons exchange in all countries varies daily, the price for the day being decided upon the receipt of European cables from the home institution. It will therefore be apparent that it is impossible to determine a fixed rate of exchange for any definite period. By buying when exchange is low and selling when it is high, much money can be made, especially if the sum involved is large. The United States did a gross business with Latin America in 1912 of $526,468,815, practically all of which was paid for by European exchange. Assuming that the commission charged was one-half of one per cent., the cost to the American merchant would be $2,632,344, which in itself is a strong argument for American banks in these lands.
Furthermore the home offices of all of these European banks having branches throughout Latin America, have had in mind the rendering of financial assistance to the home merchant or manufacturer. This was especially true of the German organizations, which were designed to foster and facilitate commercial relations of all kinds abroad. In the headquarters of these institutions, complete records and data are kept regarding all overseas merchants, their credits and the financial turnover of their business each year being known. As a consequence when the exporter presented his shipping documents at say Hamburg, the bank, should he so desire, knowing the rating of the importer, discounted the bill, and for the service rendered charged a commission, while the Latin American customer had the benefit of the time agreed upon for payment, according to the terms of the sale. Compare this perfect system of the banks extending courtesy to the exporters and the importers with the American policy of “cash against documents” and we see another vital reason why the Europeans succeeded in their conquest of these markets. The American manufacturer with small capital was handicapped. His business demanded a quick turnover; he had no way of ascertaining Latin American credits and no American banking connections to accept his export shipping documents at a discount. As a consequence, the door of this trade was closed to him and his productions.
Owing to the fact that gold coin is bulky and heavy to transport and paper money of a foreign nation always worth as a rule much less than its face value, a traveler is accustomed to carry what is known as a Letter of Credit. This is a document issued by a bank to a person or concern authorizing him or it to draw on the bank or its correspondents drafts for the whole or any desired part of the sum named in the Letter of Credit, by means of sight or time drafts. Customary means to prevent forgery of the holder’s signature are provided. On presenting this document to the bank’s foreign correspondent, the sum desired is advanced in the money of the country or in the monetary terms expressed in the Letter of Credit. These Letters of Credit are always time limited and are made against cash or some suitable guarantee to the bank issuing them.
In traveling in South America it is advisable to have two different Letters of Credit, one in Pounds Sterling and the other in Dollars. In Central America, Venezuela, Colombia, the British, Dutch and Danish West Indies it is often more advantageous to use dollars when buying exchange or getting cash on the Letter of Credit, while in Chile, Argentine, Brazil and Uruguay, pounds sterling are better. Before selling exchange on your Letter of Credit or realizing money on it, always visit the banks and see which one offers the best rate and whether English or American gold is in demand. By taking advantage of these conditions much money can be saved in the course of a long trip. The opening of American banks in Latin America will do much toward making the dollar popular and travelers are advised to take out letters of credit through United States banks with local branches in these lands.
It has been the understood custom for the correspondent banking house on whom a letter of credit was drawn to give the holder all information desired as to the rating and financial standing of local merchants and to aid him in every way possible. This was done in theory more than in practice. Assuming that your letter of credit was on an English bank in Buenos Aires, and that you were selling cotton goods, it would be most natural for the bank manager in Argentine to evade all direct information as to a possible customer’s standing, especially if his home institution had been discounting bills for a good client in England drawn against the local merchant. This is generally the attitude of bank managers in competitive lines and particularly when there is a tendency to cut into the trade of their customers. In this regard they can hardly be blamed for they are really protecting their patrons. If however, one is selling flour, or something which England cannot produce, the desired information is given fully and freely and every assistance rendered. Native or private bankers are not so reliable or as trustworthy sources of information.
In only two or three South American countries are there responsible commercial agencies; therefore, after getting what data you can from the bank it is always well to verify it by any other means at hand. Customers will often give references either in Europe or America as to their standing, which should be corroborated. Inasmuch as you desire information as to your clients’ credit and standing, you should be equally willing to establish the reputation of your house and to that end should assist as much as possible in supplying whatever facts in this connection may be wanted.
To illustrate the insufficiency of our knowledge regarding Latin American credits, let me cite a personal experience. At the beginning of the war in Europe, one of the largest daily papers in Buenos Aires was refused credit for less than $100.00 a week of cable news, because there was no really reliable means in New York of satisfying the manager of the foreign press agency that the paper was of the highest financial standing. A moratorium had been declared in the Argentine and Europe and at that time no direct banking connections existed with the United States. This condition of affairs only served to make the New York manager insist that the service be paid for weekly. He was absolutely unwilling to extend credit for even ninety days, provided the paper paid the cable tolls in Buenos Aires, which it had offered to do. The publication, its plant, equipment and the building it owns and occupies are easily worth $5,000,000. Furthermore it is eminently responsible and reputable. With all the manifold resources of a great, wealthy newspaper, it was absolutely impossible for it to remit money to the United States to get the war news so essential for its readers. Cables to Europe were cut, as the world knows, thereby preventing it from getting reports from this source. Its position was desperate. After finding that efforts to obtain the desired service from the press agency were useless and that no credit would be extended, the South American editor, in despair, cabled me, and I financed the paper for five months, paying weekly the bills incurred. With the opening of the National City Bank in Buenos Aires, remittance in full with interest was made for the money I had advanced, the draft sent me being one of the very first issued by that institution. This American news association had a great opportunity to establish a profitable connection in a country where a service of this kind is badly needed, for the favorable attitude of the press is of the greatest benefit in developing both business and friendly relations between nations. Instead of taking advantage of the situation, the position it assumed has positively hurt us as a nation.
One of the things to be met and overcome is the question of long credits. European merchants originally extended much time to reliable customers. Instances are on record of from twenty-four to thirty-six months being given. Goods were often shipped on consignment. The tendency of late, however, as business became established in these lands has been to curtail credits. This condition is one which demands delicate and diplomatic handling and very naturally will be materially controlled by circumstances. European banks were organized, as hereinbefore explained, to discount long time paper, provided the drawer and the drawee were considered good risks. The Federal Reserve Act, however, falls short of helping us in this regard for the life of a foreign negotiable draft is limited by it to ninety days.