later paid by the drawee, these proceeds can then be used by the bank to meet its own bill at maturity.

The exporter has the choice of placing his collection items directly with a bank in the country of the drawee or indirectly with an American bank operating a foreign department. It is generally unwise to send drafts directly to foreign banks, for they will not give the same attention to these as is given to drafts forwarded through American financial institutions. True, the collection charge of the latter is thus saved, but competition among banks has reduced this fee so that it is little more than the cost of handling the item. As a matter of fact, many American banks operate their foreign collection departments rather as a service for their customers than for a profit to themselves.

ENDORSEMENT

The exporter may endorse drafts forwarded for collection in either of the following ways:

"pay to the order of the X Bank"

"pay to the order of myself."

As a rule the former endorsement is employed when bills are given to the bank for discount and the latter form is used on drafts placed for collection.

DOCUMENTS

LETTER OF INSTRUCTION

Once the drafts are endorsed by the exporter and lodged with the collecting bank, the procedure of

collection is a matter of technical banking practice which can best be understood by examining the documents employed in these operations.1

COLLECTION DOCUMENTS

The forwarding of an item for collection, whether domestic or foreign, involves such parties as drawer, sending bank, presenting bank, and drawee. The relation between drawer and sending bank is expressed in the "letter of instruction," while the relation between the sending and the presenting bank is stated in the "letter of advice," or, as it is more generally termed, "remittance letter."

discount collection

DEAR SIRS: We enclose for the undermentioned draft with documents as enumerated. The surrender of documents to drawee is conditional upon fulfillment of instructions as indicated by cross (X) in margin.

1 The following part of the chapter has been adapted from a study of foreign collections conducted by the author for the Federal Reserve Board and published in the Federal Reserve Bulletin, May, 1922, pp. 522–528.

L

day of payment.

Interest to be collected at

Payable at check rate on New York, remitting proceeds by

cable, charges for our account.

until approximate arrival cover in New York.

per cent from date of issue

The letter of instruction is a form usually furnished by the bank, but large exporting houses at times prefer to use their own blanks. The instrument states the conditions to be observed by the bank in handling the transaction. While the bank

is thus bound by these terms, at the same time it cannot be held responsible for contingencies concerning which the exporter as drawer has given no instructions. Hence the exporter should fill out this form completely and carefully, for in case a difficulty arises the presenting bank can obtain additional instructions promptly only by cable which is very expensive. The letter of instruction, as seen above, contains a specific description of the draft, the accompanying documents, and detailed instructions which enable the bank to fill out its remittance letter which accompanies the draft sent to the presenting bank. (See Illustration 15 on page 299.)

While these two instruments present the specific details concerning each bill sent for collection, the general relations among the various parties to the transaction are expressed in two other documents. The sending bank usually informs the drawer of certain standing arrangements which govern the handling of all foreign drafts sent for collection. These terms are usually printed in the acknowledgment sent to the drawer by the bank which thus seeks to contract out various liabilities which it would otherwise assume in receiving items for collection. The nature of these waivers will be discussed elsewhere in this chapter.

The sending bank usually defines its relations with its collecting correspondents in a set of per

Mail to..........

X BANK OF NEW YORK.

Please report by our No.........

We inclose herewith the item described below:

manent instructions printed on the reverse side of the remittance letter, or stated in the general "condition sheet" which regulates such interbank relations as, payment of interest on balances, negotiation of commercial credits, and tariff charges on collections. In the event that the sending bank's