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.
Assume now that the silk has been put aboard ship bound for the United States, that the shipper has drawn, say, a draft for £1,000 at four months' sight on the Guaranty Trust Co., London, and has attached thereto the bill of lading and the insurance certificate. Taking this draft around to his bank the shipper sells it for local currency at the then prevailing rate for four months' sight drafts drawn on London. The fact that it is drawn at four months' sight means that he will get a lower rate of exchange for it than if it were drawn payable on demand, but that was the arrangement with the buyer in New York--that the drafts against the silk were to have four months to run.
Having sold this draft to his bank in Canton and received local currency therefor, the shipper of the silk is out of the transaction. He has shipped the goods and he has his money. What becomes of the draft he drew is the next important point to consider. But so far as the exporter is concerned, the transaction is closed, and he is ready for the next operation.
The silk has now been set afloat for New York, and the draft purchased by the Canton banker is on its way to London for acceptance. Long before the silk gets to New York the draft will have reached London and will have been presented to the cashier of the Guaranty Trust Co., there, who, of course, was apprised of the credit opened on his bank at the time such credit was originally issued in New York. Examining the draft and the documents carefully to see that they conform with the terms of the credit, the cashier of the Guaranty Trust Co., London, formally "accepts" the draft, marking it payable four months from the date it was presented to him. The accepted draft he hands back to the messenger of the bank who brought it in; the bill of lading, insurance certificate, and invoice he keeps. By the next mail steamer he dispatches these papers to the banker in New York who issued the credit.