Credit, LETTER OF. This is the term applied to a letter addressed to a correspondent at a distance, requesting him to pay a sum therein specified to the person named, or to hold the money at his disposal, and authorising the correspondent to reimburse himself for such payment, either by debiting it in account between the parties, or by drawing on the first party for the amount. This arrangement may take place between merchants or others, but in general it occurs between bankers residing in different places—e.g. between a banker in London and his correspondent in New York; and it is designed to enable any one who has money lodged at one place to obtain the use of it at another for a small charge, or commission, without the risk or trouble of actually carrying money between the two cities. It is thus a sort of primitive or informal Bill of Exchange (q.v.), though not, like a bill, a negotiable instrument. Sometimes the letter is addressed to all or several of the correspondents of the bank issuing it, in which case it is termed a Circular Credit; and any of them may pay the sum mentioned, or sums to account as desired, taking the holder's receipt, or his draft on the granter, in exchange; and the sums so paid are indorsed on the letter, to show how far the credit has been used. Even where the granter has no correspondent, the holder of an authentic letter will usually have little difficulty in obtaining money upon it; and the system is thus productive of much convenience to all who have occasion to travel.
Some bankers, having an extensive correspondence abroad, issue what are called Circular Notes, usually of the value of £10 or £20 each, which any of the granter's correspondents, or indeed any one else, may cash to the holder, on his indorsement and production of a letter of indication. In this kind of credit, the notes are bought outright; whereas for the ordinary letter of credit, the banker debits the drafts under it only when they are advised to him. The introduction (about 1770) of these notes, which have proved of great convenience to travellers, though of little direct profit to the banks, is due to Mr Herries, the founder of the eminent banking-house of Herries, Farquhar, & Co., London.
A marginal credit is one in which the due payment of the bills or drafts under it are guaranteed by a third party interested in the transaction; the guarantee being usually expressed in a marginal note on the bill. See CIRCULAR NOTES.