Marginal Credits, a term applied to business operations, in which bankers lend the credit of their names, as it were, to their customers, and thus enable them to carry out important commercial transactions which otherwise could not be so conveniently undertaken. A merchant in England, for instance, desires to import tea or silk, but his name is not so well known on the Chinese Exchanges that bills drawn upon him by a merchant in China can be sold there at a reasonable rate of exchange. The tea or silk cannot be purchased without the money being on the spot to buy it with, and were the merchant to send out specie for that purpose he would involve himself in heavy charges for freight and insurance, and lose the interest of his money while on the voyage. Moreover, before the remittance (silver probably) could arrive, the market prices of tea and silk might have so altered that a purchase might not be desirable, and the money would thus be placed where it was not wanted. But, while drafts by the merchant in China on the merchant in England would not sell, or only at a heavy sacrifice, the drafts by the merchant in China on a banker in England will sell at the best price. The merchant in this country therefore deposits with his banker cash or securities equal to the amount to which he desires to use the banker's name, and receives from him Marginal Credits for the amount. These are bill-forms drawn upon the banker, but neither dated nor signed, with a margin containing the banker's obligation to accept the bills when presented. The bills are dated, drawn, and endorsed by the merchant abroad before being sold, so that the obligation runs from the date on which the money was actually paid; and the tea or silk is most likely in the merchant's warehouse before the bill is payable. For the transaction, the banker charges the merchant a commission to remunerate himself for the risk involved. In recent years the use of marginal bills has largely fallen off in consequence of the development of electrical communication. Merchants now prefer to arrange with their bankers for a 'telegraphic transfer,' by which an immediate cash payment is effected through a foreign bank.
Many transactions between merchants abroad and in England can only be carried through by the acceptances of a London banker being tendered in payment, but the transactions are intrinsically the same as when Marginal Credits are used. Bankers in the country obtain the acceptance of a London banker for bills to be drawn against goods their customers are importing. Bankers—usually in London—also accept bills to a great amount for the exchange operations of foreign banks. A banker in, say Canton, buys from his customers bills drawn upon merchants in England for a given amount, and sends them to his corre- spondent in London, who holds them for him and grants a credit in his favour on the security of them. The Canton banker operates upon this credit by drawing upon the London banker, and sells his drafts at the most favourable exchange. With the money received he purchases other bills, and remits them also, to be again drawn against. When these operations are made with caution and sound judgment they are beneficial to all concerned; but when engaged in without sufficient knowledge or recklessly they involve most disastrous consequences.