The science of foreign banking is the most difficult to understand of all the departments of modern finance. It requires the experience of experts whose knowledge must be the most profound and complete and includes such details as the conditions of the world’s markets, the existing crops, factory productions, local and extraneous political affairs, as well as external and internal commerce.

European financiers and merchants soon recognized the importance of reciprocal banking arrangements between the home countries and foreign fields and as early as 1862, anticipating the growth of Latin America and sensing the financial necessities of its future merchants, opened the London and River Plate Bank, which with its ramifications of branches and agencies in Argentine, Brazil, Chile, New York, and various European countries has been a potent factor in developing and controlling business along British channels. Following the pioneer move of this corporation, other institutions were organized in England, until to-day the amount of British capital invested in banks in all of Latin America is close to $500,000,000.

Realizing the benefits to be derived from such monetary connections in these countries and knowing that a bank’s co-operation meant much to both the buyer and seller and formed perhaps the strongest link in the chain of foreign commerce with which they hoped to girdle the world, Germany followed in the footsteps of England and opened a similar series of institutions in the same territories, even going so far as to have branches in England, knowing the decided preference for “bills on London.” Through their offices in the English capital, they succeeded in keeping as much as possible of the business they acquired abroad in their own hands, reaping all possible profit from every transaction. In their turn, and as their foreign trade demanded it, France, Italy, Spain and Switzerland entered the field but on a much smaller financial basis, at the same time restricting their activities so as to confine them more to the home countries and to persons of their own nationalities engaged in this field of commerce.

Only recently have statutory and business conditions warranted the advance of the American banker into this sphere of finance. To-day in Latin America our banking institutions may be found in the Argentine, Brazil, Panama, Cuba, Santo Domingo, Porto Rico, Mexico and to a small extent in Haiti. As it becomes apparent that our merchants and those of other countries require financial organizations to further and facilitate trade with the United States, additional establishments will be opened in these lands until ultimately the dollar will be so enthroned in the estimation of the business world that it need pay no homage to the Pound Sterling, which up to the present has been Emperor Supreme in the Realm of Finance.

That this movement is judicious no one familiar with this trade will for a moment dispute. The ability of the British banks, through their strong financial arteries, gave them exceptional opportunities to force business into the hands of English merchants, by obliging the seller of exchange, for example, in Buenos Aires on New York to pay from 1 per cent. to 1.5 per cent. more than if he sold on London, or if he desired to buy, to pay a correspondingly higher price for a draft on New York than on London. In addition to exerting thus their powers through a high rate of exchange to drive merchants into British markets, the profits in the transfer of money incident to the transaction were enormous. The truth of this statement is vividly apparent when we are told that in 1912, “bills on London” valued at $9,025,000,000 were sold, on every penny of which a fraction of a per cent. of profit was made by English bankers.

It is not deemed necessary for the purpose of this work to go into the intricacies of the banking problem in Latin America. Such incidents as local loans, credits and financing, need not concern us, and are best left for solution to those in this line of business. It is to be hoped however that the presence of American banking institutions throughout Latin America will result in the financing with American money of municipal and national improvements such as water-works, sanitation, electric and gas companies, subways, harbor improvements, fortifications, building of warships, telephones, electric and steam railways. It was the custom of the European financier in making such loans to stipulate that the work should be done under the supervision of citizens of, and with articles and machinery purchased in, the country placing the loan. This was as it should be. It gave their engineers and contractors an opportunity to force upon these countries their products and methods, provided permanent employment for many of their countrymen, who in return created a demand for articles of home production.

We may therefore consider the banking situation only in so far as it applies to the traveller, the house he represents and the customer he sells in the accommodation it can afford them and the service it may render all parties. One of its chief uses will be to give reliable information as to the credit rating of customers.

From a financial point of view all of Latin America may be divided into seven groups: (1) the east coast countries of Brazil, Argentine, Uruguay and Paraguay; (2) the west coast countries of Chile, Peru, Bolivia and Ecuador; (3) the northern countries of Venezuela and Colombia; (4) the Central American Republics of Guatemala, San Salvador, Nicaragua, Costa Rica, Honduras, with which Haiti may be considered; (5) Mexico; (6) the countries wherein American banking systems exist, such as Panama, Cuba, Santo Domingo and Puerto Rico, and (7) the extensive group of foreign possessions and islands such as British, French and Dutch Guiana, British Honduras, Trinidad, Barbados, Jamaica, Martinique, Guadeloupe, CuraÇao and St. Thomas.

The first and second groups of these South American countries are almost entirely under the domination and control of the European financier, the English being paramount, followed by Germans, French, Italians and Spanish, in the order named. Throughout Brazil, Argentine, Uruguay, Paraguay, Chile, Bolivia, Peru and Ecuador, in all the larger cities and ports, as well as in the interior and isolated towns, where business is to be had, may be found branches, agencies, or representatives of banking houses of these nationalities. They keep their fingers on the pulse of trade, know mine outputs, crop prospects, cattle productions, stability of governments, possibilities of revolutions or political unrest, the condition of business—in a word everything that has any bearing on banking or that could by any possibility reflect on the money market. Taking all these elements into consideration together with the important factor of the question of supply and demand, they decide the price of exchange each day or how much a merchant having a foreign obligation to meet, must pay for the necessary sum to liquidate his indebtedness. Very naturally a better price is quoted for the money required if payment is to be made in coin of the bank’s nationality for the reason that it necessitates less actual movement in the medium of exchange, the entire transaction as a rule being done on paper. This preliminary saving of a fraction of a per cent. in a big business means much in the course of a year and it has a strong tendency to make the buyer seek markets so situated that he might profit thereby. On the other hand the Latin American trader desiring to remit to the United States for goods bought in this country is forced because of lack of direct financial connection in South America to buy his exchange on London, Hamburg, Paris or some other European money center, thereby giving the European banker a profit of a fraction of a per cent. on every dollar of our foreign business. Furthermore, invoices and bills of lading are frequently attached to banking documents for custom house clearance and other purposes, thereby giving the European banker and through him, his clients and friends, an opportunity of learning our prices and terms. And so, not content with giving the foreign financier a chance to make money on our export trade, we also aid our greatest competitors by supplying prices and information to defeat our commercial purpose.

Some mercantile houses in the larger of these countries maintain for their own use accounts in New York against which they draw when liquidating bills in the States and do a general banking business as well, including the cashing of drafts and selling of exchange. Obviously only a large business concern could afford to do this and their natural tendency is to sell direct exchange on New York as high as the European banks. The dealer with small capital or the foreign merchant is invariably for one reason or another forced as a general rule to do business through the European banker when in need of American exchange.

In both Venezuela and Colombia, their nearness to the United States, a direct steamship service to our leading ports and the fact that we as a nation take the bulk of their products, combine to overcome all attempts on the part of Europeans to establish banks in these countries. As the local exporters ship their goods to our shores where they are disposed of they instruct their agents to deposit the moneys so received in local American banks, against which they issue checks in liquidation of indebtedness, thereby eliminating the necessity for the services of the international banker. Local banks in these countries, never very strong, and always subject to forced loans from financially embarrassed governments, do not enter materially into the business life of the community although they also maintain credits in New York and sell drafts against them. The consequence is that every leading merchant throughout these lands develops into a foreign banker, on a small scale, and buys and sells exchange. As long as this condition prevails, and it works most satisfactorily, the foreign bank will not be required to open its doors.

Practically the same state of affairs occurs in Central America, the general tendency to political unrest and the existence of an inconvertible paper currency in some of these countries, (similar conditions being current in Colombia) serve to emphasize distrust in local banks and concentrate banking operations in the hands of the larger mercantile houses.

Prior to the revolutionary troubles which are now convulsing Mexico, American, English, German, French and Spanish banks were to be found throughout that country. The presence of the American banker in this territory and the great bulk of trade movements between Mexico and the United States, kept the price of exchange within reasonable bounds.

In Panama, Cuba, Santo Domingo and Porto Rico, American banks exist and American currency is in use almost exclusively. All financial calculations are made in dollars and cents and a complete and perfect system of exchange on leading cities of this country is current so that the subject need not be further discussed.

As is to be supposed, the European countries having possessions in the West Indies and South or Central America, very naturally have banking facilities between these colonies and each mother country. In addition, prominent Canadian banks have successfully established branches in the largest of the British colonies for the purpose of building up direct trade with the Dominion of Canada, thereby eliminating the tribute London usually demands on exchange. Although we take much of the exports and sell these possessions most of their necessities, still the individual business done in each island or colony is relatively small and the field of operation too restricted to warrant other banking connections. Besides exchange on New York is cheaper here than elsewhere, owing to the fact that both Canadian and English banks maintain branches in that city. In the other colonies merchants, as a rule, have personal accounts in American banks in the States and are thereby enabled to handle their own transactions advantageously.

There are four monetary systems in use in Latin America: (1) the gold standard, wherein gold is the only legal tender, other forms of money being maintained at a parity with or without a government guarantee; (2) the gold exchange standard, wherein gold and other forms of money are legal tender, the conversion of the legal tender into gold being guaranteed by the government; (3) the silver standard, wherein silver is the legal tender, and (4) inconvertible paper, the value of which continually fluctuates and is dependent entirely upon the stability of the government’s credit.

The gold standard is used by Bolivia, Cuba, Costa Rica, Ecuador, Peru, Porto Rico, Santo Domingo, Uruguay, the British, French, Danish and Dutch West Indies and possessions.

The gold exchange standard is in use in Argentine, Brazil, Mexico, Nicaragua and Panama.

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.

Long credits are not to be encouraged. They were excusable in the age of the sailing ships and poor banking facilities, but with the quick transportation service of to-day are unwise and unnecessary. Under no conditions should more than six months time be allowed and that only for some special line dependent upon some future contingency, such for instance as crops—agricultural machinery being a good illustration. Staples and necessities require less time to dispose of and ninety days should be ample. If possible it might be wise to get the customer to agree to pay one-third of the invoice on receipt of shipping documents and the balance in sixty or ninety days. On overdue accounts, the Latin American merchant has always been accustomed to pay a good rate of interest.