Shao Yen was a tall thin man in a plain grey robe, more like an austere monk than a merchant; but he grasped the situation at once. They spoke in English, he having had much to do with the East India Company's people in Canton in his youth and having lived in Macao during the two recent English occupations as well as in Penang. Raffles left them together after a few general remarks of a friendly nature and when the proper civilities were over Stephen said,
'When I go to Pulo Prabang it may be necessary for me to purchase the good-will of certain influential men. For this purpose I have a fair amount of gold. It appears to me that the best way of proceeding would be to deposit it with you and, subject of course to the usual commissions and charges, to carry a letter of credit to your correspondent in Pub Prabang and to draw on him.'
Shao Yen replied, 'Certainly. But when you say a fair amount have you any approximate sum in mind?'
'It is made up of different currencies: it would weigh about three hundredweight.'
'Then may I observe that if either or both of my correspondents - for I have two - were to scrape the island bare they could not produce a tenth part of the amount you speak of. It is a very poor island. But in my opinion that tenth part, tactfully presented, would buy all the good-will that is to be had.'
'In this case there is likely to be some competition.'
'Yes,' said Shao Yen. He looked down for a few moments and then said, 'It might answer very well if I were to give you a letter of credit for what I believe my correspondent can produce and then notes of hand for various sums: my paper is good from Penang to Macao.'
'That would answer admirably: thank you. And may I beg you to impress upon your correspondent that I should wish any large transaction to be entirely confidential? Ordinary money-changing may as well be public as not, but I should be sorry if it were thought I could be squeezed for thousands.'
(from) The Thirteen Gun Salute Patrick O'Brian
The letter of credit is, in many respects, the ancestor of the modern banknote. As the name implies, it consists of a letter written by a known individual declaring that they will provide a given amount of money to the bearer (or to some other named party). In theory, this should mean that the bearer can present the letter to anyone else in lieu of actual currency and the recipient can then return the letter to its author at some later date and claim the sum stated, which should mean that everyone involved is saved the need to carry large quantities of specii about with them. Someone intending to make a voyage and needing money at the other end might, for example, deposit a sum of currency with a merchant who is known and trusted by those at his destination and receive his letter of credit in exchange with the expectation that he can redeem it on arrival with the merchant's trading partners.
In practice the letter of credit relied on finding someone that people at your destination had heard of and trusted to cover their debts and that the person to whom you presented the letter had the funds available to give you cash in return (the obstacles might well be less if you were trading for goods that the recipient expected to sell anyway). In general the bearer would only receive the full value under perfect conditions and would normally be expected to accept a discount of a given percentage based on the recipient's view of how quickly (and reliably) he could be repaid by the issuer - if the letter might have to be handed on several times the discount could be substantial.
Naturally, any of these letters simply made out to "the bearer" (as in the modern banknote phrase "I promise to pay the bearer upon demand the sum of X") became tradable in their own right (especially if drawn on a known and reputable banker like the Houses of Fugger or Medici or the Bank of the Hanse) and thus became the first paper currency.
Similar letters can also be issued as a form of scrip by armed forces in time of war - the commissariat requisitions the supplies it needs from civilians and pays with a letter of credit payable either on application to the army paymaster or, perhaps, to the royal treasury or civilian government. These too vary from the tradeable to the utterly worthless depending on how eager the state is to pay its debts.
If the letter is denominated in goods rather than currency (for example in a given quantity of grain) it becomes more of a futures bond.
Game and Story Use
- These make amusing treasure - although the players might actually appreciate it if you're employing encumberance rules.
- Of course "the wrong sort of person" may not be able to present a letter of credit without being arrested on suspicion of theft - this is where having the right social status (or an appropriate patron) can help, otherwise they may need to sell it at a substantial discount.
- As the flavour text suggests, getting letters from the right person is important and can provide both opportunities for the party's social specialist and roleplaying opportunities.
- Modern players may need the concept of a discounted bill explained to them as they are unlikely to understand why they aren't getting face value for it.
- Also as per the flavour text, note that it's better to have a variety of smaller letters rather than one big one in case you are seeking more specie than the market can provide.
- Equally, the death or ruination of the issuer of a letter of credit (or even just rumours of death or ruination) can virtually bankrupt a traveller - it's a good way to pull the rug from under PCs (and therefore a tactic their enemies might attempt), but equally a good way for them to undermine a rival force. To avoid being lynched the GM might want to make the embarrassment temporary - the PCs issuer dies and his letters are devalued for a time but once the plot no longer requires the PCs to be held up word comes through that the issuer's heir is able and willing to meet all of his father's commitments and the letters are as good as ever.
- If a moneylender keeps records of the letters of credit that he has written (and many will) stealing (or copying) these records could reveal some interesting information - arguably similar to getting a financial transaction check run these days.
- Forged letters of credit are a legitimate form of fraud for larcenous PCs … and a potential tactic against any PCs known to issue their own letters. Refusal to honour a forged letter can also be blackwashed to present the alleged issuer as failing to honour a genuine letter.
- Likewise, in the event of a transferrable letter a PC may find himself having to pay over money to an enemy who has purchased (or stolen) one - again, refusal to pay may be misinterpreted by the business community in general.
- A cunning enemy may gather a number of letters together and then wait until he knows the PC to be low on specie before presenting them, effectively forcing a mini bank run.
- In some cultures - especially third world ones - the letter of credit tradition continues into the present day and is suspected of being used to bypass currency controls, money laundering laws and financial sanctions in a variety of contexts.