The Myth Of The Origin Of Standby Letters Of Credit

The standby letters of credit have been developing in the U.S. for a couple of decades. Functionally they are almost identical with independent guarantees which are popular in Europe. However, the origin of standby letters of credit remains nebulous. Mainstream scholars believe that because the <national bank act> stipulated the “no guarantee rule” with which the banks had to comply, to circumvent this prohibition American banks invented this new instrument. I could hardly agree with this theory after reviewing lots of relevant historical and academical materials since I found that there are some ambivalence and loopholes which cannot be justified. I have come up with my own theory about the origin of standby letters of credit.This essay is divided into three chapters. The first chapter is about the conception and legal nature of standby letters of credit. This chapter consists of three sections. The first section introduced the conception of standby letters of credit, I begin this section with the overview of letters of credit, introducing the concept, the independence principle as well as the documents principle of letters of credit, on the base of which I analyzed the concept, transaction process, comprehensive functions and huge commercial value of standby letters of credit; the second section is about the comparison between standby letters of credit and other similar instruments; the third section is about the legal nature of standby letters of credit.The second chapter is about the causes of myth of the origin of standby letters of credit. This chapter is divided into three sections. The first section introduced the relevant contents in <national bank act> about banking powers; the second section explained the two ways interpreting the <national bank act>; the third section introduced the “primary and secondary obligation” criterion to distinguish standby letters of credit and guarantees.The third chapter is about the true origin and developments of standby letters of credit. This chapter is divided into three sections. The first section analyzed the origin and decline of “no guarantee rule”; the second section demonstrated that issuing standby letters of credit is an implicit power of banks; the third section introduced true attitudes of authorities towards standby letters of credit which is that the legitimacy of standby letters of credit has never been denied.At the end of this essay, I made my conclusion with regard to the origin of standby letters of credit.