Why did merchants historically use letters of credit and bills of exchange?

• A. To facilitate trade by reducing the need to carry large amounts of cash and to ensure payment across long distances.
• B. To record inventory levels in their accounting books.
• C. To avoid paying taxes on their transactions.
• D. To calculate depreciation on their fixed assets.

Answer: (A)

Verified step by step guidance

1. Understand the historical context: Merchants faced challenges in conducting trade across long distances, including the risks of carrying large amounts of cash and ensuring payment security.
2. Recognize the purpose of letters of credit and bills of exchange: These financial instruments were designed to facilitate trade by providing a secure and reliable method of payment without the need for physical cash.
3. Analyze the options provided in the question: The correct answer should align with the primary function of these instruments, which is to reduce the need for cash and ensure payment across distances.
4. Eliminate irrelevant options: For example, recording inventory levels, avoiding taxes, and calculating depreciation are unrelated to the primary purpose of letters of credit and bills of exchange.
5. Conclude that the correct answer is: 'To facilitate trade by reducing the need to carry large amounts of cash and to ensure payment across long distances.'