worthless they may be individually, they cannot be multiplied beyond a certain limit. There is, therefore, a limit to the calamities they cause. But we shall show that with Accommodation Paper the limits of disaster are immensely and indefinitely extended, frequently involving in utter ruin all who are brought within their vortex

Explanation of the Real Danger of Accommodation Bills. (Quoted by Mr. Commissioner Holroyd, in his judgment in re Lawrence, Mortimer, and Schrader.-" Standard," March 7, 1861)

28. We must now explain wherein the difference between Real and Accommodation Paper consists, and wherein the true danger lies

Suppose that a manufacturer or wholesale dealer has sold goods to ten customers, and received ten bona fide trade bills for them. He discounts these ten bills with his banker. The ten acceptors of the bills, having received value for them, are the principal debtors to the bank; and are bound to meet them at maturity, under the penalty of commercial ruin. The bank has not only their names on the bills, but also that of its own customer as security. It moreover keeps a certain balance of its customer's in its hands, proportional to the amount of the discount allowed

Even under the best of circumstances an acceptor may fail to meet his bill. The banker debits his customer's account with the bill, and gives it to him back. If there should not be enough, the customer is called upon to pay the difference. If the worst comes to the worst, and its customer fails, the bank can pursue its legal remedy against the estates of both parties, without in any way affecting the position of the nine remaining acceptors, who, of course, are still bound to meet their own bills

In the case of Accommodation Bills there are very material differences. To the eye of the banker there is no visible difference between Real and Accommodation Bills. They are, nevertheless, very different and it is in these differences that the danger consists

In Accommodation Bills, the person for whose accommodation the drawing, indorsing, or accepting is done, is bound to provide

the funds to meet the bill, or to indemnify the person who gives his name. In a Real bill the Acceptor is the principal Debtor, who is bound to meet the bill, and the Drawer is a mere surety. In the most usual form of Accommodation Paper, that of an Acceptance, the Drawer is the real principal Debtor, who has to provide funds to meet the bill: the Acceptor is a mere surety: and if he is called upon to meet the bill, he is entitled to sue the principal debtor for the amount

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Now suppose, as before, A. gets ten of his friends to accommodate him with their names, and discounts these bills with his banker it is A.'s duty to provide funds to meet every one of these bills at maturity. There is, in fact, only one real Principal Debtor, and ten sureties. Now these ten accommodation acceptors are ignorant of each other's proceedings. They only give their names on the express understanding that they are not to be called upon to meet their bills and, accordingly, they make no provision to do so. If any one of them is called upon to meet his bill, he immediately has a legal remedy against the drawer. In the case of Real Bills, then, the bank would have ten persons who would each take care to meet his own engagements in the case of accommodation paper, there is only one person to meet the engagements of ten

Furthermore, if one of ten real acceptors fails to meet his bill, the bank can safely press the drawer: but if the drawer of the accommodation bill fails to meet any one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer, they dare not, for their own safety, press the acceptor, because he will, of course, have immediate recourse against his debtor; and the whole will probably tumble down like a house of cards. Hence the chances of disaster are much greater when there is only one person to meet so many engagements, than when there are so many, each bound to meet his own

The real danger to a bank, then, in being led into discounting accommodation paper, is that the position of principal and surety is reversed. They are deceived as to who the real debtor is, and who the real surety is being precisely the reverse to what they appear to be, which makes a very great difference in the security of the holder of the bills. To advance money by way of cash

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credit, or loan with security, is quite a different affair: because the bank then knows exactly what it is doing: and as soon as anything occurs amiss, it knows the remedy to be adopted. Moreover, it never permits the advance to exceed a certain definite amount: but it never can tell to what length it may be inveigled into discounting accommodation paper, until some commercial reverse happens, when it may discover that its customer has been carrying on some great speculative operation with capital borrowed from it alone

On the Danger of Accommodation Paper to a Bank

29. We have now to explain how very much more dangerous this species of paper is to a bank than the worst calamities which can happen from real paper

We have already pointed out the very common error that Bills of Exchange are paid in money. Bills are very rarely paid in money they are paid by discounting fresh bills. Thus, in ordinary times, previous Debts are always paid by creating new Debts. No doubt if the banker refuses to discount the customer must meet his bills in money: but then no trader expects to do that. He usually has a fixed discount limit; and if he brings good bills, he has little less than an absolute right to have them discounted : and if the banker calls upon him to meet his bills in money, it might oblige him to sell goods at a great sacrifice, or might cause his ruin

However, it is always supposed that the bills discounted are good ones that is, they could be paid in money, if required. Thus, though in common practice very few bills are really paid in money, it is manifest that the whole stability of the bank depends upon the last bills discounted being good ones

Now, suppose that for some time a customer brings good bills to his banker, and acquires a good character, and thus throws the banker off his guard. Owing, perhaps, to some temporary embarrassment, or wishing to push his speculations, he goes to some of his friends and gets them to accept bills without having any property to meet them. He then takes these accommodation bills to the banker. The banker buys them by giving him a credit in his books. In course of time these accommodation bills must be

met; and the way he meets them is to create more similar bills. The drawer may be speculating in trade, and losing money every day, but his bills must be met and there is no other way of doing it than by constantly creating fresh bills to meet the former ones. By this means the customer may extract indefinite sums from his banker, and give him, in exchange, so many pieces of paper. Now when discounts are low and times are prosperous, this system may go on for many years. But at last a crisis comes. The money market becomes "tight." Bankers not only raise the rate of discount, but they refuse to discount as freely as before they contract their issues. The accommodation bills are in the bank, and must be met. But if the banker refuses to discount fresh bills, they must be met in money. But all the property which the speculators may have had may have been lost twenty times over: and so, when the crisis comes, they have nothing to convert into money. Then comes the crash. Directly the banker refuses to meet his customer's bills by means of his own money, he wakes to the pleasant discovery that, in return for the money he has paid, he has got so many pieces of paper!

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This is the rationale of accommodation paper: and we see how entirely it differs from real paper. Because, with real paper and bonâ fide customers, though losses may come, yet directly the loss occurs, there is an end of it. But, with accommodation paper, the prospect of a loss is the very cause of a greater one being made and so on, in an ever widening circle, until the canker may eat into the banker's assets to almost any amount

It is also clear that if a trader, having got a good character, may sometimes do so much mischief to a single banker, his capacity for mischief is vastly increased if, from a high position and old standing, he is able to discount with several banks for then he is able to diminish greatly the chances of detection

30. In the case above mentioned, Laurence, Mortimer & Co. were of very high position and of old standing in the commercial world. They were leather and hide factors, and the house was of above fifty years' standing. They bought hides on commission for tanners, and sold leather, and had leather consigned to them for sale. The hides were paid for by the tanners' acceptances of the factors' drafts at four months. In the course of business they

got connected with a considerable number of houses which were in a state of insolvency. To support these houses, and to extend their own operations, they entered into an enormous system of Accommodation Paper. They were in the habit of advancing money to their customers at five per cent., and then discounting these bills at their bankers at three per cent., thus making two per cent. by the transaction. When their customers often lost the money, the bills were renewed, or new ones created of arbitrary amounts, to conceal the loss. The house had an agency in Liverpool, which pursued exactly the same course. They set up people ostensibly in business, for the purpose of drawing on them. And these "dummies" drew upon the house, and these cross acceptances were afloat to a large amount. This will be sufficient to give an idea of this complicated net-work of cross transactions between the house and its satellites. In the meantime heavy losses were sustained in their trade transactions, which were, in fact, extracted out of the bankers by the fraudulent concoction of bills among the losers. The high standing of the house enabled them to entangle no less than twenty-nine banks and discount houses in their meshes. At the time of the stoppage the London house had liabilities of £820,000, of which £620,000 consisted of these fraudulent bills. The Liverpool house had liabilities of £158,750, out of which £130,000 were fraudulent. Such is one example of the mischief worked by this nefarious system

A still more terrible example is the case of the Western Bank of Scotland, which is fully detailed in a subsequent chapter, which was in great part caused by the fraudulent proceedings of four houses. The cases there detailed show to what a gigantic length these proceedings were carried. The Macdonalds had bills discounted to the amount of £408,716, drawn upon one hundred and twenty-four acceptors, of whom at least seventy were men of straw, who made it a regular trade to accept bills for a small commission. In fact, they kept an agent in London for the express purpose of procuring accommodation acceptances

From these accommodation bills to forged bills there is but one step. It is but a thin line of division between drawing upon a man who is notoriously utterly unable to pay, and drawing upon a person who does not exist at all, or forging an acceptance. In practical morality, and in its practical effects, there is none.