This section is from the "Practical Banking" book, by Albert S. Bolles.
The transactions in cotton, for example, exceed three hundred millions a year, a large portion of which is consigned to houses in the North, who make advances on the security of these instruments. Formerly the method of doing business was different. Then the banks in New York and other places would not advance on bills of lading and warehouse receipts, and if the broker or merchant did so he had the money from which the advance was made. In those days cotton was sold on sixty days' time. As soon as it was purchased in the North the planter drew on the receiver, and after the bill was accepted the local bank cashed the paper. But now the Southern banks have not enough money to do this business, and cannot take the paper when offered, and consequently the planter consigns the cotton and draws for three-quarters or more, of its value. By the present method, it may be added, the receivers must have more capital than formerly, as then they had two months in which to sell and get money before their acceptances became due.
Several years ago a quantity of wheat was sent from Chicago on a bill of lading to order. The bank in that city advanced on it, and the grain was forwarded, under the direction of the bank, to a certain storehouse, with instructions to keep it until the drafts that represented the advance were paid. As these had several months to run, the storekeeper, who was a speculator, thought it would be a fine thing to use the grain, intending to put other grain, similar in quality and quantity, in its place before the drafts matured. Accordingly, he forwarded it to a house in New York for sale. The consignee was a careful, cautious man. He examined the bill of lading, found that it was genuine, examined the wheat also, and found that it answered the description required, and made a large advance at the request of the consignor on the same. The grain was sold, and the balance, after deducting the charges, etc., was paid over to the storekeeper.
It is needless to add that his speculation turned out disastrously, and consequently he could not replace the wheat. Then the bank in Chicago found out that their wheat was not where they supposed it to be. They traced the wheat into the hands of the consignee of New York, and though he had obtained it in a perfectly honest way, yet, inasmuch as the storekeeper had no title to it, he could convey no title to the consignee, and consequently the latter was held liable. This doctrine has made the business of advancing money on the security of bills of lading more perilous than is agreeable to bankers and commission merchants, and the question arises whether it is not possible to grant greater protection to them than they now receive. Ought not common carriers to be held responsible for the acts of their agents in issuing bills of lading? A bill embodying this obligation was introduced into Congress at the last session. It substantially declares that bills of lading, issued by an agent authorized to issue such instruments, should be conclusive evidence against the carrier in the hands of a bona-fide holder for value, that the freight was actually received as in the bill of lading stated, and that the agent issuing the same had full authority to do so. To prevent this rule from becoming too severe in its practical application as against the carriers, the proposed law contained a further provision that the carrier should not be responsible under the provisions of the same on any bill of lading on which he stamped the words "not negotiable," nor for any statement of fact in such a bill of lading caused wholly by the fraud of the shipper of the merchandise therein named, the holder of the bill, or the person under whom he claimed.
It was hoped that this measure would meet the necessities of the case, for while it is true that much may be said upon the propriety of making principals responsible for the acts of their agents, it is also true that that doctrine may be carried to such an extent as to work positive injustice. To make carriers responsible to an unlimited amount upon bills of lading issued at remote and unimportant stations by agents, of whose actions, owing to the circumstances, carriers have but little actual knowledge or control, is perhaps to increase the risks of the transportation business beyond its legitimate limits.
The practical effect of the bill would be, if enacted, that railroad companies would issue to their agents generally non-negotiable bills of lading, which could not be made negotiable by any erasure or alteration; they would provide their trusted agents at the largest receiving depots with negotiable bills of lading, which would be issued as required.
There is another kind of bill which may be described. A firm in New York sends an agent to Chicago to buy grain. Mr. Snooks, the agent, buys a considerable quantity, and in order to make payment draws on his principal or consignor for the full amount of his engagement. He takes this bill to a bank and asks them to advance the money, as in the case just mentioned. The bank, if having funds, is usually willing to grant the advance requested.
The bank forwards the draft to its corresponding bank in New-York, which presents it to the drawee in due time. He accepts it, and pays according to its tenor. In this case, as the wheat is purchased for the consignee, of course he is liable for the amount, and the bill is drawn for the full sum that is due for it.