This section is from the "Practical Banking" book, by Albert S. Bolles.
Independently of the wealth of the endorser, the banks derive from him a security founded on the natural desire of every borrower to protect his friends, should insolvency occur to the borrower during the pendency of the bank loan. An endorser, will, also, usually foresee earlier than the bank when mischances threaten the borrower, and when appeals for protection should be made. To derive these benefits from endorsers, they should be disconnected in business from the borrower, so as not to be involved in his calamities; hence, such disconnection is always one of the circumstances from which a banker judges of the sufficiency of any proffered endorser. Relationship of either consanguinity or affinity, between a debtor and his sureties, sharpens usually the desire of the debtor to protect his endorser; while again such relationship facilitates the concealment of a common pecuniary interest in enterprises, and facilitates collusions against the bank in times of disaster, that may more than counterbalance the benefits expected by the bank from the relationship.
The more lax the morality is of a borrower, the less will he probably feel the obligation to protect his endorsers; and the more lax the morality is of an endorser, the more will he struggle against the surrender of his property to pay an unprotected endorsement.
As a general result, however, debts are rarely collectable from the property of an endorser, unless his property very greatly over-balances the amount of his endorsement. Instances are continually occurring where an endorser who has become liable for a bad debt which his property could pay, and leave him a surplus, will ruin himself in successfully preventing the application of his property to the debt in question. Hence, when a debt is contracted wholly on the property of the endorser, the debt will not be safe unless it is small in comparison with the wealth of the endorser.
Men who are prone to extravagance in their domestic or personal expenditures rarely possess the amount of property they are reputed to possess. Men expend to be thought rich more frequently than they expend by reason of being rich. The rich are usually more inclined to parsimony than expenditure. Any way, persons who practice parsimony are in the way of becoming rich, whatever may be their present poverty; while persons who are profuse in expenditures are in the way of becoming poor, though they may possess a present opulence.
A man who transacts a regular business in a regular way is not liable to sudden fluctuations in his pecuniary solvency; but when a man's business is novel, and its results are untried, or when its results are frequently disastrous, the banker who grants him loans assumes some of the hazards and uncertainties of the business.
When money is to be invested in the purchase of merchandise, cattle, flour, or other property in the regular course of the borrower's business, the investment yields to the borrower a means of repayment; nothing is hazarded but ordinary integrity, and ordinary exemption from disasters; but when the borrowed money is to pay some pre-existing debt, none of the foregoing securities apply, and, possibly, you are merely taking a thorn out of another person's side, to place it in your own.
Notes which a man receives, on the sale of property in his ordinary business, are termed business notes. The owner, having received them as money, had satisfied himself of their safety; hence, when they are offered to a banker by a prudent man of business, they possess an inherent evidence of value. They were given also for property that will, in the ordinary course of business, furnish the means by which the notes may be paid; and thus they possess an additional ingredient of safety. Kindred to such notes are drafts which a man draws on a consignee to whom property has been forwarded for sale. If the consignee be a prudent man (the consignor must deem him prudent or he would not trust to him the property) he will not accept unless the property forwarded is equivalent in value to the amount of the acceptance. The property, therefore, will pay the acceptance, and while the property remains unsold, it constitutes an equitable pledge for ultimate payment. A country banker, however, will usually be benefited, in a long course of business, by never loaning on city names without a reliable country endorser or maker, or both; for nothing is usually more unreliable than the reputed solvency of the merchants of large cities.
A factor will sometimes accept in confidence that the drawer will supply him with funds in time to pay the acceptance. This will not constitute a worse security than an ordinary accommodation endorsement; but the transaction lacks the reliability and security that are consequent to the acceptor's possession of consignments in advance of his acceptance, and so far as the nature of the acceptance is concealed, the ostensible character of the paper will give it a fictitious security.
Notes and acceptances are often assimilated to the foregoing character to facilitate the procurement of loans. Two merchants will exchange notes, and offer each other's notes at different banks, as business paper. Such notes are peculiarly hazardous by reason that the insolvency of either of the parties will usually produce the insolvency of the other. Acceptances are exchanged in the same way, and possess the same element of danger.