16. We now come to a species of Credit, which will demand great attention, because it is the curse and plague spot of Commerce, and it has been the great cause of those frightful commercial crises, which seem to recur periodically; and yet though there can be no doubt that it is in many cases essentially fraudulent, yet it is of so subtle a nature as to defy all powers of Legislation to cope with it.

We have shewn by the exposition of the system of Cash Credits, that there is nothing essentially dangerous or fraudulent in a Credit being created for the purpose of promoting future operations. On the contrary, such Credits have been one of the most powerful weapons ever devised by the ingenuity of man to promote the prosperity of the country. A certain species of this Credit, however, having been grossly misused for fraudulent purposes, and having produced great calamities, we must now examine wherein the danger and the fraud of this particular form of Credit lie.

When a Bill of Exchange is given in exchange for goods actually purchased at the time, it is called a Real Bill, and it is supposed by many writers, and even by many commercial men, that there is something essentially safe in it; because as the goods have been received for it, it is supposed that they are always there to provide for the payment of it; and that only so much Credit is created as there are goods to redeem it.

But such ideas are highly erroneous. A Bill of Exchange, it is true, only arises out of a transfer of goods: but then a fresh bill is created at each transfer. In the ordinary course of business, there will always be in general, at least twice the amount of bills to what there are goods. But if twenty transfers took place, twenty bills would be created. If goods to the amount of £100 were transferred twenty times, supposing even that the price of the goods did not change, which it most assuredly would, there would be Credit created to the amount of £2,000. And it would only be the last holder of the goods who would have them, and be enabled to devote the proceeds to the payment of the last bill only. The remaining nineteen bills must evidently depend upon other sources for payment.

The security, therefore, which is supposed to reside in Real Bills, on account of their being founded on the transfer of goods, is shewn to be to a great extent imaginary. Suppose however that A sees that a profitable operation may be done. The Bank will not, as traders do, make him an advance on his own name alone. It must have at least two names. A therefore goes to B, and gets him to join him as security to the bank, on engaging to find the funds to meet the bill when due. A then draws a bill on B, who accepts it to accommodate A, as it is called, and such a Bill is called an Accommodation Bill.

The Bill thus created without any consideration, as it is termed in legal language, or in common language without any transfer of goods, may be taken to a banker to be discounted like any other bill: an operation may be performed, and if successful the bill may be paid with the proceeds.

Stated therefore in this way, there is nothing more objectionable in such an Accommodation Bill than in any ordinary Real Bill. The security is just the same in one case as in the other. In the one case goods have been purchased, which will pay the bill: in the other case goods are to be purchased, whose proceeds are to pay the Bill. In fact we may say that all Commercial Credit is of this nature, because a Credit is created to purchase the goods whose proceeds are to pay it. There is, therefore, clearly nothing in the nature of this paper worse than in the other, and when carefully used, nothing more dangerous. Cash Credits, which have been one of the safest and most profitable parts of Scotch banking, and have done so much for the country, are all of this nature. They were created without any anterior operation, for the express purpose of stimulating future operations out of which the Credit was to be redeemed. There is, therefore, not anything more criminal, atrocious, and vicious in the one system rather than in the other. Or if there be, the criminality and atrocity must lie in the difference between have been and is to be.

17 Nevertheless as it is indubitably certain that most of those terrible commercial crises which have so frequently convulsed the nation have sprung out of this species of paper, it does merit a very considerable portion of the obloquy and vituperation heaped upon it. It is therefore now our duty to investigate the method in which it is applied, and to point out wherein its true danger lies.

The security supposed to reside in Real Bills, as such, is as we have seen exaggerated. But there is at least this in them, that as they only arise out of the real transfers of property, their number must be limited by the nature of things. However bad and worthless they may be individually, they cannot be multiplied beyond a certain limit. There is, therefore, a limit to the calamities they cause. But it will be seen that with Accommodation Bills, the limits of disaster are immensely and indefinitely extended, frequently involving in utter ruin all who are brought within their vortex.

We shall now endeavour to explain to our readers wherein the difference between Real and Accommodation Paper consists, and wherein the true danger lies.

Let us suppose that a manufacturer, or wholesale dealer, has sold goods to ten customers, and received ten bond fide trade bills for them. He then discounts these ten bills with his banker. The ten acceptors to 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, however, has not only their names on the bills, but also that of its own customer as security. It, moreover, generally keeps a certain balance of its customer's in its own hands, proportional to the amount of the limit of discount allowed. Now even under the best circumstances, an acceptor may fail to meet his bill. The Bank then immediately debits its customer's account with the amount of the bill, and gives it to him back. If there should not be enough the customer is called upon to pay up 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 to the bill, without in any way affecting the position of the remaining nine acceptors, who, of course, are still bound to meet their own bills. Even supposing however it is only the acceptor who fails to meet his bill, the Bank would not probably take a second bill upon him, nor would a dealer sell his goods again to him, after giving him the annoyance of having to take up his bill.