Accommodation paper is most dangerous when, as is generally the case, it is carefully concealed. A proof of a banker's sagacity will be best seen in his detection of the accommodation taint wherever it may exist, however dexterously covered up, and in keeping clear of it and of the other dangerous complications and contingencies inseparable from it.
Accommodation paper disguised as trade bills should be looked for and regarded with the same discrimination applied in separating spurious coin from genuine. Such paper should be detected if a manager is observant of the working of his accounts.
The most ordinary kinds of accommodation paper, according to an old rule book, are the following:
(a) Paper floated by the borrower with the names of his friends for the general purposes of his business, say, a drygoods, grocery or hardware business, or a manufacturing business of any kind.
(b) Paper floated by the parties to it for the purpose of going into some speculation outside of their legitimate business. They are induced to buy or build a ship, a saw mill or factory of some kind, a farm, a mine, timber lands, or a score of other enterprises.
These two classes of accommodation must be avoided at all hazards.
(c) Renewals of notes that were legitimate enough in the first instance. If the goods they originally represented are still unsold by the promissor, the paper may still, in a sense, be held to be legitimate, altho, even in that case, the renewal is a most unhealthy sign, being proof of over-production and overtrading. But in the case of most renewals they have lost all connection with the goods they originally represented, the proceeds of which should have gone to wipe the notes out of existence at maturity. The proceeds of goods have been used for something else, and the notes remain, representing nothing. This is accommodation of the worst kind.
There is no more significant indication to a banker who has eyes open than renewed paper. In the most favorable light you can take it shows miscalculation. But in most cases it means something much worse - the beginning of the end.
If accommodation paper is taken at all you should be absolutely certain of the genuineness of the signatures. The danger from forgery is not the least of the dangers attending the handling of this objectionable kind of paper. The way is left open for that kind of fraud when indorsed notes are discounted for the promissors, but this is prohibited in most banks.
Never overlook the consideration that if you take an accommodation endorsement you see perhaps less than one-half of the paper afloat bearing the same names. The obligant calls for a quid pro quo, the accommodation becomes reciprocal and, likely enough, develops into a network of cross indorsements.