same person, and are again re-united in the same person from whom they emanated, that the (+£100) and the (-100) cancel each other, and the Obligation is extinguished.

How Joint Stock Banks Increase their Capital by Acceptilation.

We shall now give an example of the doctrine that the Release of a Debt is in all cases equivalent to a Payment in money, which may surprise some of our readers, and of which we have not seen the slightest notice anywhere else.

When it is published to the world that the Bank of England has a paid-up Capital of £14,000,000, and that several of the Joint Stock Banks have paid-up Capitals of several millions, most persons take it for granted that the Banks have these sums paid-up in hard cash.

Nevertheless, this is a profound error. Of course, it is impossible for any outsider to have any precise knowledge as to how much of these amounts was ever paid-up in actual money. But it may probably be said with safety, that not so much as one-half of these various amounts was ever paid-up in real money, but by another method, which we have now to describe. And it will be seen that probably the greater portion of these millions of Capital was never anything more than the Bank's own Credit turned into Capital.

To explain this, we may observe that the first subscription to the Bank of England was £1,200,000, which was, of course, paid up in money. It was advanced to Government, and the Bank was allowed to issue an equal amount in Notes, which were, of course, an augmentation of the Currency.

In 1696 the Bank stopped payment, and its Notes fell to a discount of 20 per cent.

In 1697 Parliament undertook the restoration of public credit, and it was determined to increase its Capital by £1,000,000. But not one penny of this was paid up in actual money.

The Act directed that £800,000 of the subscription should be paid-up in Exchequer tallies or Exchequer bills, and the remaining £200,000 in the Bank's own depreciated Notes, which were received at their full value as Cash.

Thus, of its first increase of Capital, £200,000 consisted of its own depreciated Notes. The Bank was authorised to issue an additional amount of Notes equal to its increase of Capital. At subsequent increases of Capital, the subscribers might always pay

N

up any amount they pleased in the Bank's own Notes, which were held as equivalent to a payment in money, and an increase of Capital. Thus, the release of the Bank from payment of its Notes was held to be an increase of its Capital.

In 1727 the Bank of Scotland increased its Capital. The subscription was partly paid-up in the Bank's own Notes. An outcry was raised against this. But the Directors justly answered: "But the objectors do not all consider this point, for the payments are many of them made in specie; and Bank Notes are justly reckoned the same as specie when paid in on a call of stock, because when paid in it lessens the demand on the Bank."

Hence, the Directors clearly understood that the Release of a Debt is in all respects equivalent to a Payment in money.

The Bank had issued its Notes, and was, of course, Debtor to the holders of them. These Debts were Negative Quantities, or Liabilities to pay. The subscribers might either pay in specie, that was+x+, or Release the Bank from its Debt to them, that was and the effect of either transaction was exactly the same. At every increase of Capital the same operations would be repeated; payments in Money and in the Bank's own Notes would always be treated as equivalent. And hence at every increase of Capital, a certain amount of the Bank's own Temporary Credit would be turned into Permanent Capital.

Thus we see that the Parliament of England, and the Directors of the Bank of Scotland, who were probably equally innocent of Roman Law and Algebra, simply from their own mercantile instinct treated the Release of a Debt as in all respects equivalent to a Payment in Money, or they recognised that in Commerce

x +.

X = +

Banks, therefore, which issue Notes may increase their Capital by receiving them in payment. But Banks which do not issue Notes may increase their Capital exactly in the same way. A customer of the Bank who has a balance at his Credit, is in exactly the same position as a noteholder. If he wishes to subscribe to an increase of Capital, he simply gives the Bank a cheque on his account. That is equally a Release to the Bank from a Debt as a payment in the Bank's own Notes, and an increase of Capital.

If the customer has not sufficient funds on his account to pay for the stock he requires, he may bring the Bank bills to discount. The Bank discounts these bills by creating a Credit or Deposit in his favour, which is, of course, a Negative Quantity, or a Debt, exactly like a Bank-note. The customer then gives the Bank a cheque on

his account; that is, he Releases the Bank from the Debt which it has just created in his favour, and that Debt released, then becomes an increase of Capital.

This is the way in which the Capital of all Joint Stock Banks is increased. And it may go on to any extent without any payment in money. And, consequently, it is wholly impossible for anyone who has not had access to the books of the Bank to ascertain what proportion of its Capital consists of payment in Money, and what proportion consists of the Bank's own Temporary Credit turned into Permanent Capital.

ACCOMMODATION PAPER.

Bills of Exchange are usually considered to have arisen out of past transactions. The merchant having sold his goods to the trader for a Right of Action, Credit, or Debt, he may sell this Debt to his banker. If the banker discounts the bill, he has two names as securities: first, the acceptor of the bill, or the buyer of the goods, who is the Debtor primarily responsible, or the principal debtor, as he is called; and, secondly, his own customer, who indorses the bill to him, and so becomes security that if the principal debtor does not pay the bill, he will.

But banking Credits may be created to effect future transactions, as well as to buy Debts created by past transactions.

Suppose that a merchant wishes to effect a purchase, he may request his banker to discount his Promissory Note, so as to obtain a Credit to effect his purchase. But the banker may say to him that it is against his rules to discount any instrument containing only one name; but that if he can get any responsible friend to stand security for him by indorsing his Note, he will discount it for him. Suppose, then, that his friend joins with him, without having received any consideration in indorsing the Note, such an instrument would be an Accommodation Note.

And when any person puts his name on a bill, either as drawer, acceptor, or indorser, and so stands security for its payment, without having received any consideration for so doing, it is termed an Accommodation Bill.

The banker, now having two names on the instrument, discounts it, and the merchant, having now a Credit on his account, purchases goods, the proceeds from the sale of which are intended to meet the bill when it becomes due.

Now, it is evident that the security of this bill, which is an Accommodation Bill, is exactly the same as if it had been a real bill, or one founded on a preceding transaction.

What difference can it make whether a bill, which arose out of a past transaction, is sold for a Banking Credit, and the goods are sold to meet the bill, or a bill is sold for a Banking Credit, and goods are purchased with it to meet the bill? The practical effect is that B stands security to the Bank for the advance made to A, and what is there in the nature of such a transaction anything worse than for one man to stand security for another in any commercial transaction?

A great deal has been said and written about the difference between Real and Accommodation Bills; and while no terms of admiration are too strong for the first, no terms of vituperation are too strong for the latter. Thus Mr. Bell says, "The difference between a genuine commercial bill and an accommodation bill is something similar to the difference between a genuine coin and a counterfeit one"; as if the fact of negotiating an Accommodation Bill were in itself one of moral turpitude.

It is generally assumed that real bills possess some sort of security, because it is supposed that there is Property to represent them. Such an idea is not uncommon among scholastic Economists, but it is utterly fallacious. As we have pointed out (Bill of Exchange), Real and Accommodation Bills have exactly the same security; they are simply claims against the persons of the obligants, which they are liable to make good out of their whole estates. The bills are no title or claim to the goods which have been purchased with them. The objection, therefore, to Accommodation Bills on that ground is futile.

The essential distinction between Real and Accommodation Bills is that one represents past transactions and the other future transactions. In a Real Bill, goods have been purchased to meet the bill; in an Accommodation Bill, goods are to be purchased to meet the bill. But this is no ground of preference of one over the other. A transaction which has been done may be just as wild, foolish, and absurd as one which has to be done. The intention of engaging in any mercantile transaction is that the result should repay the outlay with a profit. There is no other test but this of its propriety in a mercantile sense.

The common objections against Accommodation Paper are, therefore, quite futile, and wide of the mark; and the proof of it is that what was, until quite recently, the largest, safest, and most profitable

part of Scotch banking is entirely of the nature of Accommodation Paper.

The system of Accommodation Paper is one of immense importance in modern commerce, and the abuses of one kind of it have contributed to produce the greatest calamities. We must, therefore, examine more closely this species of Accommodation Paper, which, having been abused by unscrupulous persons for fraudulent purposes, has produced the most frightful mercantile convulsions; and we must point out wherein the danger and the fraud of this particular species of Accommodation Paper consist.

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

We have now to explain wherein the difference between Real and Accommodation Paper consists, and wherein the danger of Accommodation Paper lies.

Suppose that a manufacturer or wholesale dealer has sold goods to ten customers, and received ten bonâ-fide trade bills for them; he then discounts these ten bills with his banker. The ten acceptors of these bills, having received value for them, are the principal debtors to the bank, and are bound to meet them under the penalty of commercial ruin. The bank has their names as acceptors, or real principal debtors, on the bills, and its own customer as security on each of them. The bank also keeps a certain balance of its customer's in its hands, proportionate to the discount allowed.

Even under the best of circumstances, an acceptor may fail to meet his bill. The banker then debits his customer's account with the bill, and gives it to him back. The drawer has an action against the acceptor, because it is a real debt due to him. If there should not be enough on his account, 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 remedy against the estates of both parties, without in any way affecting the position of the other nine 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 real danger of Accommodation Paper consists.