The advantage to the person who has the Cash Credit is that he only pays interest from day to day on the sum he actually has at his Debit, whereas in discounting a Bill of Exchange, he pays interest on the whole amount of his Credit, whether he uses it or not, and discount is a trifle more expensive than interest. The Bank would therefore naturally prefer to employ its resources by way of discount if it could, rather than Cash Credits. There is also a further disadvantage attending them, that they cannot be called up on a sudden emergency: and if there should be a run upon the bank the security cannot be negotiated like a Bill of Exchange. It is, therefore, only where a Bank has a superfluity of Credit which it cannot employ profitably, that it would resort to Cash Credits, and also when there is but a slight chance of a run upon it.

For these reasons Cash Credits have always been looked upon with very unfavourable eyes by London bankers, and for very good reasons. In the first place their Credit, until recently, was not so solid and well established as that of the principal Scotch Banks. These originated Cash Credits in consequence of their power of issuing £1 notes; and London bankers do not issue circulating Credit in the form of notes-they can always find employment for their cash-and they are more liable to runs.

All these marvellous results, which have raised Scotland from the lowest state of barbarism up to her present proud position in the space of 150 years, are the children of pure CREDIT. It is no exaggeration whatever, but a melancholy truth, that at the period of the Revolution of 1688 and the establishment of the Bank of Scotland, that country, partly owing to such a series of disasters as cannot be paralleled in the history of any other independent nation, and partly owing to its position in the very outskirts of the civilised world, and far removed from the humanising influence of Commerce, divided in fact into two nations, aliens in blood and language, was the most utterly barbarous, savage, and lawless kingdom in Europe. And it is equally undeniable that the two great causes of her rapid rise in civilisation and wealth have been her systems of national education and banking. Her system of banking has been of infinitely greater service to her than mines of gold and silver.

Mines of the precious metals would probably have demoralised her people. But her banking system has tended immensely to call forth every manly virtue. In the character of her own people, in their steadiness, their integrity, their honour, Scotland has found wealth infinitely more beneficial to her than the mines of Mexico and Peru.

Now we observe that these Cash Credits which have produced such marvellous results are purely of the nature of Accommodation Paper in England. They are not based upon any previous operations, nor upon the transfer of commodities already in existence. They are created for the express purpose of creating or forming future products, which would either have had no existence at all but for them, or, at all events, it would have been deferred for a very long period, until solid money could have been obtained to produce them. Thus we have an enormous mass of exchangeable property, created by the mere will of the bank and its customers, which produces all the effects of solid gold and silver, and when it has done its work it vanishes again into nothing, at the will of the same persons who called it into existence.

Hence we see that the mere will of man has created vast masses of wealth out of Nothing, and then DECREATED them into Nothing, which having served their purpose after a time

were

"Melted into air, into thin air."

But their solid results have by no means faded like the baseless fabric of a vision, leaving not a rack behind. On the contrary their solid results have been her far famed agriculture; the manufactures of Glasgow and Paisley; the unrivalled steam ships of the Clyde; great public works of all sorts, canals, railroads, roads, bridges; and poor young men converted into princely merchants.

On ACCOMMODATION BILLS.

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 fraudu

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lent, 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

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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.

fail to

Let us 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 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 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.

In the case of Accommodation Paper 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 danger consists.