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.

In Accommodation Paper, the person for whose accommodation, the drawing, indorsing, or accepting, is done is bound to provide the funds to meet the bill, or to indemnify the person who gives his name. In the most usual form of Accommodation Paper, that of an acceptance, the acceptor is a mere surety, the drawer is the real principal debtor.

Now suppose as before, that A gets ten of his friends to accommodate him with their names, and discounts these bills at his banker's, it is A's duty to provide funds to meet every one of these bills at maturity. There is in fact only one real principal debtor and ten sureties. Now these ten accommodation acceptors are probably ignorant of each other's proceedings. They only give their names on the express understanding that they are not to be called upon to meet the bill: and accordingly they make no provision to do so. If any one of them is called upon to meet his bill, he immediately has a legal remedy against the drawer. In the case of Real Bills then, the Bank would have ten persons, who would each take care to be in a position to meet his own engagement: in the case of Accommodation Paper there is only one person to meet the engagements of ten. Furthermore, if one of ten real acceptors fails in his engagement, the bank can safely press the drawer: but if the drawer of the accommodation bill fails to meet one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer they dare not for their own safety press the acceptor, because he will, of course, have immediate recourse against his debtor, and the whole fabric will probably tumble down like a house of cards. Hence the chances of disaster are much greater when there is only one person to meet so many engagements, than when there are so many each bound to meet his own.

We see, then, that the real danger to a bank in being led into discounting Accommodation Paper is, that the position of principal and surety is reversed. They are deceived as to who the real debtor is, and who the real surety is, being precisely the reverse to what they appear to be, which makes a great difference in the security to the holder of the bills. To advance money by way of Cash Credit, or by loan with security, is quite a different affair; because the bank then knows exactly what it is doing, and as soon as anything occurs amiss, it knows the remedy to be adopted. Moreover it never permits the advance to exceed a certain definite limit; but it never can tell to what length it may be inveigled into discounting Accommodation Paper until some commercial reverse happens, when it may discover that its customer has been carrying on some great speculative operation, with capital borrowed from it alone.

Such appears to us to be the true explanation of the real danger of accommodation paper, which we gave in the first edition of the Theory and Practice of Banking, and we may say that in his long and elaborate judgment in the case of the great leather frauds, Laurence, Mortimer, and Schrader, Mr. Commissioner Holroyd quoted this explanation, thereby giving his high authority to its correctness.

In order to explain how such things are possible, it will be as well to notice a delusion which is very prevalent among uninformed writers, namely that Bills of Exchange are paid in money. It is true that Bills of Exchange must always be expressed to be payable in money, but as the reader may see in the preceding chapter, very few bills are really ever paid in money. When a customer has a banking account, the banker discounts his bills by writing down the amount to his Credit, and this Credit is called a Deposit. The customer always pays his bills by drawing upon this Credit, and when it gets low the usual practice is for him to discount a fresh batch of bills. Thus in ordinary times, the previous Debts are always paid by creating new Debts. No doubt if the banker refuses to discount, the customer must meet his bill in money, but then no trader ever expects to do so. If his character be good, he counts upon discounts with his banker almost as a matter of right: and therefore to call upon him to meet his bills in money may oblige him to sell goods, etc, at a great sacrifice, or may cause his ruin.

However it is always supposed that the bills discounted are good ones, that is, they could be paid in money if required. Thus though in common practice very few bills are really paid in money, it is manifest that the whole stability of the Bank depends upon the last bills discounted being good ones.

Now let us suppose that for some time a customer brings good bills to the bank, and acquires a good character, and thus throws the banker off his guard: meeting some temporary-embarrassment, perhaps, he is in difficulty to meet his bills. In order to get over this difficulty, perhaps he goes to some man of straw, and perhaps for a trifling consideration, gets him to accept a bill without having any property to meet it. He then takes this fraudulent bill to his banker. Thrown off his guard, perhaps, by his previous regularity, the unsuspicious banker buys this bill, and gives him a Deposit for it. This Deposit goes to pay the former bills. In the meantime the rotten bill is falling due, and must be met. The acceptor has manifestly no means to meet it, and the only way to do so, is to create some more of these rotten bills. Now the drawer may be speculating in trade and losing money every day: but his bills must be met, and there is no other way of doing so but by constantly creating fresh rotten bills to meet the former ones. By this means the customer may extract indefinite sums of money from his banker, and give him in return so many pieces of paper ! Now when times are prosperous and discounts are low, this system may go on for many years. If traders are in a considerable way of business, they may actually establish a number of sham houses doing a fictitious business for the very purpose of creating these accommodation bills. But at last, a commercial crisis comes. The money market becomes "tight." Bankers not only raise the Kate of Discount, but they refuse to discount as freely as formerly; they contract their "issues." All these rotten bills are in the bank and must be met, but if the banker refuses to discount they must be met with Money. But all the property which the conspirators ever had may have been lost twenty times over, and consequently, when the crisis comes, they have nothing to convert into money. Then comes the crash ! Directly the banker refuses to discount any more bills he finds that he has been paying all his customer's bills for many years with his own money !