When the Bank of England finds that a merchant has suspended payment, their rule is to examine all the bills drawn up on him, which have been discounted by different persons at the Bank, and to send notice to these persons that the Bank ex pect the bills will be taken up, and the money refunded. It is disreputable not to comply as early as possible with this intimation.
Accommodation Bills. By this term are understood bills drawn, not on occasion of a real transaction, but for the purpose of affording a temporary supply of money, or accommodation to the parties. Such bills obtain currency for several reasons. It is often difficult to distinguish a real from a fictitious bill : even when a bill is considered fictitious, it will still obtain currency, as the holder of it has the dou ble security of the drawer and acceptor. It is as valid as a real bill, the law consider ing only whether the holder has given va lue for it, and protecting him in the reco very of that value : the shortness of the term also (seldom exceeding two months, and never almost exceeding three) natu rally induces persons to think, that, al though the drawer and acceptor be of doubtful credit, they will not fail quite so soon ; and, in the worst event, the holder has the prospect of a double chance of recovery from the estates of both parties.
In the United States of America, the tanks avowedly sanction the practice of accommodation, and discount notes which they know to be fictitious. These notes are understood to be renewable, not so much at the pleasure of the bank, as of the borrowers of the money, and the consequence has been, that the banks have lost sight of the object of their institution, and, instead of confining their loans to the anticipation of funds, for short periods, hav'e resolved themselves into permanent loan offices. Now there can be no doubt but that a bank, like an individual, has a right to lend its said tal to whom, and for as long a period, as it pleases ; but on the other hand it is evident, that the profitable nature of the banking business consists in its lend ing to a greater amount than its capi tal. If it does not do so, its expenses will diminish its dividends below the legal interest. But how is a bank to lend more than its capital ? We answer, in two ways, ,flyst, by lending the money of depositors, and secondly, by lending its credit in the shape of bank notes.
This latter operation is performed by a bank's giving its promissory note, pay able on demand, without interest, in ex change for the promissory note of an individual, payable in a specified time, for which the interest is charged. If, then, a bank note is kept in circulation with out being presented for payment, until the note, in exchange for which it was issued, becomes due and paid, the bank has gained the interest, without any ad vance of capital. Now it must be plain, that the faculty of a bank to trade thus its credit, without the danger of stopping payment, depends upon the length of. time for which it makes loans. The shorter the period at which it dis counts bills and notes, the greater is the extent to which it can safely loan, in as much as the command of its re sources is more within its reach. If a bank, for instance, were to limit its loans to thirty days, it would have the com mand of all its capital and means with in that short space of time, and thus be enabled to defend itself against any run which would be likely to be made by the presentment of its notes for pay ment, or the drawing out of the money of the depositors. But, on the other hand, if a bank were to give its notes, payable on demand, in exchange for the notes of individuals, payable in six months, its excessive issues over and above the amount of its capital must be very limited, or it will be in danger of more immediate demands than it is able to meet, from its immediate resources. Now this has been precisely the situa tion of the banks in many parts of the United States. Although the notes dis counted by them have been usually drawn at 60 days, (which has been the term adopted in Great Britain and A merica, and elsewhere, as the longest at which banks should anticipate commer cial capital,) yet the implied understand ing that they were not to be paid, but renewed, when due, has virtually deprived the banks of the real command of their resources ; and this has been the chief cause, why all the banks in the United States, except those of New England, were obliged to suspend specie payments in August, 1814, or soon after.