ON ACCOMMODATION BILLS.

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draws a bill upon B, who accepts it for A's accommodation, for the express purpose of enabling him to go to the Bank and get money for it, that is a pure Accommodation Bill, and manifestly fraudulent. But if B draws an exactly similar bill at the same time on A, and A accepts it for the accommodation of B, then neither of the Bills are Accommodation Bills; but both are given for a good consideration.

This perhaps may seem somewhat strange to an unlearned reader: it is nevertheless firmly established law. In Rolfe v. Caslon (2 H. Blackstone p. 571) A and B being desirous to accommodate each other, each drew a bill upon the other, and accepted one in return, the two bills being precisely alike, in the date, sum of money, and times of payment-neither party having any effects of the other in his hands. The Court were clearly of opinion that the two bills were mutual engagements constituting on each part a Debt, the one being a consideration of the other. This doctrine was repeated and confirmed in Cowley v. Dunlop (7 T.R. 565) in which GROSE, J. said the instant the bills were exchanged each was indebted to the other in the sum which was the amount of their respective acceptances, for the counter acceptances were a good consideration to found a Debt upon either side respectively. In the case of a single accommodation acceptance there is no debt to the acceptor; the Debt accrues only by payment of the money. The acceptor, quà acceptor can never be a Creditor: his acceptance imports the admission of a Debt from him to another, and when he has paid as acceptor, if he paid for any other person in consequence of any request from that other, he becomes a creditor, not on the face of the bill, but by a contract collateral to the bill. When two persons exchange acceptances, each becomes the debtor of the other upon his accepted bills. But when a man accepts without consideration, he is never a creditor of the person for whom he accepts till he pays: from that payment arises the Debt, but when the acceptance was exchanged, the debt arises from these acceptances. This doctrine was repeated and confirmed in subsequent cases when it was adopted by the whole Court of King's Bench.

Stated in the above form, no doubt, the doctrine may appear somewhat startling to some: but when we consider the principle

and not the accidental circumstance that the persons who may do it are insolvent, the difficulty disappears. It is just what happens every day in banking. It is by no means unusual for the customer of a banker to ask him to discount his promissory note. If the banker does so, and gives him a Deposit, or Credit, or his own Notes, this is an exchange of securities. It is precisely the same in the other case. Supposing that the holders of these bills are enabled to purchase goods with them, they may be paid off at maturity: if they cannot do so then the re-exchange of the securities is the mutual payment of each Debt, precisely in the same manner as when two bankers exchange notes: or as when a merchant pays his own acceptance to a banker in the banker's notes. The two contracts are extinguished.

On the TRANSFORMATION of TEMPORARY CREDIT into PERMANENT CAPITAL.

19. We have now to give an example of the use of Credit which may surprise our readers, and of which we have not seen the slightest notice any where else.

Sixteen hundred years ago Diophantus said "Defect multiplied into defect gives existence." That is - x -=+. So also Roman Law said "Qui obligatione liberatur videtur cepisse quid; " as Von Savigny and all the Civilians say—" The Release of a Debt is in all cases the Gift of an equal amount of Money."

Thus in Commercial Algebra a Release from a Debt is in all cases absolutely equivalent to a Payment in Money, in strict accordance with the principle that is always equivalent to + x +.

When it is published to the world that the Bank of England has a paid up Capital of £14,000,000, and that the various Joint Stock Banks of London have paid up Capitals of these magnitudes

HOW JOINT-STOCK BANKS INCREASE THEIR CAPITAL. 175

and many others of lesser amount, most persons except those very few who are conversant with the mechanism of banking, believe that these Banks have those sums paid up in hard money.

This however is a complete delusion. These banks never had anything like these sums paid up in money. Of course it is utterly impossible for any one to tell how much was ever paid up in money: but we believe we are safe in saying that not the half of these sums was ever paid up in money. At least half these gigantic sums of so called paid up Capital are nothing more than the BANK's own CREDIT turned into CAPITAL.

In order to understand how this was done, we must explain how the Capital of the Bank of England was increased in 1697. The first subscription of £1,200,000 was paid up in money, which was all advanced to Government. In 1696 the Bank stopped payment, and its Notes fell to a discount of 20 per cent. In order to restore public Credit, Parliament in 1697 determined to increase the Capital of the Bank. But no part of the increased Capital was paid up in Money. In pursuance of this Act £800,000 were paid in Exchequer tallies, and £200,000 in the Bank's own depreciated notes which were taken at their full value in cash. Thus at the first augmentation of Capital, £200,000 of the CAPITAL consisted of its own Depreciated Notes or CREDIT. And the Bank was authorised to issue an amount of Notes equal to the amount of this increase of Capital.

Precisely the same thing was done by the Bank of Scotland. In 1727 it increased its Capital. The subscription was paid up partly in the Bank's own notes. An outcry was made against this, but the Directors justly answered “But the objectors do not at 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."

Thus the Directors clearly understood that the Release of a Debt is in all respects equivalent to the Payment of Money. The Bank had issued its Notes. They were obligations, and the Bank was debtor to the holders of them. When the subscription was opened the subscriber might either pay Money, or release the bank from its Debts, and the two operations were absolutely

equivalent; and hence we see that at every fresh increase of Capital, a certain quantity of the Bank's own Temporary Credit is turned into permanent Capital.

Thus the Parliament of England and the Directors of the Bank of Scotland from their own practical Commercial instinct, treated the Release of a Debt as equivalent to a Payment in Money: strictly in accordance with the doctrines of Roman Law, and the principles of Algebra.

Such are the methods by which the Capital of a Bank which issues Notes may be increased; but the Capital of a Bank which does not issue Notes may be increased by similar means. The essence of Banking, we have seen, is to make advances by creating Credits, or Deposits. Suppose that the Bank wishes to increase its Capital, and its customers wish to subscribe. They may either pay in Money, or give the Bank a cheque on their account. This is exactly the same thing as paying the Bank in its own Notes. It is the release of a Debt: and that Debt released then becomes increase of Capital. This is the way in which the Capital of all Joint Stock Banks is increased.

Similarly when large public loans are contracted for, a very large portion of them is always created by means of Credit. The customers of a Bank wish to subscribe to a loan: and they bring it a batch of bills to discount. They draw Cheques upon the Credits, or Deposits, created on the discount of these bills. These Cheques may be paid into the Credit of the great contractors at their bankers, and transferred an indefinite number of times, without ever being required to be discharged in money: they may in fact be discharged by being cancelled against other Credits.

THEORY OF THE EXCHANGES.

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CHAPTER VII.

THE THEORY OF THE EXCHANGES.

1. AN "Exchange" in commerce is where a person pays his Creditor by transferring to him a Debt due to himself from someone else.

Thus the ordinary case of a person paying a debt by means of a Bank Note or Cheque, is an exchange." It is what is called Novatio or Delegatio in Roman Law.

Two passengers are travelling in an omnibus. The fare is sixpence. One passenger pays the conductor a shilling. The conductor is then indebted to him in sixpence. The other passenger has a sixpence in his hand ready to pay his fare. The conductor, by a nod, tells him to give the sixpence to the first passenger. By this means the conductor's debt is paid without the trouble of the second passenger handing his sixpence to the conductor, and the conductor then handing it to the first passenger as payment of the Debt due to him. The whole transaction is an "Exchange."

Three parties and two Debts, are thus necessary to an exchange. We shall show presently that it is very common to have four parties. The "Exchanges" is that branch of Banking which treats of the remission and settlement of Debts between different places by Paper Documents, and the exchange of the money of one country for that of another. They are merely an exemplification of the Doctrines of Coinage and Credit which have already been explained.

2. When the coins of one country are carried to another their value is estimated solely by their weight and fineness as bullion. Though the natives of the country it belonged to, from long habit and association of ideas, see in it a certain denomination,

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