Let us now consider the kinds of notes or obligations that are discounted or purchased by a bank, and their duration and other points relating to them. a. Accommodation Paper. The first kind of note that may be mentioned is given for accommodation. By this is meant a note made without reference to any particular business transaction; a pure borrowing.

b. Commercial Paper. The second kind is commercial or mercantile notes. These are given by the buyers of merchandise in payment. They are regarded as of greater worth, because in one sense they represent actual property, while accommodation notes are purely credit instruments. Commercial paper, therefore, floats better, is discounted or bought at rates more favorable to the lender. In the rating of the two kinds of paper it always bears a lower rate of interest. The reason is, the buyer has acquired actual property therefor, has exchanged his credit for goods, and through the sale of these in due time expects to receive enough money to pay his notes.

The notes taken by a bank rarely run for longer than four months. The shorter the period the more perfectly does a bank command its money. When it has once parted therewith, nothing can be done toward a recovery until the loan has expired, except in cases of fraud. Thus, suppose a bank should make a loan and a few days afterward should learn that the borrower was in a bad way, the president or other official could not go to him and demand as a right the money. If he had obtained it through fraud or fraudulent pretenses, then it could be demanded, otherwise a bank must wait, as patiently as it can, until the loan matures. It is true that the president might re-quest the borrower to pay, or to give additional security, but neither money nor security can be rightfully demanded. If the borrower gives either money or security. he does so voluntarily and not in compliance with any legal rights on the part of the bank. Therefore, from Iong experience banks have learned that it is safer to lend for shorter periods.

When a borrower proves to be weak and in danger of failing a bank can do several things: (1) It can ask him to pay, which he is not likely to do, and perhaps could not do even if he desired. (2) It can ask him to give additional security in the way of indorsements or collateral securities. (3) If he has obtained the loan by false pretenses, it can proceed against him at once to collect the amount, and to this end may sue him and attach any property he may have.

c. Bills of Exchange. A third form of paper is a bill of exchange, which may be defined as an order by one person on another to pay a third a sum of money.1 These may be drawn in two ways : payable at sight or on demand, and payable on time, thirty, sixty days, or other period.

It is a very common thing to attach to them the bill of merchandise for the payment of which the proceeds are to be used. A western agent of a New York commission house buys ten thousand bushels of wheat of A in Chicago, and draws a bill of exchange or draft on his commission house for the amount of the purchase. The wheat is stored in an elevator, and the seller gives the buyer a warehouse receipt for the amount. The agent appends the receipt to his draft and goes to a bank and offers it for sale or discount; the purchase is made, and the money is paid to the seller. The bank then sends the draft forward for payment by the drawer, expecting of course to make something from the transaction in the way of interest on the loan. If it is a draft payable at sight, the profit to the bank will be small, as the money will be collected in a few days at most; but the draft may run for thirty or sixty days or even a longer period. In such a case the draft is forwarded and presented for acceptance. If it is accepted, at the end of the period for which it is to run, it is again accepted for payment and paid.

1 A more complete definition is the following, "An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed determinable future time, a sum certain in money to order or to bearer." New York Negotiable Instruments Act.

Some very important principles grow out of the practice of attaching receipts to drafts that should be clearly understood. By thus attaching a receipt to the instrument the ownership of the wheat passes to the bank. Though it has never seen the wheat, yet the certificate operates to transfer the title so effectively that the bank could, if it pleased, stop the transit of the grain from Chicago to New York. Suppose the bank should learn that the drawee had failed, or was about to fail. It would not suffer the wheat to be delivered to him, for, if it did, its lien thereon for its advances would be gone. The bank would, therefore, stop the wheat before it reached New York, or at least before its delivery to the drawee; and if the draft was not then paid, would sell the wheat and apply the proceeds in payment of his obligation. It thus becomes a most desirable form of loan, because the security is so adequate. In some places, like Chicago, a very large number of such drafts are drawn daily and sent forward for acceptance and payment. They are regarded as perhaps the most desir-able loans that a bank can make, for the risk is reduced to a minimum. There may be a loss accruing from the fail ure of the drawee if the grain or other security declines in value, and that is the most serious risk incurred in taking them.

There is, however, a risk attaching to the bill of lading accompanying them that should be mentioned. Though these are rendered negotiable by indorsement and delivery by virtue of statutes, they do not possess all the qualities of a negotiable promissory note or draft. For example, the rule, that .a bona fide purchaser of a lost or stolen bill or note indorsed in blank or payable to bearer is not bound to look beyond the instrument, has no application to a lost or stolen bill of lading. Thus, N. & Co. sold to a St. Louis bank their draft drawn on K of Philadelphia, to which was attached a bill of lading for cotton. The duplicate bill of lading was sent to K. The St. Louis bank forwarded the draft to a Philadelphia bank for collection, which presented it to K for acceptance. In accepting it K surreptitiously substituted the duplicate bill of lading, gave the original bill to a broker, who sold the cotton which was delivered by the transportation company on its arrival to the purchaser. The St. Louis bank then sued the purchaser for the cotton or its value, and recovered the amount.1

There are some rather difficult questions for banks to decide when holding these instruments, about giving up the security before receiving payment for the draft. We will give the principal rules that regulate these matters.

First. The indorsee or holder of a bill of lading, warehouse certificate, or other receipt given for merchandise, attached to a draft, takes it subject to the agreement, if there be one, between the consignor and consignee of the merchandise. If, therefore, the consignor had the right to withhold the bill of lading until the draft was paid, the bona fide holder has the same right.

Second. When there is no special agreement, a bill of lading accompanying a draft drawn on time, which is taken on the security of the merchandise described in the bill, is to be surrendered to the drawee on his acceptance of the draft. The theory is that the bill of lading is to be surrendered and also the merchandise, which he will sell, and with the proceeds pay the draft.

If in such a case the holder should refuse to deliver the bill of lading, and the drawee should refuse to accept the draft, and it should be protested, there would be no good reason for the protest, and the drawee would be discharged. The bank or holder of the draft would therefore become the absolute owner of the property described in the bill of lading, and the other parties would be released of all liability to the bank.

1 Shaw v. Bank, 101 U. S. 557.

Third. The drawee of a time draft attached to a bill of lading is not entitled to it, or to the merchandise therein described, unless he accepts the draft, that is, agrees to pay it, or actually does pay it.

Fourth. A bank discounting a draft on the faith of the transfer by indorsement of a bill of lading attached to the draft has the same lien on the merchandise described therein as it would have if the merchandise itself had been delivered to the bank instead of the bill of lading describing it.

Such arc the most important principles relating to the keeping and disposition of bills of lading and similar instruments taken by banks as security for loans. In the chapter relating to negotiable instruments other principles will also be found relating to the subject.

d. Overdrafts. Another form of loan is an overdraft. In the north the most common example of an overdraft is a check given by a depositor, usually by mistake, for more money than he happens to have in the bank. When this is done by a depositor, evidently through forgetfulness of the correct amount of his balance, the hank will generally pay the check, and notify him at once, and he is expected to call forthwith and make the amount good.

Sometimes a hank, as a mode of lending to its depositors, permits them to overdraw. Is this a wrong practice? Once it was thus regarded, and some states declared this to be a penal offense. But the act is no longer regarded in that way. Whether it is a proper thing for a bank to do depends on a depositor's condition. If he is a man of abundant means and able to pay his overdrafts, and the bank chooses to do this as a form of loan on which it is to receive interest, the loan is proper. If he is lacking in means, and there is danger of incurring loss by thus permitting him to overdraw, the act is highly reprehensible.

In the southern states of late years this has become a well-understood mode of lending money, and is just as safe as any other. A depositor forms an agreement with his bank whereby he is permitted to draw beyond the amount of his deposit until he has reached a specified sum. He leaves security for his overdraft, usually consisting of certificates of cotton or other merchandise, so that the bank is fully protected in its advances. The depositor checks out from time to time money as though he had an actual deposit until he has reached his limit. By and by he sells his cotton or other produce and reduces his indebtedness to the bank until it is all paid. Why does the depositor resort to this method of loan instead of giving one or more notes for the amount wanted? He saves some interest by borrowing in this manner, for he simply pays interest on each overdraft from the time of making it until the bank is reimbursed. This method of borrowing is therefore a closer one than the more ordinary method of discounts.

e. Call Loans. The next form of borrowing is on call or demand. By this is meant a loan that can be called or demanded as soon as it is made - the same day, the same hour, if the lender desires. Usually a bank gives the borrower notice of a day or two, perhaps a week or longer time. It always does this unless the pressure for money is great, or it fears his solvency. If this were feared, a bank would not hesitate to call a loan instantly to escape loss.

Such loans generally bear a lower rate of interest than loans on time; why, then, are they made? Because banks believe they have a more complete demand over their money. As depositors, except in a few instances, put their money into banks subject to call or check whenever they please, banks desire to have their deposits, if possible, within control should they be demanded. It is therefore regarded as an essential feature of good banking to keep at all times a large amount of deposits loaned in such a way that they can be speedily regained should depositors call for them.