12. We have already fully explained the nature and meaning of discounting bills of exchange: here, therefore, we have only to make some practical observations on the subject.

If an abundant supply of good bills were always to be had, they are, no doubt, the most eligible of banking investments, for their date is fixed, and the banker always knows when his money will come back to him. He charges the profit at the time of the advance, and he gains it whether the customer draws out the money or not: and in a large bank it must often happen that drawers, acceptors, and payees, are all customers of the same bank, so that when the drawer has his account credited with the proceeds of the bill, and gives a cheque on his account, in many cases it must happen that the cheque finds its way to some one who is a customer of the same bank, and, therefore, the bank has reaped a profit by creating a credit which is simply transferred from one account to another. And the same results take place much more frequently by means of the system of clearing explained presently, by which all the banks that join in it, are, in fact, but one great banking institution. If it should happen that a customer of one of the clearing banks gives a cheque to the customer of another; the chances are that some customer of that other bank gives a cheque to the customer of the first, and these claims are simply readjusted to the several accounts without any demand for coin. The more perfect the clearing system, the less coin will be required. Consequently the greater part of banking profits are now made simply by creating Credits, and these Credits are paid not in cash, but by exchanging them for other Credits.

When a banker discounts a bill for a customer he buys it, or purchases it, out and out from him and acquires all his customer's rights to it, that is of bringing an action against all the parties to it, and also of reselling it again if he pleases, or rediscounting it, and this is one of the great advantages of discounting bills, that if there is an unusual pressure for cash on the banker, he can resell the bill he has bought.

We have observed that discount is more profitable than interest, and the profit rapidly increases the higher discount is. A very slight consideration will shew this. Suppose a money lender advances money at 50 per cent, interest. He would advance his customer £100, and at the end of the year receive his £100 back, together with the £50. His profits therefore would be £50 per cent. But suppose he discounts a bill for £100 at 50 per cent. He would only actually advance £50 and at the end of the year he would receive £100; consequently he would make a profit of 100 per cent.

The following table shews the difference in profit in trading by way of Interest and Discount.

Table showing the profits per cent, and per annum at Interest and Discount.

The system of discounting bills is intended to be the sale of bond fide debts for work done, or for property actually transferred from one party to another, and there is nothing that requires more sleepless vigilance on the part of the banker than to take care that the debts he buys are genuine and not fictitious. When bills are offered for sale, he ought to know whose debt it is that he is buying, and he ought to be able to form some conjecture as to the course of dealing between the parties, which could give rise to the bill. Bills should not only be among traders, but only according to a particular course of trade. We will speak of real debts in the first place: and these may arise in a number of different ways. First between traders in the same business, and, secondly, between traders in different species of business, but yet for work done. If we take the case of manufactured or imported goods, there are usually three stages they pass through -

1. From the manufacturer or importer to the wholesale dealer.

2. From the wholesale dealer to the retail dealer.

3. From the retail dealer to the consumer.

Each transfer of Property may give rise to a bill: but of these the first two are by far the most eligible, and are most peculiarly suitable for a banker to buy: the third should only be purchased with great caution, and but rarely.

There are other cases of good trade bills, when one business requires the supply of different productions, such as a builder requires wood, lead, slates, bricks, and other materials.

Hence a bill of a wood merchant, or a lead merchant, on a builder, would be a very natural proceeding, and apparently a proper trade bill. So if a builder fits up premises for a shopkeeper or merchant, a bill for the work done is a legitimate trade bill. All these bills therefore follow the natural course of trade: and carry the appearance on them of being genuine.

But if a banker sees bills drawn against the natural stream of trade, it should instantly rouse his suspicions. Thus a bill drawn by a wholesale dealer upon a manufacturer, or by a retail dealer on a wholesale dealer, would be contrary to the natural course of trade, and should arouse suspicion. A bill drawn by a lead merchant on a builder would be proper on the face of it, if there were nothing to excite suspicion: but a bill of a builder on a lead merchant would be suspicious, unless it were satisfactorily explained. Bills of persons doing the same trade upon each other are suspicious on the face of them. Thus a bill of one manufacturer upon another in the same business, or between one wholesale dealer and another, are evidently suspicious, because there is no usual course of dealing between them. Besides such bills are chiefly generated in speculative times, when commodities change hands repeatedly on speculation that the prices will rise. Bankers should be particularly on their guard against buying bills drawn against articles which are at an extravagant price in times of speculation.