CREDIT MANAGEMENT

Part I.-Basic Considerations

OF

CHAPTER I

RELATIONS OF CREDIT TO THE ECONOMIC ORDER

Credit Defined.—What is credit? The world of today is organized on a basis which, in the majority of cases, makes it undesirable for one person to render a return in kind or money at the time the first transfer of value is made. Credit in the business world refers to that which is accepted in lieu of goods or money. One person believes that another will pay in the future. The business success and the economic welfare of a community depend not alone upon the production of great quantities of cotton, live stock or grain, or even upon the skillful organization of productive factories or commercial enterprises, but also upon the intelligent creation of that more or less intangible relationship known as credit and upon the wise direction of those mutual and cooperative activities which make it possible to coordinate financial needs with financial re

sources.

From the point of view of the credit manager of an enterprise, the person who acts as the executive in charge of the opening and closing of credit relationships, or, as he calls them, credit accounts, credit is not necessarily opposite in character to the cash itself which comes over the counter. Much of so called cash is credit currency, representing the credit of nations expressed in currency. One might even follow this

analogy to a point where the credit department would be considered the mint of a house busily engaged in turning out credit specie in the shape of open book accounts and other forms of credit, back of which is the reserve of the credit seeker's assets.

Various definitions of credit as used in business have been given. Joseph French Johnson has said, "Credit is the power to obtain goods or services by giving a promise to pay money or goods on demand or at a specified date in the future."1 Alexander Wall gives a longer definition, "Credit is the power to secure the present transfer of the ownership of wealth expressed or measured in dollars or other monetary standard, by a promise of the buyer to pay an equivalent at a future time, based on the confidence of the seller in the ability and willingness of the buyer to meet such obligations promptly." 2 Stanley F. Brewster calls credit a "Process whereby the use of capital is transferred from one party to another, measured in amount by the recipient's power to borrow on the one hand, and the confidence reposed in his paying propensities on the other." 3 J. H. Tregoe, Secretary-Treasurer of the National Association of Credit Men and a business economist of note, has looked at credit from another point of view, preferring to see in it a power, and to consider this power as the substitute for cash in a credit transaction. Thus the buyer gives credit instead of cash and the seller agrees to accept this power called credit in lieu of a cash payment, expecting to return the power called credit when payment is made.

The virtue of a consideration of a number of definitions lies in the fact that we come to appreciate the various angles of the subject and the reader can now formulate one which covers the field involved in this study. Credit may be said to refer to that relationship which comes into existence when one

1 Johnson, Joseph F., Money and Currency, p. 9.

2 Wall, Alexander, Analytical Credits, p. 7.

Brewster, Stanley F., Legal Aspects of Credit, p. 4.

of the two exchanges in an exchange transaction is deferred, the basis of that relationship being such that there is confidence in the deferment.

The Field of Credit Economics.-Among all men where confidence prevails and within those geographical limits where the relations of men are such that one trusts the other to pay in the future, there will you find the credit relation existing.

Professor Richard T. Ely defines Economics as "the science which treats of those social phenomena that are due to the wealth-getting and wealth-using activities of man." This is another way of saying that it is a study of man in his efforts to create desirable goods which he can exchange for another kind of goods to satisfy his varied wants. The exchange process is the one which gives rise to credit transactions and so the study of credit economics includes a study of those economic principles which tend to strengthen business judgment in relation to all those economic processes arising out of the exchange relation.

Of the four main categories of the subject of economics: Production, Consumption, Exchange, and Distribution, the third or Exchange is the one principally involved, though all the others are closely related. Business is said to embrace the forces that create economic goods, transport them from place to place, distribute them, and increase them, just as in the story of the ten talents. The credit business involves any postponement on one side of the exchange, and all activities forming a part of that transaction.

Credit itself is to be distinguished from the forms which arise out of credit transactions. To know the legal implications of the notes, checks, and other records, does not necessarily mean that the principles underlying the operations involved, are also known. This point was emphasized by J. Laurence

• Ely, Richard T., Outlines of Economics, p. 4.

Laughlin, who said, "Economic and legal conceptions should be carefully kept apart. The actual transfer of goods is the essential economic part of the credit operation; the promissory notes, drafts, bills of exchange, book entries, and the like are merely the evidence of the credit transactions which have been used to facilitate, in a greater or lesser degree, repayment, and they differ from each other greatly in business convenience and legal force." 5

The Credit Executive.-In modern business enterprises all questions involving credit transactions are settled under the direction of the head of the credit department, known as the credit manager. The credit manager thus finds himself in the center of the economic stage with questions of production, consumption, exchange, and distribution before him. Though technically he is held responsible only for those situations arising in the field of exchange, yet when the success or failure of a business enterprise is analyzed, he finds that his decisions on credits have permeated all departments of the business and have involved all fields of economics. The factors of production did or did not operate on a one hundred per cent efficiency basis depending on whether or not the credit manager made the proper decision. As the various factors of production clamor for their share of the product, the public is happy or discontented depending upon whether or not there is confidence abroad in the justice of the decisions of the grantors of credit. Rent, interest, wages and profits are but the names of the various portions of the total product created by human activity. The creation of the general income is facilitated or hindered, as the case may be, by credit policy. The credit man who sells to the ultimate consumer on a credit basis, finds himself the center of an activity which presupposes the enjoyment of the goods before payment is made.

8 Laughlin, J. Laurence, Principles of Money, p. 75.

Origin and Development of Credit.-The definitions in the first paragraphs indicate in some measure the beginnings of credit. Early exchanges were carried on with barter as an intermediary. Cash transactions imply that two exchanges of wealth take place at one time. The credit transaction implies that one exchange has been deferred.

It is easy to picture the first instances of credit when one man shared with his neighbor the results of the day's hunt, with the understanding that repayment was to be made sometime in the future. A study of the development of law indicates the changes in credit transactions. The Pandects, published by Justinian in the early part of the sixth century, confirmed in the Basilica, the reformed code promulgated by the Basilian dynasty in the tenth century, indicate the growth of credit as a business force.

The Relation of Credit to Wealth.-If we accept economic value as meaning exchange value, and credit is given in exchange for goods, it seems at first that value has been created, but this credit on the basis of which an exchange has taken place is only representative of value. We all know that as the margin of economic value becomes less and less, a credit arising out of that economic value becomes more and more undesirable. In a way, credit is a measure of wealth. At the moment credit has been received no more wealth has been created though the facilities for the creation of such wealth may have been greatly increased. The idea that credit is wealth has been responsible for many mistakes of business judgment and credits have been pyramided one upon the other until the thin foundation of real value gave way and liquidation demands revealed the difference between real value and representative value.

This conception was well emphasized, though the statement must be qualified, by a leading economist, John Stuart Mill, who said that "Credit has a great, but not, as many people