seem to suppose, a magical power. It cannot make something out of nothing. How often is an extension of credit talked of as an equivalent to a creation of capital, or, as if credit actually were capital. It seems strange that there should be any need to point out that, credit being only permission to use the capital of another person, the means of production cannot be increased by it, but only transferred; that is, the borrower's means of production are increased by the credit given him, that of the lender are correspondingly diminished, as the same capital cannot be used as such, both by the owner, and also the person to whom it is lent." "

6

It must be remembered, however, that while the means of production which pass from one person to the other in a credit transaction remain the same in the hands of the debtor as in the hands of the creditor, yet the possibility of greater productivity through the use by one rather than by the other furnishes the motive for the exchange. The fact that credit is not wealth has been emphasized by comparing credit to the positive and negative poles of a battery. For every debit there is a credit. Neither the positive pole nor the negative would be effective alone. It is the relationship between them which secures results. Credit is not wealth. It is the relationship existing between buyer and seller which proves to be desirable. The positive and negative poles are not valuable in themselves. It is the relationship between them which is sought and this relationship makes greater satisfaction of human wants possible.

Services of Credit in the Modern Economic System.There is no need to go into detail as to the percentage of credit business and cash business. It is sufficient to say that probably ✓ 85% of all retail and wholesale business is done on credit. The

Mill, John Stuart, Principles of Political Economy, p. 309.

Adapted from a comparison made by Roland Young, Credit Manager, Ventura Refining Company.

amount varies in various communities and under differing conditions, being affected by (1) the need for a medium of exchange, (2) the degree of certainty of being able to realize on the obligation of the debtor, (3) the objective ability to pay as revealed by the presence or lack of facilities for quick and accurate transmission of the facts. These involve both moral and legal confidence. Every step in civilization has demanded more in the nature of credit service and at the same time has made possible an increase in the number and scope of credit transactions.

The relationship of credit to capital is especially important. "It is as an instrument for the transfer of capital that credit is most useful to mankind. By capital, the economist means all those forms of wealth-all those goods, such as tools, machinery, raw materials, and food stuffs-which men use in the production of new wealth. These often belong to men who have neither ability nor desire to utilize them, and would go to waste or lie idle if our modern credit system had not been developed. This enables men of brains, energy, and skill, whom economists call entrepreneurs (i.e., men who undertake enterprises) to get possession of a country's capital and devote it to productive uses.” 8

Thus, on the one hand, we find the process of production being lengthened by the introduction of more highly capitalistic methods and the greater extension of territory over which commerce is carried. On the other hand, credit was found increasingly necessary, for it proved to be of advantage to the individual and to the nation, and with every step in civilization came an increased number of credit transactions. To the individual, loans for consumption purposes are often desirable and necessary. Credit for a college student makes an education possible. A monthly charge account keeps food and clothing available until the pay check comes in. Thirty days'

Johnson, Joseph F., Money and Currency, p. 36.

time for the retailer enables the use of sales receipts for payments on purchases and so the man of small capital finds it possible to go into business.

A man who is to inherit a million dollars at fifty years of age finds credit helpful in securing earlier enjoyment of his riches. Credit of this character benefits two classes of people. the borrowers, who might otherwise have no incomes now, and the lenders, who might otherwise expect to have no incomes, or a smaller income, in the future. Production requires the factors of production, land, labor, capital and management. Few men have all of these. A man with management ability may borrow a portion or even all of the others and thus he can make a success. The fact that he makes a success implies that he has created something of economic value in an efficient way. Society is the richer and the nation has prospered. Land, capital and human resources then find their way into the control of the more efficient users because credit enables the individual to overcome the handicap of a lack of capital.

Mention of the importance of credit as a part of the medium of exchange must not be omitted, though a complete discussion of that function is not to be included here. One has only to compare the total of bank clearings of the United States with the total amount of actual money in circulation to see how insignificant is the amount of money. In one week ending July 28, 1923, the average daily bank clearings were $1,077, 783,042 and the money in circulation on August 1, 1923, was $1,490,391,084. Bank clearings, of course, represent only one part of the total of credit transactions, yet the daily bank clearings were almost as great as the amount of money.

REFERENCES

Hagerty, James Edward. Mercantile Credit, pp. 3-18. New York, Henry Holt & Co., 1913.

Johnson, Joseph F. Money and Currency, Chap. III. Boston, Ginn & Co., 1921.

Laughlin, J. Laurence. Principles of Money, Chap. IV. New York, Chas. Scribner's Sons, 1903.

Mill, John Stuart. Principles of Political Economy, Chap. XI. New York, Longmans, Green & Co., 1921.

Prendergast, William A. Credit and Its Uses, pp. 3-17. New York, D. Appleton & Co., 1910.

Seager, Henry R. Principles of Economics, Chap. XX. New York, Henry Holt & Co., 1923.

CHAPTER II

TYPES OF CREDIT

The Credit Chain and Production Processes.-We have seen that credit enters into most of the many transactions taking place in the production and consumption of goods. From the point of original production to the point of ultimate consumption, a large group of people participate in the various transfers involved. Many of these participations are of a credit character. For instance, take the case of wheat from its production to its point of consumption as flour. The farmer buys machinery, and promises to pay when the wheat is harvested. He sells the wheat to a broker and receives a promise of payment when the wheat is milled. In some cases the broker may have advanced money to the farmer to grow his crops. The broker in turn delivers the wheat to the miller and receives a promise to pay. The miller delivers the flour to the wholesaler; the wholesaler delivers it to the retailer; the retailer sells it to the ultimate consumer, who, like as not, "charges" it. In each case the vendor received only a promise to pay, usually in the form of a promissory note. In the meantime the farmer needs his money-the credit chain is strained. At this point the banks and financing companies step in, and by lending money on the notes, they "carry" the financial burden until the money is received from the sale of the flour and passed back along the chain. This strain may occur at different points along the credit chain. The broker finds that he is short of cash at certain intervals and could do more business if for a time he had a greater amount of capital available. The bank loans him the money to carry him over the peak of his activity. The manufacturer finds