wholly contingent, and to the other definite, in so far as the mortgage is adequate. But credit, through the entrusting of one's funds to a third party, is an essential element in both. Mercantile Credit is the credit used by producers, wholesalers, commission merchants, retailers, etc., in connection with the manufacture and sale of commodities, that is, with the movement of goods from first producer to ultimate consumer. For instance, a manufacturer who buys raw materials to be made into finished commodities may agree to pay the producer of the raw materials only after he has sold his product. He has thus been "trusted" by the producer; there has arisen a "time obligation," a future payment. Or the manufacturer may at once pay the producer with cash, procuring the cash by a loan from the bank, which he promises to repay after the goods are manufactured and sold. In this case he has used his credit with the bank instead of with the producer of the raw materials; but it is obvious that the nature of the operation is the same. A wholesaler or retailer may likewise purchase the goods he wishes to sell, on time, or on funds borrowed from a bank, as the case may be, agreeing to repay the loan after the goods are sold. Mercantile Credit is to be distinguished from Capital or Industrial Credit by the character of the business which employs it and the nature of the use to which the funds are put. A characteristic feature of Mercantile Credit is that it usually runs for a short time, whereas Industrial Credit is usually extended for long periods. Mercantile Credit is represented by promissory notes and bills of exchange rather than by bonds or stock certificates. Personal or Individual Credit obviously takes its name from the fact that it is connected with individuals rather than with public or private corporations. It is the means by which an individual may secure goods for consumption purposes without an immediate payment of cash. The laborer who settles his bills on the weekly pay day, the salaried man who pays by check at the end of the month, and the farmer who settles his account at the village store when he sells his crops are cases in point. Personal Credit is distinguished from other credit in part by the character of the security furnished by the borrower and in part by the use that is made of the things borrowed. The basis of the security is an indirect one, consisting primarily, not of actual property in hand, but of a recognized earning power from personal or professional services. The things borrowed are generally used for immediate consumption rather than for further production. Such credit is therefore often called "Consumption Credit." It is also sometimes spoken of as "Retail Credit," because it is used primarily in retail transactions. This, however, is confusing, because such a term might mean the credit of the "retailer" himself. Personal Credit is usually extended without requiring a deposit of collateral as security and even without a written promise to pay in the future. A promise is, however, implied, and the entry on the books of a retail store is the evidence of the credit transaction. "Book Credit" is a name commonly used in this connection; but this name describes not so much the character of the credit operation as the manner of "evidencing" the credit transaction. The credit on the books is an evidence that a personal credit has been granted. The fifth form of credit has been called Banking Credit. As is well known, banks furnish funds to borrowers of every description; it is to the banks that one in need of credit naturally turns. But by Banking Credit is not meant the credit extended to individuals, corporations, merchants, and governments. Such forms of credit fall within the classifications given above. The essence of Banking Credit may be discovered only in the answer to the question, Where do the banks procure the funds which they loan to the business world? These funds are procured in part from the banks' own capital, and in part from the funds that have been left with them by individual depositors; but in the main it is through the use of their own credit. A bank uses its own credit in much the same way as does an individual. A man who is responsible morally, who has a reputation for business honesty and ability, and who has security in the form of commodities that enter into trade, is able to borrow on his credit. He uses his good name and his property as means of securing funds for immediate use. A bank likewise, if it possesses the confidence of the community, is able to extend its business by means of its credit. The simplest use of its credit is found in the entrusting of funds by depositors with the bank-for safe-keeping or use, as the case may be. There is a more important way, however, in which our large commercial banks use their credit. A bank with $100,000 cash on hand is able by means of its credit to do a business equal to five or six times this amount. This is accomplished through borrowing on its credit. Just as a government borrows when it issues paper currency, so a bank borrows when it creates obligations, either in the form of bank notes or deposit accounts against which checks may be drawn. The ordinary commercial bank usually owes on demand several times the amount of its cash. A bank is safe in thus extending its obligations so long as the management is efficient and the resources other than cash are ample. There are some special problems involved in the use and control of Bank Credit, but in essence it does not differ from the other forms of credit that have been enumerated. Viewing credit apart from particular groups of persons or organizations, such as governments, corporations, wholesalers and retailers, banks, and private individuals, two distinct types of credit may be distinguished, namely, commercial and investment credit. This classification is of the foremost importance from the standpoint of economic analysis and a clear understanding of the principles underlying the various forms of banking operations. Investment credit is that which is used in the financing and development of business enterprises such as railroads, factories, workshops, stores, farms, and mines. The funds borrowed are invested in fixed or durable forms of capital goods, as distinguished from consumptive goods. In consequence, the borrower does not expect to be able to repay the loan within a few weeks or months; rather, he plans to pay the principal of the loan out of the accumulated earnings of the business in the course of several years. The lender, similarly, regards such a disposal of his funds as permanent; hence the term investment. Commercial credit, on the other hand, is used in financing the manufacture and marketing of goods, and it has to do only with consumptive goods. It is only another name for the mercantile credit described on a previous page, viewed from another angle that of the use to which the funds borrowed are put. Unlike the borrower of investment funds, the borrower here wishes to use his funds only temporarily. A concrete case will serve to illustrate the difference: A borrows, let us say, $10,000 and purchases a stock of goods with the money. Two months later he sells these goods for $11,000, or at a profit of 10 per cent. The goods purchased thus furnish the direct means of liquidating the loan. The borrower for investment purposes, on the other hand, invests the $10,000 in a factory. He does not contemplate selling the factory within a few weeks or months. On the contrary, he expects to use the factory for many years in the manufacture of commodities. It may take ten years or more before the accumulated profits will permit the repayment of the principal of the loan. The latter is a long-time process, requiring years for fruition; the former a short-time operation, carried to completion in a few weeks or months. It is by means of the former that industries are developed and continued; it is by the latter that the manufacture and marketing of goods are accomplished, that commodities are transferred through purchase and sale from the original producer to the hands of the ultimate consumer. 124. TYPES OF COMMERCIAL CREDIT INSTRUMENTS1 A promissory note is an unconditional written promise by X (the maker) agreeing to pay, either on demand or at a definite future date, Lindy days after date for value received the undersigned promise to pay to the order of THE NATIONAL CITY BANK OF CHICAGO Fur hundred and fore DOLLARS at its Banking House in Chicago Illinois, with interest AFTER MATURITY at the rate of seven per cent per annum until paid and with costs of collection and a reasonable attorney fee if not paid at maturity. Presentment and demand for payment, notice of non-payment, protest and notice of protest are each and all hereby waived by the makers, endorsers and guarantors jointly and severally. Any indebtedness owing from said bank or legal holder hereof to the undersigned or to any endorser or guarantor may be appropriated and applied by said bank or legal holder on this note at any time either before or after maturity of this note and without demand upon or notice to any one. John Doe Дос a sum of money to Y (the payee) or to Y's order or to bearer. It may or may not designate the place at which payment is to be made. Promissory notes may be issued by institutions and governments as well as by individuals. Bank notes, United States notes, certificates of deposit, etc., are forms of the promissory note. To indorse a note the payee writes his name across the back of the instrument. This act makes the payee, like the maker, responsible for the payment of the note. Notes may also be indorsed by third parties, thereby adding to the number of those responsible for the payment of the note. Notes which show only one person responsible for the payment are called single-name paper. Those which have two or more signers are called double-name or three-name paper. I Taken by permission from H. G. Moulton, Principles of Banking, pp. 32-35. (The University of Chicago Press, 1916.) AN ACCEPTED TRADE DRAFT A bill of exchange is an unconditional written order, signed by X (the person giving the order-the drawer), ordering Z (the drawee) to pay, either on demand or at a definite future date, a sum of money Value received and charge the same to unt of to Y (the payee) or to Y's order or to bearer. The drawee may indi cate his willingness to honor it by signing his name to the word "accepted" written across the face of the bill. |