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The Organization of Credit

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THE ORGANIZATION OF CREDIT Every economic relation between two mem bers of society implies credit, or confidence that the service or commodity given by one to the other will be repaid immediately, or at some fut ure time, as may be agreed. Credit has already been enumerated as one of the most prominent features of the social environment of man. It has been seen that barter, purchase on condition of deferred payment, the use of representative money, and the interchange of products between distant places, are all in different degrees de pendent upon some kind and degree of credit. We are now to examine from a different stand point the place of credit in the economic organ ization of society.

Banks exist for the special purpose of organizing credit in such a way as to make it of use in commerce and _industry. The nature 239 of credit will best be explained by a reference to the various steps by which the institution of banking has developed. In their simplest form banks were merely associations of mer chants whose money was deposited permanently in a common treasury. In the earliest histori cal example, the Bank of Venice, the deposit was the state treasury, and the money once de posited was never returned. But the principle will be made clearer if we suppose the money to have been placed in a vault under the care of a custodian chosen for the purpose by the mem bers of the banking association. Each member is credited with the amount of his purchase. Whenever he desires to make a purchase with any part of the money which he has deposited, he does not withdraw it, but simply directs that the ownership shall be transferred on the books of the bank to the person from whom he has made the purchase. If this second person is a member of the banking company, the money in the treasury is not disturbed, but the account of the one member shows a larger and of the other a smaller credit than before the transaction took place. Every transfer of goods among the mem hers of the association is thus represented by a transfer of a corresponding amount in the credit at the bank, which takes the place of a transfer of money.

The word " credit " has here a slightly differ ent meaning from that which we have assigned to it in preceding chapters. Heretofore we have used it as a synonyme for confidence or trust. In the present sense it indicates power over commodities secured in this instance by full payment of money in advance. It is only in this latter sense that we can speak of the organization of credit. The word would hardly have been used in this sense except for the practice of extending this power over com modities on trust to persons who had not actually advanced payment for them.

The bank, in the simple case described, ob tains money from each of its members giving in return credit, or the power of drawing upon it for the amount of the deposit. Be fore such an arrangement as this can be made the bank itself must have gained credit ; or, to put it in another way, the members of the proposed company must .have gained sufficient mutual confidence to justify their intrusting their money to the common treasury.

The advantages of this most primitive kind of banking are, first, that it reduces the wear of coin. Money will last longer properly stored in a safe vault than in actual circula tion. Secondly, it makes easier the adoption and maintenance of the best kind of money. If the currency consists of many kinds of coinage, some of full weight and others worn or debased, the bank will perform a useful service for its members by reducing the value of the different deposits to the common stand ard, obviating the necessity for future tests at each exchange. This useful function was for a long time denied to banking institutions in England by the crown, which kept this profitable business in its own hands. Thirdly, if the members of the banking association live in different cities, considerable expense and difficulty in transporting coin is saved.

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