The word "draft" is commonly used to desig nate the order drawn by one bank upon another. It differs in no respect from a personal check, except that it is preferred for exchange between cities, because it is easier as a rule to learn the standing of a bank than of an individual ; but even this is a question of degree only, and there are many private persons whose financial stand ing is so well known that their personal check would be accepted as readily as the draft of any metropolitan bank.
The organization of international credit is earlier in time than the elaborate banking sys tem just described. The occasion for it has been already explained in the chapter on the "Distribution of Products." 1 In the complexity and vast extent of modern commerce it rests upon credit in an ever increasing extent. Bills of exchange are bought and sold as are other articles of international commerce, and their rates vary with the exportation and importation of goods. If the exchange of products between two countries is in equilibrium, exchange will be at par, i.e., it will be as easy to pay a debt in the foreign country as at home. If more goods are imported so that the balance of trade, as the saying is, becomes unfavorable, the rate of foreign exchange will rise until it reaches a point at which it is more profitable to ship gold abroad than to buy the foreign bills. Inversely, if more goods are exported so that there is a tend ency for gold to flow in from foreign countries, those who have payments to make abroad will find an advantageous rate of exchange, since there will be in the foreign country many persons 1 See Chapter X.
eager to accept the bills of exchange which to that extent relieve the demand for gold.
Another form of credit which does not imply the existence of banks, though it furnishes to them a large part of their business, is the bor rowing of capital on promissory notes for a stipu lated time, and at a stipulated rate of interest. By this means capital is transferred from owners who have no use for it, or who desire only a regular income from it of moderate amount, to others who believe themselves to be in position to use it advantageously. This ability to bor row depends upon the credit of the borrower, which in exceptional cases has no other founda tion than personal character of the kind that inspires confidence. As a rule, some security is required. The wealth pledged as security
need not, however, be withdrawn from active production, so that the borrower is able to in crease his available capital by the extent of his credit. Closely analogous to this variety of credit is the formation of partnerships in which capital is furnished by persons who do not other wise engage in the proposed enterprise. Before it was permitted to loan money at interest in England, it was very common to form partner ships of this kind in which owners of capital obtained a share of the profit. There was thought to be no impropriety in securing such return for the use of capital, since the capital shared in the risk of the enterprise. By both of these methods the immediate control of capi tal is placed in the hands of business men of greater efficiency and skill than its original owners possess, or, at least, in the hands of men who are willing to employ it actively in com merce or industry. There is no certainty that ability in industrial management will accompany the ownership of capital, particularly where laws permit the inheritance of wealth. The general welfare of society is promoted by a system of credit, which permits its employment to pass into the hands of such persons as find them selves able to make the best use of it. There is at present no better test of this than the rate of interest which borrowers are respectively able to pay.
Banks deal in this kind of credit as a part of their regular function. Whatever portion of their deposits is not needed as a reserve fund for the transaction of daily business is free, for loans at interest, and their facilities for learning the financial standing of their customers gives them unusually good opportunities for lending their own capital to advantage. But the business is by no means confined to banks. Private indi viduals may lend directly, or they may lend their savings through special associations which pay interest upon sums intrusted to them. Most conspicuous among these are the savings banks and the building associations. Life-insurance companies also afford an excellent opportunity for the safe investment of moderate amounts. In the aggregate the funds collected by these various agencies are very large, and a heavy re sponsibility for their judicious employment rests upon their officers.