Effect of Time Element on Credit Values The time element in a credit ordinarily gives rise to discount when the credit is exchanged against money. If a promissory note does not mature till 3o days hence, the holder cannot hope to find in the business world a purchaser who will pay down at once its face value for it, since such a purchaser would be de prived of the use of the purchase price for 3o days; for this reason a purchaser would deduct the interest in advance and pay the proceeds. In practice this is calculated either as true or as bank discount, depending upon the purchaser. Long-term instru ments, such as bonds, are invariably valued by true discount.
The time element, however, is ordinarily ignored in case of credit instruments payable upon demand and about which there is no doubt as to the willingness and ability of the debtor to pay. Promises of the government to pay on demand, and similar prom ises of reputable banks, are accepted without discount because these promises will themselves function as a medium of exchange, and the person who accepts them in exchange for a credit instru ment, goods, or services will not lose the use of the funds during the time until the promissory notes can be redeemed. These pro mises can be used immediately and without discrimination or dis count. They circulate as money themselves. To give such demand instruments is one method of paying, whereas to give a time instru ment that is subject to discount is not, in common parlance, "pay ing"; one does not pay by giving his note. The commonest forms of demand instruments that circulate as money, and are money, are government notes and bank notes, and also bank deposits but for their limited acceptability attain to the role of money.
Other Kinds of Credit Another form of credit is commonly called "personal," or "consumptive," credit, on the theory that such credits "spend themselves in the consumption or annihilation of necessities and articles of luxury as opposed to those utilities of credit which as sume a productive or distributive character." This kind of credit was the earliest historically, and gave birth to our credit system by educating men in the honest keeping of contracts; but personal credit constitutes a relatively small fraction of present-day credits and is discouraged by credit-givers.
Still another form of credit may be specified in this classifica tion on the basis of uses to which the funds are devoted. It is
"public" credit. The debtor is the body politic, and the funds raised are diverted to the uses of the state. Such credits are usually long term and, being strictly financial credits, partake of the qualities of the bonded debt of corporations.
Relation of Credits to Wealth The credit instruments are many and, to facilitate their va rious uses, are highly specialized. Book credits, promissory notes, bills of exchange, drafts, acceptances, certificates of indebtedness, checks, bank notes, bonds, and the like all arise from credit transactions, however much the instruments themselves may differ in their details of form and terms, in their power to circu late, and in their creation by debtor or creditor. They purport to be claims for money, are evidences of debt of the debtor and of credit by the creditor, and are used to facilitate the exchange of goods and the investment of funds.
The issue of credit does not, however, by itself directly increase the wealth of the community. If Brown gives Jones a promissory note the volume of credit in the community has been increased by that amount, but the volume of wealth has not been affected one iota by that act. The deferment of the payment may, however, leave the capital in Brown's hands, and Brown may be a more efficient producer of wealth than Jones; the net result of the credit transaction for the community will thus in directly be an increase of wealth.
The presumption is that the borrower is a more efficient pro ducer than the lender, else the lender would use the capital in his own productive activities. One of the greatest functions of credit is just this—it throws control of productive capital into the hands of the most efficient producers, and this control results in additional consumable commodities for the community. One of the commonest of errors is to fail to keep in mind the funda mental fact that credits are not wealth, but at best claims to wealth, and that their issue does not add directly to the wealth of the community. The issue, for instance, of multiplied millions of dollars of credits by the government does not increase our na tional wealth directly, however prone the owner of a dollar bill is to regard it as part of his wealth.