Fundamental Basis of Credit A credit rests upon the person or wealth of the debtor; even when apparently based upon credits the ultimate basis is concrete wealth. For instance, a mortgage company may pledge mortgages and mortgage notes as security for debenture bonds issued by them and sold to the public; the holder of such a debenture bond ma pledge it with his bank to secure an advance to his account; then the holder of a check drawn by this bank customer has a credit in strument which, in its ultimate analysis, is a property right in the mortgaged land.
This illustration shows how very useful credit is in making fixed wealth rapidly transferable and marketable so that it may be diverted to that operator who can make best use of it. The land remains intact and the operator is able, by the issue of credit based upon it, to procure seed, machinery, fertilizer, and the like, with which to work the land. Persons in other parts of the coun try who have funds—titles of purchasing power—are willing to exchange these funds for credits based upon land Relation of Credits to Interest It is human nature to prefer present economic goods or ser vices to future economic goods or services, the degree of prefer ence varying with the person—with his personal characteristics and the nature of his income. If Brown is less impatient for in come than Jones, he will lend to the latter, but if more impatient, he will borrow; borrowing tends to lower the impatience of the borrower and raise it for the lender. Given a market of borrowers and lenders there will result a market rate about which borrowing and lending will crystallize. This rate measures the general no tion as to how much, in a certain community at a certain time, present goods are preferred to future goods; it denotes, in other words, that lenders are willing to lend $ioo today for Sio5 repaid one year later; the premium, 5 per cent, is our market rate of interest. Whenever a credit is drawn, this element of time pref erence enters, and the value of the goods or the money returned at maturity must exceed the value of the goods or money origi nally paid. A borrower is willing to pay this premium for the use of goods, or for money which represents goods, for various rea sons, but in any case the borrower must be satisfied that the goods are worth more to him (at the market rate of interest) than to the lender. One of these reasons would be that he feels himself by the amount of the interest a more efficient producer than the lender.
Credits as Circulating Media In its function of facilitating exchange, credit may become the actual medium. An earnest of this was seen in the treatment of
subsidiary, fiduciary, or token, coins. A credit medium is more economical than a metallic medium. The expenditure of labor and capital in producing metals for monetary use is a big item of expense for society. Moreover, these metals have industrial uses —and the erection of a superstructure of credit on a reserve of metallic money conserves the metal for use in the arts. Since the creation of a credit currency is done with less effort than that of a metallic currency, there is an economic advantage in substituting credit for metallic media wherever possible. Such substitution, though not without danger, is within limits highly beneficial.
Any medium circulates for one or more fundamental reasons. Certain counters may circulate by express or implicit agreement among a limited group, as gamblers' poker chips. It has been shown that commodity money attains and maintains this func tion because of a belief in the stability and the persistence of social custom. Credit rests upon confidence in the issuer. The issuer may be a government, a corporation, a firm, or an individual; in any case the credit issued will have a more or less extensive circu lation, dependent upon the public's opinion of the ability and willingness of the issuer to meet his promises. Credit may be classified, therefore, on the basis of whether or not it has general acceptability. Those forms of credit which do possess general acceptability perform all the functions of money, and usually more efficiently than money.
Media which have only a restricted circulation are: i. Securities (stocks and bonds). These are usually too highly specialized, too technical, too dependent upon market conditions, and too large in denomination to acquire a general circulation. They are, however, quite commonly used in making large payments at great distances, as overseas. Where the expense of shipping gold runs high, securities of international reputation may be used to settle credit balances.
2. Credit instruments, like checks, drafts, promissory notes, acceptances, and the like, which have Only a local cir culation among a limited circle who know the issuer, drawee, drawer, or acceptor.
Credit media which have a general circulation are: i. Government issues: (a) Convertible metallic money, as nickels and coppers.
(b) Certificates of deposit of metallic money.
(c) Convertible paper money.
(d) Inconvertible paper money.
2. Bank issues:' (a) Deposits, represented by checks.
(b) Bank notes.