3. The merchant who does not use credit.—Con sistently with the foregoing, the merchant who "doesn't owe a dollar in the world" is not ordinarily making the best use of his opportunities, and is not, therefore, regarded as conducting his business upon approved lines of good merchandising. A dealer may have too much capital invested in his business for his own good, just as he may have too little. It is hardly necessary to point out that the dealer with insufficient capital is handicapped at every turn. A respectable percentage of business failures is attrib uted to that very condition. Such a dealer cannot buy in sufficient quantities to obtain the lowest prices ; he cannot carry customers who require liberal credit accommodation; he cannot take advantage of cash dis counts and bargain offers such as arc often made by manufacturers at certain seasons of the year. With him the problem of meeting his obligations on time is an ever-present and difficult one. Unless indeed he possesses conspicuous business ability, such a dealer, tho he be perfectly honest, is not a safe credit risk.
On the other hand, the dealer who uses twice as much of his own capital in his business as is actually necessary, and who fails to avail himself of the op portunity to make use of his creditors' capital, or of capital furnished by the bank, in the amount to which he is properly entitled, is necessarily depriving him self of the profits which an outside investment of his surplus capital might bring to him. While for a time the dealer with too much capital is admittedly a safer credit risk than one with too little, this condition may readily reverse itself, especially if the former has competitors who employ sound merchandising and credit principles, and also use aggressive busi ness tactics.
4. How credit helps the manufacturer.—Another instance of the benefits of credit for purposes of busi ness extension is where a manufacturer has sold his output of goods to wholesalers or jobbers on usual credit terms of, say, sixty days, and where this output represents practically all the manufacturer's avail able capital—a condition not uncommon among small manufacturers. Under the circumstances, if he had to pay cash he would not be able either to buy the necessary raw material or to enlarge his factory in order to take care of an expected increase in orders. He might not in fact be able to continue the produc tion of additional goods until the goods sold had been paid for. At the same time he could not well afford to let his plant be shut down or his men remain idle for sixty days while he waited for his customers to settle their accounts. He would need the use of his money at once.
Thru the good offices of credit the manufacturer is able to repossess himself of his capital without any delay. The bank, which is primarily an institution
for the purchase and sale of credit, stands ready to buy, with certain safeguards, the manufacturer's right to demand payment from his customers in sixty days. In payment for this right the bank in turn gives the manufacturer a right to use its—the bank's—credit in an equal amount, less the interest charge for the in tervening period. The bank may, of course, if re quested to do so, pay to the manufacturer the amount in gold. Usually, however, it merely credits the amount on its books to the manufacturer's account. But for the manufacturer's purpose the bank's credit, which he thus obtains, is just as useful as the gold which it represents, since with the aid of that credit he may at once resume his productive activities, buy raw material and pay his workmen's wages, exactly as tho his customers had paid him cash for their pur chases.
5. Credit in seasonal lines of business.—Again, the manufacturer may have a large quantity of goods made up in readiness for the coming season's busi ness. This is a condition which obtains, for example, in the toy business, where the selling season is very brief and commences only about two or three months before the Christmas holidays. In that case, since the larger part of the manufacturer's capital will probably be represented by his stock on hand, the services of credit may be greatly needed. As in the previous case, the banker is ready, upon proper in vestigation of the circumstances, to extend the re quired credit accommodation, and the manufacturer is able once more to utilize the capital which, without the services of credit, would remain locked up in the manufactured product while this was awaiting the season's sale.
The foregoing instances are sufficient to point out, in a general way, the nature of the services which credit is capable of rendering to the business world —that, namely, of making the capital of others avail able in the present, when one's own command of capi tal lies in the future.
6. Legitimate and illegitimate credit.—The obser vation already made enables us now to distinguish be tween what may be termed legitimate and illegitimate credit. In the first place, only such credit is legiti mate as permits larger profits to be made than would be possible without it. When a point is • reached where the use of additional credit adds nothing to profits, credit ceases to be legitimate. The economic law of diminishing returns applies just as much to that non-material substance which we call credit as it does to land or capital. In the second place, credit, in order to be legitimate, must be based upon goods in possession. This statement may call for a word of explanation.