We have already noted that confidence is neces sary to the existence of credit. So interwoven, in fact, are the two terms that at times they are used interchangeably. But when we come to look at the subject from what might be called its economic side, we discover that credit—legitimate credit—rests upon a foundation somewhat more tangible than mere confidence or trust. This foundation is goods—sal able goods. It is necessary that for every dollar's worth of credit there be an equivalent in goods to give it legitimacy. Where this is not the case, credit is illegitimate and as such lacks the right of existence.
7. "Goods for goods" the object of trade.—The foregoing remarks will, perhaps, be more readily un derstood if we remind ourselves that the ultimate ob ject of trade is invariably the exchange of goods for goods. Money is never the real object of trade; it is, as we know, merely the medium of exchange by means of which goods are moved from seller to buyer and in the terms of which their value is measured. The various human wants cannot be satisfied with money. Man needs food, clothing, shelter, implements, etc., to which may be added the wants created by modern civilization—comforts and luxuries which, altho not indispensable, nevertheless contribute materially to man's well-being and happiness. Money is valuable only as it facilitates the satisfaction of these wants.
Further proof is hardly needed to show that credit rests upon goods and that the ultimate object of trade is goods, not money. The foregoing observa tions relate not only to the trade of a particular sec tion or territory or country, but to that of the whole world. For every debit there must be a credit. The world's sales and purchases must necessarily balance. For every dollar's worth of goods exported from a country, an equivalent of goods, or title to goods, must be received by that country. In view of this fact, it is evident that what is chiefly needed in order to facilitate such exchanges, is a system whereby these sales and purchases may be "cleared" or set off against one another on the principle employed by the banks of a city whereby these daily "clear" each other's checks received in the previous day's business. And precisely as a large amount of checks may thus be exchanged without the use of other than a very small amount of money, so may the world's sales and purchases, however large, be set off against each other by means of a suitable and adequate credit system.
8. Credit arising thrv, transfer of goods.—We should note, however, what for our purpose is straight to the point, that it is the process of transferring goods from seller to buyer that makes a medium of exchange necessary. Credit comes into being by the shipment of goods; it is measured by the invoice value of the goods expressed in terms of money, and is extinguished when—perhaps months later—an equivalent in exchangeable goods (which may include gold) is rendered the creditor.
The economic basis of credit is thus seen to be goods, just as the movement of such goods between seller and buyer furnishes the occasion for the crea tion of credit. But as soon as the volume of credit
exceeds the value of salable goods, a false condi tion is created, and credit thereupon becomes illegiti mate. In times of prosperity a strong tendency al ways exists to carry credit beyond its proper limit. For a while this condition may not be apparent and no evil results may reveal themselves; but sooner or later the true condition becomes manifest, and then things begin to go wrong. That is why business de pression always follows a season of marked pros perity. So regular, in fact, are these "swings" of prosperity and depression that the time of their ap pearance may generally be foretold with a fair de gree of accuracy provided a little study be given to their history and periodicity.
9. Credit expansion and overproduction.—It is a fact often observed that over-expansion of credit causes overproduction of goods. This happens be cause the increased purchasing power created by such over-expansion of credit in turn gives rise to an arti ficial demand, as a result of which prices go up. When the time of settlement comes, it is discovered that production is greatly in excess of the actually existing demand. When this point is reached, prices generally come tumbling down, often falling to a level considerably lower than that of a normal valua tion. At such times credit, too, suddenly contracts. Capital likewise is withdrawn, and a slow and pain ful process of readjustment begins to take place. Only gradually are normal trade conditions restored.
Henry D. Macleod, the English writer, describes this process as follows: All commercial crises originate in the over-creation of credit, and this is innate in the modern system of credit. Suppose that at any time the commercial world started with a perfectly clean slate. When such multitudes of persons are trading on credit, it must inevitably happen that a con siderable number will speculate unsuccessfully and create an excess of credit, which cannot be redeemed by fair means.
All excess of credit may be considered as so much virus or poison in the body commercial. However, by various tricks and devices known to traders, they can keep themselves afloat many years after they are utterly insolvent ; and thus the poison continually accumulates. Then, perhaps, a fever of speculation takes place, giving rise to the creation of vast masses of speculative paper, and then the poison, having accumulated to a sufficient extent, bursts forth in a tumor or abscess, called a commercial crisis.
W. Credit and panics.—Nearly all business fail ures are caused by illegitimate credit. Every finan cial panic has its origin in the same evil. But legiti mate credit, let it be noted, no matter how extensive it may be, can never be an evil. It can never cause a panic. It will never clog the wheels of commerce or induce a business depression. On the contrary, such credit acts as oil upon the machinery of trade; it keeps business transactions moving smoothly and expeditiously. The more perfect a country's credit system the more remote is the probability of a finan cial panic.