3. Abuse of personal credit.—The injudicious ex tension of personal credit has a twofold effect—an in fluence upon the commercial system as a whole and an influence upon prices. If the retail merchant can not collect his debts when these are due, he may be compelled to ask the wholesalers from whom he buys his goods to wait for payment. Producers and manufacturers, therefore, are compelled to suffer the restrictions that are put upon their business activi ties by failure to meet their obligations promptly and sometimes by fraud on the part of their customers. Ultimately, of course, the penalty for all this loose ness with regard to the observance of credit terms is paid by the consumer in the form of increased prices. This is made necessary because the commercial world must assume the added risk of bad debts.
4. Too liberal credit harmful.—The burden which a community must bear as the result of too liberal ex tension of personal credit is not wholly limited to the higher prices for commodities. It includes also the presence of many persons who are chronically impov erished thru the reckless buying of too many arti cles or goods on credit. Among those who avail themselves of such credit are many persons who give no consideration to the probable demands of the fu ture, but are governed in their purchases solely by present desire. In every section of the country there are those who have made no provision for old age or for periods of idleness or sickness.
Where principles of frugality have not been incul cated, the temptation to buy beyond one's means is always strong, even tho, as is frequently the case, the article bought lacks the ordinary elements of use fulness or suitability. In a report upon the condi tions of some of the southern cotton mills, mention is made of the prevailing habit of the operatives to buy on credit such things as highly colored pictures, jew elry, articles of finery, etc., tho as a consequence they suffer for want of many of the actual necessaries of life. It is beyond dispute that in such cases the grant ing of credit is distinctly harmful; yet, let it be no ticed, it is the abuse of credit—not its proper use— that is here exemplified.
5. Mercantile we may expect to find a more highly developed credit system in connec tion with these larger transactions.
Since mercantile credit applies to all those trade interchanges which relate to the distribution of goods, the latter function includes so many and such varied credit operations that special institutions and agencies have had to be provided in order to facilitate such operations and make them safe. Banks, brokerage
houses and commercial agencies are among the insti tutions that have been called upon for help in effect ing such transfers of goods.
The mercantile credit system of today has been de veloped slowly and according to the demands of trade. As commerce grew, the entire system of dis tribution gradually underwent a transformation. With the development of the country westward and southward, new conditions of distribution arose, ow ing to the widely separated markets. As the distance grew between producer and consumer the risk in volved in credit sales also grew, while the difficulty of adjusting present and prospective resources to the present and prospective needs for an increasing number of communities made itself increasingly felt. This was true of local, national and international markets.
The modern mercantile credit system may be said to be complementary to the commercial system, since the former adjusts itself to the latter and thereby pro tects it. In the West and South the new communi ties needed capital with which to develop their natural resources. By means of credit they were enabled to overcome the difficulties which confronted them in the beginning of their enterprises. At that stage a tendency to speculation developed in their midst, at times sweeping over an entire community. How ever, as they gradually acquired a more settled con dition, these communities learned to ,abandon their speculative tendencies and to be more conservative in their commercial transactions.
6. Present credit system and modern trade condi tions.—As a direct result of improved trading condi tions the character of the credit system also under went certain important changes. Formerly it had been necessary for the manufacturer and the whole saler to sell on long credit terms. For that reason they were generally compelled to require payment by promissory note at the time of shipment, in order that by discounting such notes at the bank they might assure themselves of being in capital funds during the period when their goods were being sold by the retailer upon the prevailing long credit terms. Under the improved facilities of communication, how ever, the former long-time commercial paper rapidly gave way to short-time payments on open account.