NATURE AND FUNCTIONS OF CREDIT 1. The magic of credit.—That credit is a force in modern business requires but little proof in view of its extensive use by merchants and manufacturers the world over. That, as a matter of fact, it is an indis pensable element in present-day commerce, will also readily appear upon even a cursory examination of the subject. That some of the feats performed by credit are remarkable to an extent approaching the work of a magician upon the stage, is likewise subject of proof.
To illustrate the last statement : A merchant in Chicago wishes to import a shipment of goods from a manufacturer in Yokohama, Japan. He is not will ing, however, to pay for these goods in advance; in fact, he wishes to pay for them only after he has re ceived them and has had an opportunity to resell them to his customers. But the Japanese manufacturer in sists upon receiving payment before the steamer upon which he is to ship the goods leaves port. Inasmuch as two months might elapse before such a shipment would be delivered in Chicago, and since another month or two might be required for the resale of the goods and for the money to reach the Yokohama manufacturer, probably four months would elapse before the transaction as a whole could be closed. It is evident, therefore, that the conditions imposed by the shipper on the one hand and the importer on the other, cannot be complied with—unless, indeed, the latter borrow the required amount of money.
Credit, however, overcomes the difficulty. A sim ple letter of credit, obtained by the Chicago merchant from his local banker, permits the Yokohama manu facturer to make a four months' draft upon a Lon don bank, which draft he may sell to his Yokohama banker even before the ship that carries his goods has started on its voyage to the United States. The Yokohama bank in turn may promptly resell the draft to a local merchant who has bills to pay in London. Upon presentation of the draft in due time at the London bank, the latter, with a stroke of the pen "accepts" the document, which thereupon circu lates in the credit market until the four months have just expired, when it is again presented—this time for payment. But long ere that date arrives, the goods from Japan will have arrived in Chicago and will in all probability have been resold by the importer. A
sufficient part of the proceeds of the sale will also have been sent to the London bank, so that the lat ter, when the draft reappears, is ready to pay it with out having to use any of its own money.
Thus, without anyone having advanced a penny, the transaction has gone thru without a hitch. The money which the Chicago importer paid for the Jap anese shipment was received by the shipper four months before that money was sent. Yet the im porter sent the money only after the goods had been received in Chicago and resold there. Credit, as we see, has performed the apparently impossible! 2. Meaning of credit.—It is natural that in begin ning our study of this exceedingly important factor of modern commerce, we should seek to obtain a clear and comprehensive understanding of the meaning of the term itself. In a general way, of course, every one is familiar with the term "getting credit" or "buy ing on credit." We know that ordinarily it describes the obtaining in the present of something for which payment is to be made in the future. Yet for our present purpose we need a somewhat fuller and more exact understanding of the sub j ect than this general concept affords.
Numerous definitions of credit have been given, each differing more or less from the others, accord ing to the special viewpoint of the defining authority. Thus, one definition tells us that credit is "a reputa tion of character, of confidence or trust, a good name or opinion gained by upright conduct in business; a reputation of solvency." Another definition, equally correct, says that credit is "the present right to a future payment." It is easily recognized that both definitions are right as far as they go; yet they are necessarily incomplete in that each regards the sub ject from only•one point of view. We shall probably obtain a clearer idea of the subject, as far as our pres ent inquiry is concerned, if we consider briefly the place of credit in our modern commercial structure. We may, therefore, defer for the moment any attempt to supply a more comprehensive definition.