3. Relation of credit to capital.—When wealth, or any part of it, is employed for productive purposes, as in manufacturing or similar enterprises, it is called capital. Unless it is employed productively, wealth is not, properly speaking, capital. When hoarded or otherwise permitted to be idle and unproductive, it is not regarded as capital.
Credit is not a product of labor and is not capital. It is important that we be clear as to that from the outset. We shall presently note more fully what credit accomplishes in the world of trade, and shall then be better able to appreciate the fact that what ever else credit may be in an economic sense, from the standpoint of the merchant, credit may be regarded as machinery invented to aid in accom plishing the purposes of capital.
4. Credit and civilization.—Going back a little, we note that credit did not attain its present importance all at once. It has been a plant of slow growth. Credit is, in fact, both a promoter and a result of civ ilization, and its development is found to have kept pace with the development of civilization, which fact suggests that as time goes on still further refinements and extensions in the profitable use of credit may be possible.
In the earliest times of man's existence credit was probably unknown. For as long as might was right, the stronger possessed himself at will of the property of the weaker, and since under such conditions the question of payment did not arise, there could be no occasion for the use of credit. Gradually, however, the law of might gave place to the law of right, and instead of possession by conquest, there came to be possession by exchange. For the thing wanted, an other thing of equal value was tendered, and if the exchange was mutually satisfactory, the trade was consummated.
But exchange in the form of barter is necessarily crude and cumbersome, and seldom wholly satisfac tory. Hence the demand for a medium of exchange arose. Something was needed that could be passed from hand to hand at a fixed value and into the terms of which other values could be readily translated.
A variety of commodities came to be used for that purpose. It is interesting to recall that no farther back than the Colonial period of our country, to bacco was used as currency, and for nearly two hun dred years the State of Virginia grew its own money.
Maryland did the same for a somewhat briefer period.
Finally, as we know, gold and silver became the preferred money metals. In the course of time, how ever, a point was reached where even a material medium of exchange, such as gold, proved inadequate for the purpose of a ready exchange of goods and services. For that reason, and for others which will come before us presently, credit came to be recog nized as a legitimate and desirable factor in trade, and began to take the place of money as a medium of exchange in business transactions.
5. Place of confidence in credit transactions.— With the gradual progress of civilization men learned to trust each other, and out of this increasing confi dence of man in his fellow-man the use of credit was gradually developed.
Without such confidence there could of course be no credit, for altho, as we shall presently see, confi dence is not the sole basis of our credit system, it is nevertheless indispensable to the existence of credit relations. "Credit cannot exist," as one writer has well said, "without confidence in the security of prop erty and in the disposition of the purchaser of a com modity to pay for it at the time appointed. No man parts with his property except when be believes an equivalent will be returned." 6. Confidence supported by is clear, however, that if the requirements of business make it necessary that men trust each other, it is equally necessary that some means be found for protecting this confidence and preventing its abuse. The law of contract has come to us as a result of that necessity. As the lawyer would express it: "The growth of civilization is the development of man from a condi tion of status to a condition of contract." Earlier conditions permitted every man to continue in his way of making a living with the assurance that as long as he observed the common usages of the locality in which he lived, his status or economic relation with other men would be duly protected. Hence, we find that men paid customary rent for their land, received customary wages for their labor and charged cus tomary prices for their products. In fact, business relations of every kind were regulated wholly by the customs which earlier generations had established.