Later we find that men entered into agreements with each other whereby they pledged themselves to perform some act in the future. And since the ele ment of future time entered more and more into men's business relations, it was seen to be necessary that the confidence upon which these relations rested should be protected against abuse. It is for this reason that the fundamental law of the business world is one that punishes severely every act whereby the obligations of a contract are disregarded. So closely associated have the two ideas of confidence and contract become that they are often expressed in a single word—credit. From a legal viewpoint credit has been defined as a "right of action." 7. Time element in credit.—Just as in all credit transactions confidence is an essential factor, so is time an ever-present element. To illustrate: A re tail merchant buys from his wholesaler a bill of goods amounting to $1,000. If payment were demanded on delivery of the goods, the merchant, perhaps, could not pay for them. If, on the other hand, the whole saler consents to wait thirty or sixty days for his pay ment, it will be possible for the retailer to resell the goods, or at least a considerable part of them, before the wholesaler's bill falls due. Thus it becomes pos sible to earn a profit by the resale of goods for which payment has not yet been made.
This, as will appear more fully later, is just the purpose for which commercial credit is sought and given. To this end a credit of thirty, sixty or ninety days, and sometimes of even a longer period, is given, the credit terms being governed by the nature of the goods and by the customs that prevail in the partic ular line of trade. If the buyer, instead of holding off payment until the expiration of the credit period, completes the transaction by paying his bill within a certain shorter period, he usually receives a spe cial discount called a cash discount. This cash dis count in most cases applies to payments made within ten days of the date of invoice, altho there are not a few exceptions to this rule.
8. Credit the chief medium of exchange.—Since with the increase and development of business, the inadequacy of money as a medium of exchange be came more and more evident, credit gradually as sumed a more and more important place as such medium in the settlement of business transactions. This development has now reached a stage where all but a small fraction of the world's business is trans acted with credit as the medium of exchange, tho all such transactions are necessarily measured and re corded in terms of money.
So important, in fact, has this function of credit become that any attempt to dispense with it at this late day would prove disastrous not only to business, but to society at large. If we may conceive a situa
tion in which credit was eliminated and the substitu tion of cash payment enjoined, we should find the gigantic machinery of the world's trade rapidly com ing to a standstill. Under such conditions industry and enterprise could not exist. ;Untold and wide spread suffering and death would follow, and man would quickly relapse into a state of semi-savagery. So integral a part of our social system is credit at the present time.
In the oft-quoted words of Daniel Webster: Credit is the vital air of modern commerce. It has done more, a thousand times, to enrich nations than all the mines of the world. It has excited labor, stimulated manufac tures, pushed commerce over every sea, and brought every nation, every kingdom and every small tribe among the races of men to be known to all the rest ; it has raised armies, equipped navies and, triumphing over the gross power of mere numbers, it has established national superiority on the foundation of intelligence, wealth and well-directed industry.
9. How credit takes the place of gold.—As already mentioned, the world's gold supply is wholly insuffi cient to meet the demands of trade even if it were used for nothing else. For the purpose of settling trade transactions, therefore, recourse is had to bills of exchange, notes and checks—commonly spoken of as instruments of credit. Instead of handing his job ber, say, $100 in gold in payment of a bill of mer chandise, the retailer may offer a piece of paper con taining merely a promise to pay a certain sum at some definite future date—a promissory note. This paper, if confidence is had in the ability of its maker to ful fil his written promise, assumes for the purpose of payment all the importance and value of the gold which it promises to pay. Like money it may be passed from hand to hand, each recipient using it in paying his bills.
The paper may be an order upon the drawer's bank account—a depositor's check. For ordinary pur poses of trade, such a check is just as good as the money it represents. The one who receives it, instead of taking it to the maker's bank and there exchanging it for its face value in gold, simply writes his name across the back of it and deposits it in his own bank, subsequently drawing his check against it. Or he may, after thus indorsing it, turn it over to some cred itor, precisely as tho it were actual money.
Again, the paper may be a draft—an order upon some person in a distant city, directing him to pay to the person named in the order as payee a certain sum.