As media of exchange, these various forms of credit instruments are, under proper conditions, equally serviceable.
10. Bank and government credit money.—Possi bly the paper, instead of being a privately issued credit instrument, is a bank note issued by a national or Federal Reserve bank, promising to pay on demand an equal sum of gold. But no one into whose hands such a bank note falls, thinks of taking it to the issu ing bank to redeem it in gold. He simply regards it as "money" and proceeds to use it as such. He knows, of course, that the government safeguards such bank notes by means of compulsory reserves or by deposits of first-class securities, and that therefore the risk he is assuming is wholly negligible.
Once more the credit paper may be one that is issued by the government itself. It may be a "gold certificate," entitling the holder to a certain amount in gold whenever he presents it at the Treasury De partment for payment. But in ordinary times at least, this bit of paper is worth for purposes of trade every cent of the amount printed on its face, even tho intrinsically of no value whatever.
As long, therefore, as such "promise-to-pay" paper is accepted and passes current in trade for the liquida tion of debts, this medium of exchange is sufficient to effect the settlement of trade balances the world over. The relation of credit to gold and its regula tion by the government are interesting and important subjects, but do not come properly within the scope of our present inquiry.
11. Other advantages of credit over gold.—Sup pose a million dollars were to be sent from San Fran cisco to New York in settlement of a trade obliga tion. Suppose, also, that this amount in gold were on hand and available for the purpose. It would be possible, of course, to pack and box the gold securely and to send it by express train across the continent. Yet to do so would be both troublesome and expen sive. It would furthermore entail considerable risk. The loss of interest, while the gold was en route and thereby withheld from the channels of trade, would add to the cost of transportation, especially if delays occurred.
In order to avoid all this risk of loss and delay, and for the purpose of saving all but a small part of the cost involved in such shipment, credit is summoned to the shipper's aid. A bill of exchange on New York
for the amount to be transferred is obtained without difficulty and promptly deposited in the mail. In a few days the creditor will have received the amount at the bank in New York—not in gold, to be sure, but in credit. Yet his account in the bank will be credited with the amount transferred, just as tho the gold itself had actually been received, and the whole transaction, as far as he is concerned, is thereby closed.
When large amounts are to be sent abroad—per haps some far-away country where the shipment of gold would be attended with even greater risk and difficulty than in the case cited—the use of credit instruments instead of gold is, of course, all the more convenient.
12. Difference between money and credit.—But while credit as a medium of exchange now performs the greater part of that work which formerly was al lotted chiefly to money, it is important to note that credit itself is not, under any circumstances, money. The latter, being wealth, possesses value. The metal in a five-dollar gold piece is worth approximately $5. It may be melted or hammered into any shape, yet merely as a slug or piece of gold, whatever its form it is worth and can be sold for the same amount. Credit, on the other hand, is merely an evidence of debt and obtains its commercial value solely from that fact. This is shown by the fact that when times are hard and a financial panic threatens, credit is unable to satisfy the existing needs of the commercial world. In the confusion which always exists during a panic, everyone is clamoring for money. Credit is abundant in the form of evidence of debt but in its usual forms is not acceptable; money, that is, gold, is correspond ingly scarce. It is, in fact, just because such evi dences of debt, or credit obligations, cannot be liqui dated in gold on demand that the panic occurs.
In the same way, the paper currency of a country is good only so long as the government is able to re deem it in gold upon demand. When conditions make this impossible, the paper currency (govern ment credit) quickly declines in value.