I A credit is so much more than the permission to use another's capital that it will serve our purposes better to amplify the definition of MacLeod and designate credit as the right to receive a future payment oil money. If we keep this thought in mind it will enable us to understand more clearly not only what credit does but how it accomplishes results.
Such a definition of credit implies that some ex change is incomplete. On the one hand, a quantity of ono ds or some other valuable consideration has been transferred, but the payment for it is postponed. All that is given in exchange is a promise to pay. This promise may be regarded as something definite because in various ways whoever obtains from such a transaction a right to receive payment can transfer that right before the payment is actually due, and thus come into the possession of the full fruits of the transaction. For its further utilization in business affairs, however, the form in which the promise or the credit is expressed is of the highest importance. If reduced to a promissory note, bill of exchange or similar instrument, it becomes at once impersonal, and can be bought and sold with comparative ease.
4. Kinds of credit.—All credit arises in the process of exchange, either the exchange of credit for goods, credit for money, or credit for credit. If A buys goods of B, he may offer the price of the goods in gold or in bank notes, be may give _his promissory note or he may give nothing but his simple promise to pay. When payment is made in gold no credit is involved.
The case is different when payment is made in bank notes. As we have seen, these circulate as money and have a wide acceptability, but back of them is the credit of the bank. They belong in that intermediate stage between standard money and credit which has been designated as credit money. When the pur chaser offers his personal check and this offer is ac cepted, there is a payment thru credit. This is plain in the case of payment by promissory note or when there is only a simple promise to pay, but in the former case the credit is less personal and more general.
It is plain that these different forms of credit have different degrees of transferability. Checks, notes and personal promises or book credits represent three degrees of transferability, of which the first is the highest and the last the lowest.
5. Credit based upon, is the right to receive a future payment of money, but if it were nothing more than this it would serve only a limited purpose. All credit is expressed in terms of money because all values are so expressed. If the credit is a simple book credit for 30 or 60 days and on the expiration of this time is canceled by a payment of gold the transaction is merely a money exchange with deferred payment. The same is true if a promissory note is given which remains until maturity in the seller's hands and is then paid in gold.
But if the seller takes the note to the bank and has it discounted, lie transforms a credit of limited ac ceptability into one of much larger acceptability and is able to make use of an equivalent amount of capital.
If when the credit, whether a book credit or a note, becomes due the buyer cancels it by his check on the bank, the whole transaction has been accomplished without the use of money.
Credit always creates a right to receive money at a future date, and while in the majority of cases it is not money but money's equivalent which is received, it would be utterly impossible to understand all the workings of credit if it were not borne in mind that this right to receive money may be exercised. In deed, the varying degree in which this right is actu ally exercised is largely responsible for what the busi ness world knows as the cycle of prosperity, panic and depression.
6. Use of credit in business requires capital for its foundation and its operation. It must have lands, buildings, machinery—a great variety of capital goods which make up plant and equipment. Furthermore, it requires raw rnaterials, supplies and money to pay for services and for such expenses as taxes. -Now, in the modern world it is not necessarily the owners of wealth who engage in production or direct industry. If the man behind the enterprise is not a capitalist and cannot induce cap italists to share with him in the risks and profits of the business he must borrow property from others. In so doing he goes into debt, and various kinds of credit obligations are created which must eventually be liquidated.