The particular form which these credits take depends upon a variety of circumstances, not only the sagacity of the borrower, but the purposes to which the money is to be put and the condition of the credit market. As a general rule, before credit can be obtained in any form the borrower must have some. actual wealth which he owns or controls. Thus credit appears in the role of supplementing capital, and enabling the enterprise to verify the scriptural saying that "to him that hath shall be given." The readiness with which credit can be commanded depends upon the reputation of' the manufacturer or dealer for successfully selling his product, the amount of the credit and the nature of the business. Since all kinds of business are not considered by the world at large as equally vital to the welfare of the com munity, there may in dull times be much greater diffi culty in borrowing for one kind of business than for another.
Those who deal in food and in other necessaries of life are reasonably sure of selling their product under all conditions. Even in hard times credit is granted to those engaged in such business, where it would be denied in a business which could command a less cer tain market. But oftentimes men in these other lines of business have a reputation for successful sell ing which is so good that they can easily obtain credit when many of their rivals encounter extreme difficulty in so doing, or fail in the attempt. These conditions may Well determine the form of credit. In some cases ahnost absolute reliance may be placed on tem porary accommodations. In other cases it may be niore advantageous to increase permanently the work ing capital by placing longer terms of mortgage upon the real estate used in the business.
7. Mortgages and bonds.—When capital is bor rowed on a mortgage, real property is pledged for the payment of the obligation assumed. The ordinary small loan is,made by means of a bond and mortgage, in which the bond contains the direct obligation to pay and the mortgage is the agreement, in case of non payment, to transfer the property pledged to the creditor.- Such a bond is in smaller transactions indivisible. In the larger transactions of corporations the bond becomes bonds which are fractional parts of and common obligation secured by a mortgage. Like short-term obligations these promises must be redeemed, but as they run for considerable periods of time the borrower is given the opportunity to make the required payments from the accumulated profits of the capital which has been borrowed.
The purpose of loans of this character is to allow the borrower to use the proceeds in some more or less fixed or permanent investment. The railroa.d cor porations of the United States have borrowed largely in this manner and the method is coming- to be more and more general among the public utility corpora tions. On the other hand, industrial corporations have used this form of borrowing sparingly. When bonds are issued in this form it is expected that in terest will be paid from the current earnings of the corporations. Payment of the principal is sometimes provided at least in part from earnings, but is gener ally made from the proceeds of the sale of new securi ties.
8. Commercial borrowing on bonds and mortgages naturally suggests a contrast to ordinary/commercial credit. When a dealer pur chases goods on credit he hopes to have sold these goods again before the expiration of the credit period and to be in a position to meet his obligation from the proceeds of the sale. By such action he expects to gain in addition a profit for himself. This illustrates what Mill had in mind when he defined credit as per mission to use another's capital.
Similarly, when a manufacturer buys materials on credit or borrows money on his note to pay wages, he hopes to meet such obligations from the sale of his product. There is in these cases a confident expecta tion that the whole amount borrowed will be replaced, as it were, by a single transaction. When money is borrowed for longer terms the replacement of the capital is only gradual.
The distinction between borrowing for investment purposes and borrowing for operating expenses is very important, altho it is not always observed either by those who seek or by those who grant credit accom modations.
9. Cost of is an economic good and like other economic goods must be paid for by those who use it. In the case of bonds and certain long term notes the price is expressed as interest. In the case of notes discounted at the bank the price of credit appears as discount. In some cases, indeed, no inter—! est is apparent on the face of the transaction. When goods are bought on sixty days' credit, for example, the interest paid by the borrower is concealed in the price of the goods. In mercantile practice, Wherever a specific discount is allowed for cash payments, the amount of the interest involved in payments on credit can be precisely calculated. There can be no doubt that such transactions always include interest, whether or not it may be readily calculated.