CREDIT (Fr. credit, from Lat. ercilitum, a loan, neut. p.p. of ercdcre, to trust). In politi cal economy this term indicates broadly the con fidence which is reposed in the ability and pur pose of men to meet future obligations. It is defined by J. S. Mill as permission to use an other's capital, and by H. D. MacLeod as 'a right of action.' While it rests etymologically upon trust in human nature. the term embraces many operations in which this plays a small part, in which by the establishment of claims to portions of the debtor's estate the creditor as sures himself of the repayment. A familiar illustration of such transactions are the loans of bankers upon collateral security.
From an objective point of view, the essence of a credit transaction is that on one side the transfer of goods or money is immediate, on the other that the return is deferred. Personal credit resting solely upon the good faith of the creditor is the earliest form in which credit ap pears, and is still widely prevalent, as in the hook accounts of retail merchants. But in the larger transactions of commerce credit could not have gained its prominent place without the in tervention of instruments of credit. These assume various forms, notes, drafts, mortgages, bonds, etc.; hut all have a common purpose—to insure the transferability of the claim against the debtor. Without them the lender—for whatever form the credit may assume it is always in the nature of a loan—must await the pleasure of the debtor or the termination of the contract before he can enter into possession of his own. With these instruments of credit he practically has control of his capital whenever he desires to use it. By transferring his claim to others he can secure his capital at any time.
Credit rests ultimately upon the fact that many persons possess wealth who have no pres ent use for it and are willing that it should be employed by others. If circumstances arise, as in times of panic, when each seeks to secure for himself the actual possession of his wealth, then credit cannot be obtained, and those whose trans actions require it must either pay exorbitant prices for it or be crushed out. This explanation
of credit will serve to indicate the bnportant function which banks play in the world of busi ness. They are reservoirs of credit. In them are gathered claims upon the unemployed wealth of the community, and through them this wealth is directed by loans into channels of usefulness. It is brought together in small and large quan tities from all classes of persons who do not immediately need it, and who are unable or un willing to loan it directly. From the point of view of individuals credit is frequently spoken of as capital, because, like capital, it increases their productive power. But credit from a na tional point of view is only to be regarded as capital in so far as it diminishes the amount of wealth which would otherwise lie idle, and in creases that which is devoted to productive pur poses. An effective organization of credit does not produce wealth, but draws out wealth, and enhances its usefulness. Hence a nation in which credit, as in Anglo-Saxon communities, is highly organized, will have a higher productive capacity than one in which a primitive organiza tion prevails. Credit is not without its dangers, and when the credit organization is out of joint the results are disastrous. This is the price of progress. As the disasters to a railroad express train are more severe than those which overtake the lumbering wagons which preceded it. so the commercial disasters of a highly organized na tion with a broad development of credit are more serious than those of less advanced peoples. The remedy is not to go back to the wagons, but to apply every device to insure the safety of the modern vehicle. For a clear analysis of credit, consult: MacLeod, Theory of Credit (London, 1889-91 ) ; Dunbar, Chapters in the History and Theory of Banking (New York, 1802) ; Report of of the Currency, 1896. See BANKS; CRISIS, ECONOMIC.