ratio of quick assets to current liabilities, substantial earnings, etc.; and, on the other hand, if it were found that a business was poorly equipped and managed, there would be a definite reflection upon the manager's business capacity. Investigation, both of the man and of the business, usually serves, however, to furnish a more adequate basis for a sound judgment than investigation of either one alone.

One may conclude from this brief analysis that before deciding to extend credit one should have confidence, first, in the ability of the borrower to pay as promised, and, second, in his willingness and intention to pay. One is a matter of property and business ability; the other a question of honesty and business integrity. The basis of credit may be diagrammatically presented as follows:

Credit

Confidence

1. Character of man

(Intention to pay)

2. Character of business' (Ability to pay)

V. THE SIGNIFICANCE OF CREDIT

While the economic significance of the credit system cannot be adequately discussed in the present chapter, a few of the ways in which credit is of assistance in the conduct of modern affairs and some of its broader social aspects may, however, be suggested.

Credit enables governments to obtain possession of funds with which to meet pressing emergencies, when no other means are available. It also enables individuals to surmount temporary difficulties or embarrassments. For example, it makes possible the purchase of goods for consumptive requirements pending the receipt of income; it permits the purchase of a home before the entire purchase money is in hand; and it makes possible the acquisition of an education on borrowed funds.

Credit makes it possible for honest and capable men without capital to secure the funds required for the conduct of modern 1 Collateral security is also often required. See pp. 386–90.

industry. Similarly, it enables people with funds in excess of their immediate needs to lend the surplus to capable men of affairs who utilize them in productive activities. This process of lending funds tends to shift "capital" from the hands of those who have not the desire or the ability to make use of the funds to those who are willing and able to assume the risks of capitalistic enterprise. The result is a more effective utilization of the national resources.

The ability to borrow makes it possible for the business. manager to adjust the volume of his capital to the varying requirements of business. When the demand for his products is very large at certain seasons and in certain years of extraordinary business activity, he may enlarge the volume of output by borrowing additional working capital and in dull seasons and years he may reduce the volume of capital employed. This expansion and contraction of loans, as we shall later see, finds reflection in the condition of the commercial banking institutions which constitute the foundations on which the credit structure is reared.1

With reference to the broader aspects and relations of the credit system, it may be pointed out that its development has depended upon the growth of three things: first, a sense of business morality, or what may amount to the same thing, a recognition of the fact that honesty is the best policy; second, a relatively stable monetary standard for deferred payments; and third, a legal system designed to safeguard the rights of individuals and to enforce a prompt fulfilment of contracts. The evolution of these three supports of the credit system has been one of the most significant features of the transformation from medieval to modern industrial society. All of these developments have been very closely interrelated; moreover, each has contributed to, and each has been accelerated by, the growth of the credit system.

The institution of credit has made possible the growth of large-scale business enterprise and, in turn, the specialized industrial society of the present time. For the moment industry I See chap. xxiii below.

passed beyond the handicraft stage, each 'enterprise usually required a volume of capital greater than could be furnished by the proprietors. Accordingly borrowing became an indispensable handmaiden of business. The growth of the capitalistic (profit-making) system of industry has, moreover, been marked by an ever-enlarging scale of business enterprise, instituted, under the competitive régime of the eighteenth and nineteenth centuries, in the expectation of obtaining larger profits through enlarged output, decreased costs of production, and lowered selling prices. The various stages in the transformation from the medieval household non-profit-making economy to the twentieth-century capitalistic industrial system are outlined in chapter xi below. It need merely be noted here, therefore, that the steadily expanding scale of both industrial and commercial undertakings is dependent upon ever enlarging aggregations of capital, the assembling of which has been made possible only by a great extension of the credit system, whereby funds might be raised for a given enterprise from a veritable multitude of individual investors. Small accumulations of capital which could not be effectively utilized by their owners are thus joined with other accumulations and placed under the control and management of individuals who are able to make the most effective use of capital resources.

Since nearly every business enterprise is nowadays in greater or lesser degree dependent on the use of borrowed funds, it is not difficult to understand why writers should stress the importance of credit in the extravagant terms noted in the introductory paragraph of this chapter. Credit is in truth a pervasive, fundamental institution-one that is indispensable to the conduct of a capitalistic industrial system.

QUESTIONS FOR DISCUSSION

1. Give a definition of credit.

2. What is the difference between credit and credit instruments? 3. Do you know of any businesses that do not borrow at all?

4. Give concrete illustrations of borrowing operations that take the form of the borrowing of actual goods. Are the operations settled by a return of goods in kind?

5. Give concrete illustrations of borrowing operations that take the form of the borrowing of money or "funds."

6. With what function of money is credit most closely associated? 7. What are the bases for the two different classifications of credit given in the chapter?

8. Which classification do you regard as more significant? Why? 9. What is the essential distinction between commercial and investment credit, that of the length of time for which the credit is extended or the use to which the funds borrowed are devoted?

10. What is the explanation of the fact that investment credit usually runs for long periods of time and commercial credit for short periods?

II. Turn to the chart on page 136 and indicate where commercial credit might be placed.

12. Where would "capital" or "industrial" credit appear on the chart? Where would "mercantile" credit appear?

13. Would consumptive credit ordinarily be extended for a shorter or longer period than commercial credit? Why?

14. Does consumptive credit appear upon the chart on page 136? 15. What is meant by the statement that the "basis of credit is confidence"?

16. As a business proposition, would you lend a man funds on the strength of his moral character alone?

17. As a business proposition, would you lend funds to a man on the strength of his ability to pay alone?

18. Which do you regard as more important in credit, the character of the man or the character of the property security?

19. "The law's delays and the law's circumventions permit property to melt away, but the element of personal honesty and the quality of efficiency do not change with time." If you agree would you conclude that ability to pay is less important than determination to pay?

20. In the case of public credit, is there any property basis for credit? 21. Is there ever any doubt of the intention and willingness of a

government to pay?

22. Why do French borrowers have to pay in the neighborhood of 10 per cent on loans placed in the United States in the year 1920? 23. Is the basis of capital or industrial credit confidence in the management or in the property of the corporation?

24. The railroads now have to pay relatively higher interest rates on borrowed funds as compared with other industries than formerly. To what is this relative decrease in credit standing attributable? 25. When a retailer advertises: "Your credit is good; cash payments not required," on what is he basing his belief that his customers will prove good?

26. When a small-town retailer sells goods on credit, does he make any investigation of the borrower?

27. When Marshall Field & Company extend credit to a lawyer, allowing him to pay his bills monthly, what is the basis of the credit?

28. What, in general, is the basis of consumptive credit?

29. Do you think it is true that large-scale business enterprise would not be possible without the institution of credit?

30. Could we have a specialized industrial society without credit? 31. In what way would you say that the institution of credit lessens the cost of producing goods?

32. Draw up a statement showing how the institution of credit has made it easier for society to satisfy its wants.

REFERENCES FOR FURTHER READING

Hagerty, James E.: Mercantile Credit, chaps. i, iii, and v. Laughlin, J. Laurence: Principles of Money, pp. 71-88. Meyer, Charles A.: Mercantile Credits and Collections, chaps. i and viii.

Prendergast, William A.: Credit and Its Uses, chaps. i and ii. Shaw Banking Series: Credits and Collections, chaps. iv-viii. The Credit Monthly. Published by the National Association of Credit Men.