may be considered together for the purpose of contrasting them with government and bank notes. A great variety of bonds is employed to suit the needs of different classes of investors. The same may be said of promissory notes and trade and bank bills. The process of differentiating credit instruments to meet new needs and better to adapt them to old uses is continually in progress.

4. The foundations of credit.-The utility of a credit instrument in facilitating the transfer of capital depends quite as much upon the security back of it as upon the suitability of its form. If there is doubt regarding the fulfillment of the obligation it records, its usefulness will be impaired, possibly completely destroyed, however perfect its adaption in form to the purposes it was designed to serve. It is this element of security we are now to consider.

In its completed form every credit instrument records the obligation of some person to pay to another a specified sum, usually described in terms of the prevailing standard of value. The fulfillment of that obligation obviously depends upon the ability and willingness of this person to pay the debt thus contracted and upon the social arrangements for compelling payment in case of default. A person's ability to pay depends primarily upon the amount and the saleability of the wealth in his possession at the time his debt falls due. Obviously he cannot hand over to another what he does not possess, but to the extent of his possessions he is able to satisfy creditors, provided those possessions are saleable. At the time the obligation is contracted his ability to meet it is not necessarily measured by the amount and saleability of the wealth then in his possession. In the interval before the maturity of the debt he may lose what he had at that time or he may acquire more. In the usual case of a loan made for productive purposes,

the wealth likely to be produced in the interval is the chief element in the determination of his ability to pay.

The saleability of wealth depends upon its form and upon the condition of trade. Some forms of wealth are so constantly and so generally needed and the machinery for marketing them is so perfect that they can be sold at any time, while other forms for which the demand is not so general and so constant or for the sale of which the machinery is not so perfect cannot be so easily and quickly sold. On account of these differences some forms of wealth are better adapted to credit operations than others. There are no forms, however, which may not be so used under certain circumstances. The phrase condition of trade refers to the degree of perfection of the operation of the machinery of commerce, that is, of the transportation and banking systems, of the produce and stock exchanges, of the arrangements for buying and selling, for the adjustment of supply and demand along all lines, and for the regulation of the relations between labor and capital, etc., etc. This machinery may work perfectly or it may be more or less impaired. For one reason or another it occasionally almost completely breaks down. The foundations of credit are then seriously undermined whatever be the forms or the amount of the wealth in the hands of the debtors.

A person's willingness to pay his debts is an important factor in his credit, since few people would continue to lend or sell goods on time to a man, however great his financial ability, who compelled his creditors to resort to legal processes to obtain their dues. He must also be willing to pay promptly as well as ultimately, if he expects to have credit commensurate with his wealth.

The laws of all civilized nations provide for the collection of debts which have been legally contracted by putting the creditor in possession of a sufficient amount of the property

of the debtor to satisfy his claim. These laws are the result of a long process of development and are calculated to meet almost any contingency that may arise. They are essential to the existence of a highly developed credit system such as the great nations of the world enjoy at the present time. Serious imperfections in such laws or laxity in their enforcement are evidence of backwardness in civilization and seriously obstruct the commercial and industrial life of a people.

The fact that the amount promised to be paid is usually expressed in terms of the standard of value is probably responsible for a widespread belief that credit is based on standard money. This is not true in the sense that the amount of a person's, a corporation's, or a nation's credit is measured by their command of standard coins. It is measured rather by their wealth, productivity, integrity, legal arrangements for the collection of debts, etc. Neither is this statement true in the sense that the payment of the obligations contracted must ultimately be met by means of standard money. Most of them will ultimately be cancelled by an offset of similar obligations. The process by which this is accomplished will be fully explained in subsequent parts of this book. It is, however, true that standard coins and the standard commodity play an important rôle in the credit system of a country.

For reasons explained in the previous chapter there is in every country a demand for standard coins. The demand usually takes the form of requests addressed to banks for the encashment of credit instruments which serve as a medium of exchange. It is of prime importance to the credit system of a country that the banks be able to meet these demands and to this end they must keep on hand an adequate supply of standard coins or be able readily to procure a supply. What constitutes an adequate supply

varies with the same bank at different times and with different banks at the same time and has no fixed relation to the magnitude of credit transactions. If the supply is inadequate, that portion of the credit system which depends upon the banks for its support is in danger of breaking down, and if it does break down or becomes seriously impaired, a crisis ensues with all its attendant suffering and losses. The kernel of truth in the claim that credit is based on standard money is revealed by these facts. A supply of standard coins equal to the demands of the community for that kind of money is essential to the maintenance of the credit system, but these demands are variable and may be modified by various expedients. The presence of wealth in the many forms required to satisfy the people's needs and its possession by the persons who have assumed the obligations expressed by credit instruments is equally essential to the maintenance of the credit system, and for this there is and can be no substitute. Upon this we may rely even when standard money fails, and the various methods of obtaining substitutes for standard money have this in common,-that they directly or indirectly liquidize or transmute into currency other forms of wealth.

5. Credit and prices.-The extensive use of credit instruments as a medium of exchange has given them an influence over prices which it is important to note. The nature of that influence has been explained in the preceding chapter where it was shown that the demand for the standard commodity is affected by the extent to which substitutes for standard coins are provided. It is in their capacity to serve as such substitutes that credit instruments exert influence on prices. If the form and security of these instruments is such as to render them universally acceptable they may perform all the functions of standard coins in the

medium of exchange and completely take their place in these uses; that is to say, they may serve the public as handto-hand money and the banks as reserves. They cannot serve as a safety fund or guarantee for the ultimate redeemability of the credit portion of a currency, and in this use only are they incapable of serving as a substitute for standard coins.

The extent to which credit instruments will be substituted for such coins depends upon custom, statutory regulations, and the condition of trade. The influence of cuscom is seen in the differences in the extent to which greenbacks and other government notes are used as hand-tohand money on the Pacific Coast and in other parts of this country. They are equally available everywhere, but the people on the coast prefer to use gold, probably because they have become accustomed to it. The influence of statutory regulations may also be observed in this country where banks are permitted to count in their reserves balances to their credit in other banks and various forms of government notes; also in England where the absence of statutory regulations has left the joint-stock banks free to use as their reserves balances in the Bank of England, Bank of England notes and short time loans, as well as coin. The condition of business is of prime importance in this connection. If the machinery of commerce is impaired, confidence between man and man is likely to weaken, fear to accept credit instruments, lest the obligations they represent may not be met, to spread, and the presentation of credit instruments for encashment in standard coins to take place. This means the withdrawal of credit instruments from their use as a substitute for standard coins and a consequent increase in the demand for the latter. This happens in times of crisis and is the chief cause of the extreme money stringency which characterizes such periods.