BOOK III. сн. х. Not neces sarily money. Circumstances affecting credit. principle, although there may be some difference in the mode in which the transaction is conducted. For instance, it is customary, when wealth is lent, that the loan should be made in money. If, in the above example, the surplus wealth which A is supposed to possess consists of a stock of wheat, he will not, as a general rule, lend this wealth in the form of wheat, for he will almost invariably sell the wheat and then lend the money. Such a course is much more convenient, since a substance which is uniform in its value is always chosen to perform the functions of money. When money is lent, both the borrower and lender very accurately know how much they have respectively to pay and receive. But if, instead of money, any other kind of wealth, such as wheat, was lent, great risk would be incurred both by the borrower and lender; because if the wheat were to be repaid at any particular time, it might then be only half as valuable, or, on the other hand, perhaps far more valuable than it was at the time when it was borrowed. If it is borne in mind that credit is a synonymous expression for borrowing and lending, it will be readily perceived that various circumstances are implied in the existence of credit. In the first place, there can be no credit if a man has not confidence in the person to whom he lends. No one would be willing to lend his wealth, unless he believed that he who borrowed it would repay it. The more confident a man is in this belief the less remuneration will he require for the money which he lends. If A lends two sums of 100l. to B and C respectively, and if he places much greater faith in B's honesty and ability to pay than he does in C's, C will be compelled to pay a much greater sum for the use of this loan than B. It need scarcely be said that the annual sum which is paid for the use of borrowed money is termed the rate of interest. Therefore two individuals borrowing at the same time and from the same person, pay a rate of interest which is determined by the confidence which he who lends the money may feel that it will be repaid; or, in other words, by the faith which he places in the solvency of those to whom the money is lent. Since B is supposed to be able to obtain a loan at a lower rate of interest than C, B's credit is for that reason said to be better than C's; hence, credit should be defined as the power to borrow wealth. This definition is more precise than the meaning given above, but not inconsistent with it. Credit being defined as the relation between the borrower and lender, credit will be good when this relation is easily produced, i.e. when money is easily lent or borrowed; or credit will be abundant when there is a large number of persons ready to enter into the relation on both sides, and a large amount of wealth ready to be lent and borrowed. It has been said that C's credit would not be so good as B's, if C were compelled to pay a higher rate of interest for money borrowed than B. But it must be remembered that B and C are supposed to borrow money in the same place, and in the same country. If B borrowed in England and C in India, C would be compelled to pay a higher rate of interest than B, although C's credit, so far as depended upon personal character and means, might be quite as good as B's. It would in fact be necessary for C to pay this higher rate of interest, not because his own credit was not good, but because a generally higher rate of interest prevails in India than in England. This is tantamount to saying that the credit of India is not so good as the credit of England. The circumstances which determine whether the credit of any particular country is good or bad are very similar to those on which depends the credit of individuals. If the government of a country is unsettled, a revolution may quickly displace the ruling dynasty, and the obligation incurred by one government may be disavowed by the next which takes its place. In such a case as this those who lend money must be compensated for the increased risk which is incurred. States, either through dishonesty or through inability to pay, have sometimes repudiated their obligations. Those who subscribe to government loans carefully examine the character and the financial position of the states to whom the money is lent. The result of this examination is shown in the price of foreign stocks, for the prices of these stocks form a measure of the credit of different countries. Russia can borrow money at five per cent., whereas the credit of Egypt and Turkey is so low that Egypt cannot borrow money at less than 18 per cent., and Turkey, in conse BOOK III. CH. X. credit is capital. quence of her inability to pay the interest on her existing loans, is now unable to borrow, and her 5 per cent. stock stands at a nominal price of 127. The credit of Russia therefore is at least three times as good as that of Egypt. Confused Hence the meaning to be attributed to the word notion that credit, is the power to borrow, whether the credit of an individual, or the credit of a state is spoken of. It may perhaps excite surprise that so simple a signification is given to the word credit, for it is often spoken of in a most mysterious manner. Thus some political economists assert that the principles of this science can only be unfolded to those who properly appreciate the great maxim, that credit is capital. If the true nature of credit is borne in mind, it will be at once perceived that this maxim instead of being pregnant with meaning is a striking indication of confusion of thought and language. The fundamental idea attached to capital is, that it is a fund from which to feed, and otherwise to support labourers. Credit is a power to borrow, and surely labourers cannot be fed on a power to borrow. The power to borrow, if exercised, may obtain capital. Just in the same way, the muscles of a man's arm will, if required, lift fifty pounds; but it would be absurd to say, that his muscles were fifty pounds. Credit accumula- tion of capital. We shall proceed to point out the real assistance which credit lends to the production of wealth; in doing so, it will be shown that if there were no credit much less wealth would be saved, and a great portion of that which is saved would cease to be productively employed. Political economists are not, however, justified in affirming that credit is capital, although it may be shown that the existence of credit materially aids the production and distribution of wealth. If there were no credit, all the capital of the country must be applied to industry by those individuals who actually possess it. A person who saves wealth, but does not wish to employ it upon any industrial purposes, would be prevented using it as capital, if he were debarred from lending this wealth to those who would be willing to devote it to the further production of wealth. The amount of wealth which is in this manner saved by those who wish others to employ it as capital is enormously great. Some conception of the amount may CH. X. be formed from glancing over the accounts of such institu- BOOK III. tions as the London and Westminster Bank. The average amount of the deposits which are held by this bank exceeds 18,000,000l. This vast amount of wealth has been collected from a multitude of depositors, who are in very different positions in society, and who are engaged in the most varied occupations. Experience teaches, that even the most prudently managed bank need not keep in the form of money an amount exceeding one-third of the sums deposited with it, in order to meet the every-day demands which are made upon the bank by those who have deposited money. If, therefore, a bank has deposit accounts amounting to 18,000,0007, at least 12,000,000l. of this sum may be applied by the bank to productive purposes. The profits of a banking establishment mainly arise from such an application of their deposits, for the bank either employs the money directly as capital in carrying out some industrial work from which profit is realised; or, as is generally the case, the bank lends the money to others, who use it as capital, and who pay a certain rate of interest for the loans thus received from the bank. But suppose that either from the instability of the government, from a generally low state of commercial morality, or from any other cause, the credit of this country should be materially damaged. Confidence in banks and other similar institutions would thus be lost. Those who now deposit in banks the money which they do not require for their immediate wants, would then cease to do so, since they would be prompted to hoard it for the sake of security. Some idea may be formed of the extent to which such an event would affect the capital of the country, when it is remembered that the credit of the London and Westminster Bank enables it to gather together 18,000,000l. in deposit accounts; of this amount a sum equivalent to at least 12,000,000l. is employed as capital. The foregoing remarks suggest one of the many modes Method by by which credit economises the resources of the country. These deposit accounts represent the sums which tradesmen and others keep to meet their current expenses; for instance, a person who receives an official salary of 1000l. does not wish to invest it, because he will have to live upon it during the year. He would also be afraid to keep which banks in crease the effective resources of the country. BOOK III. CH. X. Accumula ted wealth is made useful by credit. Undertakings too great for so large a sum in his own house. He therefore deposits it in a bank, and gradually draws upon it as he requires it. In this manner, small sums which would not otherwise be invested as capital are collected by banks, and a large proportion of the aggregate sum which is so collected is productively employed as capital. Again, many persons who accumulate wealth would not do so if they were obliged to engage in business themselves, and to superintend the industry which may be supported by the wealth which they save. An individual, A, may have an annual income of 2000l. One thousand pounds a year suffices for his ordinary expenditure; he is therefore glad to save the remaining 1000l., if he can profitably invest it. But very probably he does not wish to engage in any industry himself, or if he is already so engaged, he may not wish to extend his operations by bringing more capital into his business. He will therefore be anxious to lend the 1000l. which he is disposed to save to some one whom he can trust, and who will pay him interest for the use of it. If it is assumed that the money is lent to B, B probably desires to borrow it, because he thinks that he can so advantageously employ this sum as capital, that there will be a profit remaining to him, after he has paid interest for the use of the loan. If, however, A placed no confidence either in B's credit or the credit of any other individual, he would not lend the 10007. he had saved, and therefore the money would not be employed as capital, unless A chose so to employ it himself. It has however been supposed that he is unwilling to do this; in all probability, therefore, he would spend the 10007., if the absence of credit prevented him from finding a profitable investment for it. The consequence of this would be, that the industry of the country would be seriously affected, since the accumulation of capital would be impeded. There is another mode in which the existence of credit most powerfully assists the production of wealth. It has individual been frequently remarked, that nothing contributes more powerfully to promote the wealth of a nation than its public works. The railways, docks, canals, and roads of this country are not only the surest signs of its wealth, but have also been the chief instruments of its industrial resources are carried out by credit. |