JEVONS, W. S., Money and the Mechanism of Exchange. (D.

Appleton & Co., 1896.)

TAUSSIG, F. W., Principles of Economics, Vol. I, Book III, Chapters xvii to xxii.

This book in Taussig's "Principles" is entitled "Money and Mechanism of Exchange," and is perhaps the best short account of the fundamentals of money and banking that has been written.

WHITE, HORACE, Money and Banking, Book I. (Ginn & Company, 1914.)

A standard short work dealing with the principles and history of money and banking.

Mr. A to Mr. B in 1900 would have been worth at that time perhaps 100 bushels of wheat or 35 pairs of shoes. To-day, when Mr. B pays back the one hundred gold dollars, they are worth to A perhaps only 50 bushels of wheat or 12 pairs of shoes. Thus Mr. A lent the equivalent of 100 bushels of wheat or of 35 pairs of shoes and gets back only the equivalent of 50 bushels of wheat or of 12 pairs of shoes. Proposals have been made, especially by Professor Irving Fisher of Yale, to stabilize the purchasing power of the dollar; but as yet there are certain difficulties encountered in international payments, which seem to render these proposals impracticable at least for the present.

CHAPTER III

CREDIT FUNDS

Definition of credit.-Credit is a contract made between two parties whereby the one promises to deliver a certain amount of money to the other at a specified time. This contract, or promise, may be written or oral, formal or informal, expressed or implied, but in each case the essential fact is the same-a contract for the future delivery of money. A "credit transaction" is one in which a promise to pay (i. e., a contract for future delivery of money) is exchanged for something else of value. When one deals "on credit," he deals on his own promises to pay, or contracts for future delivery, instead of money; when one buys with (i. e., "on") credit, he purchases goods and gives his obligation to pay, in exchange; when one sells for (i. e., "on") credit, he transfers his goods to another in exchange for the promises of that other to deliver a definite sum of money at a definite future time.

ILLUSTRATIONS OF CREDIT USES

Morgan is a young man of sober, industrious habits, is well trained, and has a good reputation in the community where he lives. He decides to begin business for himself. He goes among the farmers with whom he is acquainted, and asks them if he may become their agent for the sale of grain in Chicago. A list of clients is scheduled which seems to warrant the opening of an office. But he has no capital, and it will require at least $1,000 in "funds" to equip and manage an office where he can display his sam

ples, meet prospective buyers, manage consignments, etc. He lays his plan before his friend Drexel, who has an abundance of means and who makes it his business to supply funds to those who have need for them in business. Morgan explains his plan, shows his assured list of clients and his business prospects, and proposes to Mr. Drexel that if he will give to him $1,000, then he (Morgan) will execute to Drexel a contract in writing for the delivery of $1,100 one year hence. Mr. Drexel has confidence in the honesty of young Morgan, and after studying his plan of undertaking and his prospects of success, he decides to exchange $1,000 for Morgan's contract to deliver $1,100 one year hence. No money passes, however. Morgan hands to Drexel his "note" for $1,100, and Drexel gives to Morgan his "check" for $1,000. Morgan takes the check to the bank and presents it, and the cashier transfers $1,000 from the credit account of Drexel to the account of Morgan. That is his capital. This credit account is the "fund" with which his business is begun.

Credit as current funds.-Morgan now goes to Chicago, where he has the credit account transferred to a bank. He rents and equips an office. He forms business relations with an old and reliable produce broker who has a seat on the Board of Trade, and agrees to divide commissions with him until, finally, he is able to purchase a seat of his own. He devotes himself to building up and enlarging his clientage. By advertisement and constant effort he gains good will; he arranges with the bank to carry the margins of speculating clients; he finds constantly increasing profits in his commissions. A business which at first netted him only enough to meet office and personal expenses, after years of effort nets him $10,000 per month. During this time he has paid the original loan from Drexel, bought a seat on the produce brokers' board (the Board of Trade), and at a mature age becomes possessed of many valuable properties and securi

ties. All of this has come to him from the use of credit, from untiring energy, from thrifty habits, and an unimpeached integrity. He now wishes to retire from the business of brokerage and to lead a more quiet life, devoting only such time to business affairs as may be necessary to the care of his investments.

A credit purchase.-Gates, a young man of wealth, and a friend of Morgan, desires to engage in the business of brokerage. He does not wish to spend a life of hard competitive effort in building up a new business; he prefers to buy a business already established. He goes to Morgan for advice, and, each recognizing an opportunity, a bargain is made, whereby Gates agrees to pay $50,000 for Morgan's seat on the Board, and $250,000 for the business name of his firm. That is, Morgan retains all the securities, accounts, and investments acquired by him in course of business; he sells his seat (his opportunity to trade on the Board) and his "good will" (or business reputation) for the sum of $300,000. But how is this to be paid for? Does Gates count out standard gold coins to that amount? No. He does not even pass to Morgan his check. Finding that it will be advantageous to retain his present available "funds" for use in the business, it is arranged that the purchase shall be made "on credit"; that is to say, Gates offers to Morgan three promissory notes for $100,000 each, due in one, two, and three years respectively. The purchase price of the business is $300,000, as agreed, but in consideration of the time that payment is deferred, Gates further promises to pay 5 per cent interest on the respective amounts until they are paid. By these several contracts (agreements for the purpose of exchange) Gates promises to deliver $115,000 at the end of the first year, $110,000 at the end of the second year, and $105,000 at the end of the third year-$330,000 in all, principal and interest-instead of $300,000, the purchase price if payment had been

made in money at the time the business was delivered. Now note just what has taken place. Morgan has sold what? Nothing tangible; nothing that may be seen; nothing that may be passed from hand to hand. He has disposed of his business opportunity and his business reputation as a broker-nothing else. Morgan may still do business in any other way so long as he does not attempt to use his seat on the Board or the name and reputation of his old firm for the business of brokerage. And what has he received? Something tangible? Something that may be seen? Something that may be passed from hand to hand? Yes, but what is it? Is it gold? Is it money? No. What is it? "Paper." One slip reads as follows:

$100,000.00

NEW YORK, January 1, 1922.

One year after date, for value received, I promise to pay to Morgan or order One Hundred Thousand Dollars in gold coin of the United States, of present weight and fineness. With interest at the rate of 5 per cent per annum from date until paid.

[Signed] GATES.

The other two slips read exactly the same way, except as to date of payment. But suppose Morgan loses these slips of paper, or that they are destroyed by fire, is the credit destroyed? Not at all. The obligation to pay remains as before; if Morgan can prove the loss and likewise the amount due, he can enforce the payment. These slips of paper are only evidence of the credit agreement, which in itself is a thing as intangible and as invisible as that for which it was given-viz., business opportunity and business reputation. Still, credit is bought and sold in the market; in fact, credit is one of the chief items of exchange in mercantile business.

ESSENTIAL CHARACTERISTICS OF CREDIT

Credit arises out of exchange.-Good-will, membership in a society of brokers, business opportunity and reputation are the properties that have changed hands. They have