CHAPTER III.

Definition and Growth of Credit-Contributes to facilitate Production by distributing Capital in the most advantageous manner-Circulation of Bills, &c.

HAVING seen, in the last chapter, the effects resulting from the accumulation and employment of Capital, our attention is next called to the subject of Credit. This is most commonly represented as a very effective agent in the production of wealth; and though its influence has been, in this respect, a good deal exaggerated, it is, notwithstanding, of very considerable importance.

Credit is the term used to express the trust or confidence placed by one individual in another when he assigns him property in loan, or without stipulating for its immediate payment. The party who lends is said to give credit, and the party who borrows to obtain credit.

In the earlier stages of society credit is in a great measure unknown. This arises partly from the circumstance of very little capital being then accumulated, and partly from government not having the means, or not being sufficiently careful to enforce that punctual attention to engagements so indispensable to the existence of confidence or credit. But as society advances, capital is gradually accumulated, and the observance of contracts is enforced by the public authority. Credit then begins to grow up. On the one hand, individuals who have either more capital than they can conveniently employ, or who are desirous of withdrawing from business, are disposed to lend, or to transfer a part or the whole of their capital to others, on condition of their obtaining a certain stipulated premium or interest for its use, and what they consider sufficient security for its repayment; and on the other hand, there are always

individuals to be met with disposed to borrow, partly and principally in order to extend their businesses beyond the limits to which they can be carried by means of their own capital, or to purchase commodities on speculation, and partly to defray debts already contracted. These different classes of individuals mutually accommodate each other. Those desirous of being relieved from the fatigues of business, find it very convenient to lend their capital to others; while those who are anxious to enlarge their businesses, obtain the means of prosecuting them to a greater extent.

It is in the effects resulting from this transference of capital from those who are willing to lend to those who are desirous to borrow, that we must seek for the advantages derivable from credit. All the operations supposed to be carried on by its agency, how extensive and complicated soever they may appear, originate in a change in the actual holders or employers of stock. Nothing, indeed, is more common than to hear it stated, that commodities are produced, and the most expensive operations carried on, by means of credit or confidence; but this is an obvious mistake. Wealth cannot be produced, nor can any sort of industrious undertaking be entered upon or completed, without the aid of labour and capital; and all that credit does, or can do, is, by facilitating the transfer of capital from one individual to another, to bring it into the hands of those who, it is most probable, will employ it to the greatest advantage. A few remarks will render this apparent.

It is plain, that to whatever extent the power of the borrower of a quantity of produce, or of a sum of money, to extend his business, may be increased, that of the lender must be equally diminished. The same portion of capital cannot be employed by two individuals at the same time. If A transfer his capital to B, he necessarily, by so doing, deprives himself of a power or capacity of production which B acquires. It is most probable, indeed, that this capital

will be more productively employed by B than by A; for the fact of A having lent it, shows that he either had no means of employing it advantageously, or was disinclined to take the trouble; while the fact of B having borrowed it, shows that he conceives he can advantageously employ it, or that he can invest it so as to make it yield an interest to the lender and a profit for himself. It is obvious, however, that except in so far as credit may thus bring capital into the possession of those who, it may be fairly presumed, will employ it most beneficially, it can contribute nothing to the increase of wealth.

The most common method of making a loan is by selling commodities on credit, or on condition that they shall be paid at some future period. The price is increased proportionally to the length of credit given; and if any doubt be entertained with respect to the punctuality or solvency of the buyer, a farther sum is added to the price, to cover the risk that the seller or lender runs of not recovering the price, or of not recovering it at the stipulated period. This is the usual method of transacting business where capital is abundant and confidence general; and there can be no manner of doubt that the amount of property lent in Great Britain, Holland, and other commercial countries, in this way, is decidedly greater than all that is lent in every other way.

When produce is sold in the way now described, it is usual for the buyers to give bills to the sellers for the price, payable at the expiration of the credit; and it is in the effects growing out of the negotiation of these bills that much of that magical influence that has sometimes been ascribed to credit is believed to consist. Suppose, to illustrate this, that a paper-maker, A, sells to a printer, B, a quantity of paper, and that he gets his bill for the sum, payable at twelve months after date: B could not have entered into the transaction had he been obliged to pay ready money; but A, notwithstanding he has occasion for the money, is enabled, by the facility of negotiating or

discounting bills, to give the requisite credit, without disabling himself from prosecuting his business. In a case like this, both parties are said to be supported by credit; and as cases of this sort are exceedingly common, it is contended that half the business of the country is really carried on by its means. All, however, that such statements really amount to is, that a large proportion of those engaged in industrious undertakings do not employ their own capital merely, but also that of others. In the case in question, the printer employs the capital of the papermaker, and the latter employs that of the banker or broker who discounted the bill. This person had, most likely, the amount in spare cash lying beside him, which he might not well know what to make of; but the individual into whose hands it has now come, will immediately apply it to useful purposes, or to the purchase of the materials, or the payment of the wages of the workmen employed in his establishment. It is next to certain, therefore, that the transaction will be advantageous. But still it is essential to bear in mind that it will be so, not because credit is of itself a means of production, or because it can give birth to capital not already in existence; but because, through its agency, capital finds its way into those channels in which it has the best chance of being profitably employed.

The real advantage derived from the use of bills and bank-notes as money, consists, as will be afterwards seen, in the substitution of so cheap a medium of exchange as paper, in the place of one so expensive as gold, and in the facilities which they give to the transacting of commercial affairs. If a banker lend A a note for £100 or £1000, he will be able to obtain an equivalent portion of the land or produce of the country in exchange for it; but that land or produce was already in existence. The issue of the note did not give it birth. It was previously in some one's possession; and it will depend wholly on the circumstance of A's employing it more or less advantageously than it was previously employed, whether the transaction will, in a public

point of view, be profitable or not. On analyzing any case of this kind, we shall invariably find that all that the highest degree of credit or confidence can do, is merely to change the distribution of capital-to transfer it from one class to another. Occasionally, too, these transfers are productive of injurious results, by bringing capital into the hands of spendthrifts: this, however, is not a very common effect; and there can be no doubt that they are, in the majority of instances, decidedly beneficial.

The following extract from the evidence of Mr. Ricardo before the Committee appointed by the House of Lords in 1819, to inquire into the expediency of the resumption of cash payments by the Bank of England, sets the principles we have been endeavouring to establish in a very clear point of view.

"Do you not know," Mr. Ricardo was asked, "that when there is a great demand for manufactures, the very credit which that circumstance creates enables the manufacturer to make a more extended use of his capital in the production of manufactures?" To this Mr. Ricardo answered, "I have no notion of credit being at all effectual in the production of commodities; commodities can only be produced by labour, machinery, and raw materials; and if these are to be employed in one place, they must necessarily be withdrawn from another. Credit is the means, which is alternately transferred from one to another, to make use of capital actually existing; it does not create capital; it determines only by whom that capital shall be employed: the removal of capital from one employment to another may often be very advantageous, and it may also be very injurious."

Mr. Ricardo was then asked, "May not a man get credit from a bank on the security of his capital which is profitably employed, whether vested in stock or land? and may he not, by means of that credit, purchase or create an additional quantity of machinery and raw materials, and pay an additional number of labourers, without dislodging capital

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