from first producer to ultimate consumer. For instance, a manufacturer who buys raw materials to be made into finished commodities may agree to pay the producer of the raw materials only after he has sold his product. He has thus been "trusted" by the producer; there has arisen a "time obligation," a future payment. Or the manufacturer may at once pay the producer with cash, procuring the cash by a loan from the bank, which he promises to repay after the goods are manufactured and sold. In this case he has used his credit with the bank instead of with the producer of the raw materials; but it is obvious that the nature of the operation is the same. A wholesaler. or retailer may likewise purchase the goods he wishes to sell, on time, or on funds borrowed from a bank, as the case may be, agreeing to repay the loan after the goods are sold.

Mercantile Credit is to be distinguished from Capital or Corporation Credit by the character of the business which employs it and the nature of the use to which the funds are put. A characteristic feature of Mercantile Credit is that it usually runs for a short time, whereas Corporation Credit is usually extended for long periods. Mercantile Credit is represented by commercial promissory notes and bills of exchange rather than by bonds or stock certificates.

Personal or Individual Credit obviously takes its name from the fact that it is connected with individuals rather than with public or private corporations. It is the means by which an individual may secure goods for consumption purposes without an immediate payment of cash. The laborer who settles his bills on the weekly pay day, the salaried man who pays by check at the end of the month, and the farmer who settles his account at the village store when he sells his crops are cases in point. Personal Credit is distinguished from other credit in part by the character of the security furnished by the borrower, and in part by the use that is made of the things borrowed. The basis of the security is an indirect one, consisting primarily, not of actual property in hand, but of a recognized earning power from personal or professional services. The things borrowed are generally used for immediate consumption rather than for further production. Such credit is therefore often called "Consumption Credit." It is also sometimes spoken of as "Retail Credit," because it is used primarily in retail transactions. This, however, is confusing, because such a term might mean the credit of the "retailer" himself.

Personal Credit is usually extended without requiring a deposit of collateral as security and even without a written promise to pay in

the future. A promise is, however, implied, and the entry on the books of a retail store is the evidence of the credit transaction. "Book Credit" is a name commonly used in this connection; but this name describes not so much the character of the credit operation as the manner of "evidencing" the credit transaction. The credit on the books is an evidence that a personal credit has been granted.

The fifth form of credit has been called Banking Credit. As is well known, banks furnish funds to borrowers of every description; it is to the banks that one in need of credit naturally turns. But by Banking Credit is not meant the credit extended to individuals, corporations, merchants, and governments. Such forms of credit fall within the classifications given above. The essence of Banking Credit may be discovered only in the answer to the question, Where do the banks procure the funds which they loan to the business world? These funds are procured in part from the banks' own capital, and in part from the funds that have been left with them by individual depositors; but in the main it is through the use of their own credit.

A bank uses its own credit in much the same way as does an individual. A man who is responsible morally, who has a reputation for business honesty and ability, and who has security in the form of commodities that enter into trade, is able to borrow on his credit. He uses his good name and his property as means of securing funds for immediate use. A bank, likewise, if it possesses the confidence of the community, is able to extend its business by means of its credit. The simplest use of its credit is found in the entrusting of funds by depositors with the bank-for safe-keeping or use, as the case may be. There is a more important way, however, in which our large commercial banks use their credit. A bank with $100,000 cash on hand is able by means of its credit to do a business equal to five or six times this amount. This is accomplished through borrowing on its credit. Just as a government borrows when it issues paper currency, so a bank borrows when it creates obligations, either in the form of bank notes or deposit accounts against which checks may be drawn. The ordinary commercial bank usually owes on demand several times the amount of its cash. A bank is safe in thus extending its obligations so long as the management is efficient and the resources other than cash are ample. There are some special problems involved in the use and control of Bank Credit, but in essence it does not differ from the other forms of credit that have been enumerated.

8. COMMERCIAL VERSUS INVESTMENT CREDIT

Viewing credit apart from particular groups of persons or organizations, such as governments, corporations, wholesalers and retailers, banks, and private individuals, two distinct types of credit may be distinguished, namely, commercial and investment credit. This classification is of the foremost importance from the standpoint of economic analysis and a clear understanding of the principles underlying the various forms of banking operations.

⚫ Investment credit is that which is used in the financing and development of business enterprises such as railroads, factories, workshops, stores, farms, and mines. The funds borrowed are invested in fixed or durable forms of capital goods, as distinguished from consumptive goods. In consequence, the borrower does not expect to be able to repay the loan within a few weeks or months; rather, he plans to pay the principal of the loan out of the accumulated earnings of the business in the course of several years. The lender, similarly, regards such a disposal of his funds as permanent; hence the term investment.

Commercial credit, on the other hand, is used in financing the manufacture and marketing of goods, and it has to do only with consumptive goods. It is only another name for the mercantile credit described in the previous selection, viewed from another angle-that of the use to which the funds borrowed are put. Unlike the borrower of investment funds, the borrower here wishes to use his funds only temporarily. A concrete case will serve to illustrate the difference: A borrows, let us say, $10,000 and purchases a stock of goods with the money. Two months later he sells these goods for $11,000, or at a profit of 10 per cent. The goods purchased thus furnish the direct means of liquidating the loan. The borrower for investment purposes, on the other hand, invests the $10,000 in a factory. He does not contemplate selling the factory within a few weeks or months. On the contrary, he expects to use the factory for many years in the manufacture of commodities. It may take ten years or more before the accumulated profits will permit the repayment of the principal of the loan. The latter is a long-time process, requiring years for fruition; the former a short-time operation, carried to completion in a few weeks or months. It is by means of the former that industries are developed and continued; it is by the latter that the manufacture and marketing of goods are accomplished, that commodities are transferred through

purchase and sale from the original producer to the hands of the ultimate consumer.

9. THE IMPORTANCE OF INVESTMENT CREDIT

The importance of investment credit has often been underestimated by writers on the subject of credit. Nevertheless it plays quite as important a rôle in the world of business as does commercial credit. By means of government credit the individuals who purchase bonds receive interest on funds that might otherwise be either unemployed or less safely or remuneratively invested, while the government, on its part, is enabled to build a Panama Canal, wage wars of self-defense or conquest, construct public roads and buildings, street railways, electric lighting plants, etc. In so far as a government can perform certain services for society more effectively than can private business, there is clearly a direct social gain arising from the uses of this form of credit.

By means of capital or industrial credit the surplus funds of individuals are turned back into the channels of productive industry; they are transferred from non-productive to productive employments, thereby increasing the wealth and productive power of society. These private funds are converted into railroads, factories, shops, and farms which would not yet have come into existence without the use of investment credit.

An idea of the enormous extent of investment credit may be gained from the statistics of the bonds and stocks listed on the New York Stock Exchange. The principal of the bonds listed on the exchange amounts to a total of $14,310,553,000, classified in groups as follows:

The face value of the listed stocks amounts to $13,084,073,923. It is estimated that for the country as a whole the bond houses every year market in the neighborhood of $2,000,000,000 of bonds. The significance of these enormous figures may be realized when one considers that the total wealth of the entire nation is estimated at about $120,000,000,000.

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THE COMPLICATED SYSTEM OF COMMERCIAL CREDIT It has become almost a trite saying that credit is the very lifeblood of commerce and that without its wonderful assistance the enormous business of the modern world would be quite impossible. It is a commonplace, also, that the credit structure is a very uncertain mechanism, one that periodically breaks down, involving hundreds of businesses in financial ruin and indirectly demoralizing the commerce of an entire country. The precise manner, however, in which this credit structure is built up, with its intricate and complicated interrelations, is often not clearly understood. It is the purpose of the following analysis to trace these intricate relations and show the complicated interdependencies in the fabric of commercial credit.

Commerce relates to the movement of goods from the hands of those who perform the first operation in production to their final resting-place with the ultimate consumers. Commercial credit connects itself, therefore, with the various purchases and sales that are made in the extended process of marketing commodities. The nature and place of credit in this marketing process may perhaps best be made clear by assuming first a society that does business on a cash basis only.

To illustrate the process, let us begin with some raw materials in the form of iron ore and coal which are to be manufactured into farm machinery for sale to farmers. These raw materials normally pass through the hands of the following classes of business men: (1) the manufacturer of machinery; (2) the wholesale dealer; (3) the retail merchant, from whom they are purchased by the farmer. In the absence of credit the producer of raw materials would have to possess enough capital to defray the cost of producing these materials. Let us assume he sells them for cash to the manufacturer, who pays for them with ready money. In turn, the manufacturer, after converting the materials into finished machines, sells them in a new form to the wholesale dealer, who pays for them out of funds accumulated for the purpose. The wholesaler next passes them on to the retailer for cash, and the retailer disposes of them to the farmer for cash. In each case cash accumulated and in hand ready for payment is the significant feature. We have thus far, however, but half completed the commercial circle.

The farmer does not purchase the machinery as an end in itself. With it he produces crops for sale. He sells his annual produce to a