Now it is the differential advantage of diamonds which makes possible the extra value, in this use. If all wealth were equally serviceable in conspicuous display, if cattle and barns and shares in a coal mine or slaughter-house or glue factory could display themselves as well as diamonds can, and if possession of these things conferred prestige as much as possession of diamonds does, this differential advantage of diamonds would disappear, and with it all extra value from that cause. Diamonds are members of a class of goods, a restricted, but still large class, which possess this advantage. We may apply the old Ricardian rent analysis here, arranging goods in a series from the standpoint of their capacity to perform this additional service. Bread would, for the purpose in hand, be a "no-rent" good. Ford automobiles are probably nearly no-rent goods now! That the differential factor is a cause of value in land, as the Ricardian doctrine seems to hold, is not, I think, true. If all land were of equal quality, and of equal accessibility to the market, all land would still bear a rent, if it produced goods which had value, and if the land were sufficiently restricted in quantity.[491] But here is a case where the differential factor is an actual cause of value. If all wealth were equally effective in displaying itself, no form of wealth could gain in value as a means of display.
This proposition calls for one important qualification. The fact that wealth, in general, confers prestige is, undoubtedly, a source of stimulus in wealth creation and acquisition, and a big source of the value[492] of total wealth. It is probable, however, that it is so great a stimulus to production that it defeats itself so far as the values of units of goods are concerned. It stimulates production, which reduces the marginal values that arise from other causes. Thus, while a source of additional value to the aggregate of wealth, it probably reduces the values of given items.
I have dwelt at length on the case of diamonds, because principles applying there will give us important clues to the case of the value of money.
Money, by being valuable, is so far equipped to perform the money service. But its differential advantage over other valuable things comes from its superior saleability. Its original value comes from non-monetary causes, and has been sufficiently explained in the chapter on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra value which comes from the money functions rests chiefly in its superior saleability. Saleability is itself a cause of additional value. But here again we may arrange goods in a series, starting with the least saleable, and ending in money. Money has an advantage, but its advantage is not absolute. Under a system of free coinage, gold bullion is virtually on a par with coin, and even without free coinage, bullion is for many purposes as good, and for foreign exchange may be better. Modern credit, moreover, as has been indicated before, tends to add to the saleability of all goods, and so to lessen the differential advantage of money.
Here, again we may see the principle that the extra value that comes from the differential advantage tends to limit itself. As the money-use adds to the value of money, a smaller amount of money is required to do the money work, and hence the source of the increment of value is cut under. This principle will partly explain why the rental of money cannot be capitalized in the same way that the rental of land can be. Increasing the capital value of land is not the same as increasing the productive power of land. But increasing the capital value of money does mean an addition to the power of a dollar to do money work. It tends, moreover, to lessen the work that there is for money to do, both by reducing the total amount of trading, and by increasing the incentive to the use of substitutes for money. Only a part of the value of the services of money, thus, can be added to the capital value of money. There is a further point which is important, as differentiating money from diamonds: much more of the value of the services resting on the value of diamonds can be added to the capital value of the diamonds than is the case with money. The reason is that diamonds may give forth a continuous flow, in the same hands, of the service of conspicuous display of wealth. Money, however, can perform most of its services for a given owner only once. For a given owner, it can serve only once as a medium of exchange. For one owner, it can serve only once as legal tender for debts. It can serve indefinitely as a store of value, or as "bearer of options." In these cases, however, the relation between value of service and capital value does work out in accordance with the capitalization theory. The money thus held brings in no money income. It is held thus only if the services which it performs are equivalent to the income which would come if it were alienated, and something which would bring in a money income were purchased in its place. Money may have added to its capital value the value that is created by one marginal exchange, but the whole series of values which a dollar may create in exchanges cannot be capitalized, if only because the same owner cannot get them all. This holds strictly true only so long as no credit arrangements exist. If loans of money can be made, then the lender can take toll on successive exchanges, and get an income which may be capitalized in part, subject to the limitation already discussed, that increasing capital value of money cuts into the rental, and so, in large measure, destroys its own source.
Where money is not freely coined, there may be an increment, growing out of the capitalization of the money-services, in the value of the coin. The coin may be worth more than the uncoined bullion. This need not be true. If the amount of money work to be done is not increasing, it will not be true, unless the value of the bullion declines, and need not be true then. But an agio on coined over uncoined metal is quite possible, and has frequently occurred. Such an agio has limits, however. In the first place, the bullion may be used as a substitute for coin, so lessening the amount of work there is for coin to do, and lessening the source of the agio. Bullion would tend to rise in value from being thus employed, and coined money would lose in value from a reduction in the services it performed. Further, anything which has more than ordinary saleability may be used as a substitute, in one or another capacity. Again, the agio, if it appeared in a country where men are accustomed to thinking about money, might well arouse distrust, lessen the scope of the coin still further, and so cut into its own source. But such agios have appeared, and while a pure case, where the sole source of the agio is the values created in the money-functioning, is hard to find, I think it is not to be questioned that cases where this is part of the explanation have arisen. I should be disposed to find part of the explanation of the rise of the rupee in India after the closing of the mints in 1893 in this factor. There seems to be evidence, however, that Laughlin is right, in part, in ascribing the rise to an expectation of the adoption of the gold standard.[493]
Modern money, in general, however, rests on a system of free, even where not strictly gratuitous, coinage. Coined metal thus rarely gets, save to a limited extent or temporarily, an agio over uncoined bullion. Uncoined bullion is acceptable in a host of places where coin would otherwise be used, particularly in reserves for credit instruments. Bullion is even superior in international trade as a medium of exchange. Credit paper (particularly bills of exchange), is superior to both in international exchange, as a medium of exchange, because of various reasons of economy. Such paper is even used in reserves in many places, particularly by the Austro-Hungarian Bank.
The fact of free coinage means, substantially, that the state has made the money form a free good. How much value is thereby destroyed we may best see if we ask precisely how much the money form could mean at the limit. Initially, the money form means simply the certification of weight and fineness by a trusted authority. It saves, therefore, the delay and expense of testing the weight and fineness by assay, etc. It saves the trouble and delay of subdivision of a formless metal. It averts many difficulties. For small retail transactions, indeed for retail transactions in general, the conveniences of coined over uncoined metal are very great. Small transactions do not justify the trouble and expense of assaying and weighing and subdividing gold! In a country, therefore, where the bulk of the money work is in effecting small transactions, we might expect a considerable agio for coined over uncoined metal. This would be especially true if that country had few facilities for credit substitutes for the coin, particularly for small transactions. In a country like the United States, however, where checks are often drawn for amounts less than a dollar, and where the bulk of the gold, or standard money, is to be found, not in circulation but in reserves, one need not anticipate that the medium of exchange function would give a big agio to gold coin, even if free coinage ceased. So long as coinage means merely a certification of weight and fineness, this conclusion will hold. For purposes of large transactions, the item of weighing and assaying would not be serious. Indeed, American banks are accustomed to weigh even gold coin, in quantity. It goes by weight, rather than by tale, and if light-weight, it counts for less than its nominal value. The writer knows a bank which has a considerable store of light-weight gold coin that has been in its vaults for over twenty years. Such coin may be counted at par in reports by the bank to the Government.[494] It might be paid out through the window to customers, who would not weigh it, in case of a "run" on the bank. But it cannot be used in dealings with other banks without loss.
Does the legal tender aspect of coin count for more? Under a smoothly working system of free coinage, where moreover, all forms of money are kept at a parity by ready redemption, we have seen that the legal tender feature makes no difference. Would it make a difference where coinage is restricted? If we assume that the use of checks for small payments, and the use of bullion in reserves, in a given case, prevents the existence of an agio growing out of the other functions of money, I think it clear that the legal tender feature alone will not create one. But suppose that there is an agio from other causes, will not the legal tender aspect of money tend to increase it? Will not men demand coin, which bears an agio, rather than bullion, when they have the right to demand either? And will not the agio then, in a way, grow out of itself, a bigger agio appearing, because an agio has already appeared? It does not seem to me that this need follow. If there be an agio, then creditors will demand either coin, or bullion on a different basis from coin. But so long as they get the benefit of the agio, either in the form of coin, or of a larger amount of bullion, particular circumstances, rather than a general rule, will determine which they will demand. The banker might well prefer bullion. The international banker would prefer bullion. The man who wishes money for retail transactions will take coin. Men will use the legal tender quality of money as a means of getting the benefit of what agio there is (though contract right, where the contract calls for coin, would accomplish all that a legal tender law would accomplish), but whether they take 23.22 grains of coined gold, or 25.5 grains of gold bullion, will depend on which they prefer in the circumstances. I do not see that the legal tender feature adds anything to the case of restricted coinage that it does not add to the case of free coinage.[495] In either case, there will be temporary emergencies, when panics arise, when legal tender money gets an agio over any possible substitute. Solvency may depend on it. This might arise under free coinage, if the panic were acute, and if settlements had to be made immediately. But as long as there is time for men to work things out, I should not expect the legal tender feature, per se, to add to the agio of coined metal even under restricted coinage.
In general, the possibility of an agio for coined metal, under restricted coinage, rests on the extent to which coin has a unique function. In so far as substitution is possible, there is no room for an agio. For many purposes, bullion may be substituted. To the extent that credit is developed, and is flexible, various other substitutes are possible. To the extent that barter can be used, still other substitutes are possible.
Among an ignorant people, little accustomed to developing new expedients, having an economic life that is not flexible, having an economy based on petty economic units, having little development of credit, accustomed to the use of money in most transactions, money might well be, in many connections, highly important if not indispensable. In England, before the War, where no bank-notes under five pounds were in circulation, and where small checks were little used, an agio on coin might appear if coin got so scarce as to be inadequate for retail trade, but for bank reserves bullion would have served virtually as well as coin, and with the stock of coin she had at the time England could have gone on for a long time indeed with no more agio than just enough to prevent the melting down of the coin. In the United States, where checks can be used for very small transactions, and where a high percentage (very conservatively estimated by Kinley at from 50 to 60%) of retail business is done with checks, the agio on coins of a dollar or over growing out of retail trade might be expected to be very slight. On the other hand, the legal requirements for reserves in specified types[496] of money might, in time, lead to some agio. I do not think that the reserve function in England would ever do so. If we could combine our use of checks in retail trade with England's absence of legal reserve requirements, I should think that the agio would have little chance indeed of growing great! If to this could be added Canada's extensive use of small elastic bank-notes, the chance would be still less. If bank-notes of one dollar could be issued, the agio would be less still.
It is in the case of coins of very small denomination that the agio might appear most readily. Such coins, if limited in amount, and if given the usual restricted legal tender,[497] do not need redemption to circulate at face value, even when made of baser metals. It is quite thinkable that such coins should, even when redeemable, circulate at an agio over the redemption money. In small retail transactions the need for money to do business is most imperative. Even here, however, there is large flexibility. The present writer, during the period of money stringency in the Panic of 1907, made much larger use of checks in very small payments than was his usual practice, and the same was true of various of his acquaintances.
I think that the quantity theorist, with his doctrine of an unlimited agio through the restriction of coinage proportionate to the restriction, is best understood if we say that he has taken an exaggerated estimate of the imperativeness of the need for formed money in the smallest retail transactions as typical of the whole situation.[498] I have elsewhere shown, however, that, in so far as Kinley's figures for 1909 give us a clue,[499] the total retail trade of the United States is less than one-eleventh of the total of all transactions calling for the use of money and checks. Of that total retail trade, the part in which money is actually used is, on Kinley's high estimate, between 40 and 50%,[500] and the part in which money is imperative is much lower still. Small retail transactions do not give the type for the pecuniary transactions in the United States! They more nearly do so in India, and the possibility of agio is, doubtless, greater there. For our larger transactions, there is an almost indefinite possibility of substitutes for coined money, if profits can be made by making the substitutions. Beating the agio would be a source of profits.
I repeat what was said in the chapter on "Dodo-Bones" differentiating this doctrine of the agio from the quantity theory doctrine: (1) This doctrine presupposes value for the money article from some non-monetary source. It relates only to a differential portion of the value of money. (2) This doctrine denies the law of proportionality even for this differential portion. (3) This doctrine is concerned, not with the general level of prices, but with the absolute value of money measured in the ratio of coin to bullion.
Under the system of free and gratuitous coinage, no agio of coined over uncoined bullion is possible. Where small brassage charges are made, as in France (or as in England, where the interest lost during the period of coinage is charged to the man who exchanges bullion for coin at the Bank of England) there may be an agio of this amount, though it often happens that this agio disappears, particularly in England. So perfectly is bullion a substitute for coin in England, that the Bank of England will often forego its privilege of taking the slight toll in interest, and will credit men depositing bullion with as much as if they had deposited coin. From what has gone before, as to the possibility of an agio, I conclude that the United States, England, Canada, and possibly France, would be unable to make large brassage charges. If the brassage charge were much larger than the charges made by reputable and well-known jewelers for assaying and weighing, etc., there would be a large substitution of bars for coins, and the mints would have little to do. However, it needs no arguing that with free coinage, and either very low or no brassage charges, the value of bullion and of coin will, quality for quality and weight for weight, be virtually identical, within a narrow range of variation.
What, then, shall we say of the way in which the forces drawing gold from the arts into money manifest themselves?
How describe the equilibrium between the value of gold as money and the value of gold in the arts? How construct intersecting curves, presenting a marginal equilibrium? The problem is baffling, and I frankly confess that what I shall have to say does not satisfy me. I hope that some critic may solve the problem better. I can point out the difficulties of the situation, and can indicate reasons why the sort of solution which the economist's training in marginal analysis leads him to desire are not easily found. But I fear that I shall fail to satisfy the demand for an application of curves to the problem!
The first difficulty is that we are barred from the use of our yardstick. Money is the measure of all things in economic theory—except money and gold bullion! Of course there are economic values other than those of gold which do not actually come into the market, but even there we can commonly, by the accountant's methods, make use of the money measure. In very high degree, our conventional curves of all sorts run in money terms, and assume a fixed value of money. Clearly the money curve of diminishing value for gold would tell us nothing. The value of gold might sink as its quantity increased, but then the value of the money-unit would sink pari passu, and so the curve, with ordinates expressed in numbers of dollars per ounce, would not sink. The value-curve of gold, expressed in money, is a straight line, parallel to the X axis. Possible substitutes in the form of abstract units of value,[501] or of composite units of goods, of an assumed fixed value, will have to be used if anything is used, but they are less satisfactory in the application, and leave the analysis a good deal less realistic.
If this were all, the problem would be easy! But there is a second difficulty. We find the factors requiring gold as money, if summed up in a curve, presenting themselves as a call for the temporary rental of the gold. The money functions are performed, in general, not by keeping gold, and getting an endless series of uses from it, as in the arts, but by passing it on, sooner or later. Even in the case of the reserve function, the bearer of options function, and the store of value functions, it is not expected to hold the gold indefinitely—always there is the anticipation of some time when it will be passed on again. A curve for gold in the monetary employments, therefore, would be a curve showing the diminishing values of rents, or particular services rather than a curve for capital values. The curve for gold in the arts, however, would be a curve showing the diminishing capital values of units of gold, as the supply in the arts is increased. The two curves do not run in common terms. But another and more fundamental difficulty. In the case of wheat, we may construct our curve free from complications, in idea, at least. On the base line, we lay out quantities of wheat. For each quantity of wheat, we erect an ordinate, a sum of money, or a number of abstract units of value, as the case may be. Connecting these ordinates, we have a curve, showing how the value (or the money-price) of wheat descends as the quantity of wheat increases. Given the shape of the curve, and given the number of bushels of wheat, the marginal value of the wheat is given. In idea, at least, it does not matter, for the shape of the curve, whether the amount of the wheat is great or small, whether the marginal value of the wheat is low or high. If there are ten thousand bushels only in the market, wheat will be worth $5 per bushel. With 100,000 bushels, it is worth 40c. The fact that there are 100,000 bushels does not lessen the magnitudes on the higher portions of the curve. The nature of the services which wheat performs is not affected by its value. This is not true of gold, either in the arts or as money. In the arts, I have already shown that one function of gold is as a means of conspicuously displaying wealth. Gold is like diamonds in this. Because gold is a valuable, it gets an additional valuable service. This additional valuable service enhances its value. The thing is checked, however, before an endless circle is created, by the fact that as gold rises in value a smaller amount of gold will display a given amount of wealth. The value-curve for gold in the arts, therefore, is not a simple thing like the curve for wheat. It turns upon itself, in ways that I see no graphic device for presenting. This is even truer for money. Men wish to have, when they seek money, a quantum of value in highly saleable form.[502] The curve for the value of the services of money presupposes a fixed capital value of money. It is the capital value of money which does the money work. Given a value of money, and given the values of goods, we may see how much money is required to effect a given exchange or perform some other money service. Then, knowing how much value will be created by each exchange, or other money service, we may arrange the services in a series, a scale of descending importance, and get a curve. This curve is, in fact, the curve which presents itself in the money market. There we find a curve, running in terms of money itself, so much money for the use of money for such a length of time. But this is a curve of demand for money funds, rather than for gold as such. The "supply" that corresponds to this "demand" is, not gold, but all manner of credit instruments, chiefly bank-deposits, expressed in terms of gold. Such a curve is clearly not to be put into equilibrium with the value-curve for gold in the arts, (1) because it assumes a fixed value for money (2) because it is concerned with temporary rentals, and not capital values, and (3) because the demand it expresses is not for the use of gold alone.
We may get some aid in reducing these complexities to familiar terms if we employ the device of assuming an equilibrium between gold in money and gold in the arts, without trying to explain in quantitative terms how that equilibrium is arrived at, and then see what causes will lead that equilibrium to shift. In getting the laws of change, we may get closer to the causes of the phenomenon itself. The effort to reduce the thing to precise mathematical form requires a degree of simplification which seems to me likely to rob an answer of much significance.
Assuming that the equilibrium is reached, we may see what factors would tend to cause gold to go into the money-use, and what factors would tend to draw gold into the arts use. We may also see how these changes from one side or the other would modify the value of gold.
Assume that a manufacturing jeweler has extra demand for his products. His products, of course, are composites of gold, labor, and other raw materials, etc., but part of the extra value that comes to his products attaches itself to the gold that is in them. He now has an incentive, which was lacking before, to melt down full weight gold coin in his possession, or to buy gold bars which might otherwise have been coined. To buy the gold bars, however, probably means that he must have accommodation at the bank. He borrows from the bank the amount he needs, giving a short-time note, since he expects to make up his gold and market it in a fairly short time. The paper of manufacturers of gold will commonly stand well in the "money market," and this is especially true of those in whose hands the gold is not worked up into such specialized forms that the value of the bullion is a minor matter. (I find it necessary to refer frequently to the money market, though a full analysis of money-market phenomena cannot come till after our discussion of credit.) If he must borrow to get the gold, then the money-rates will come into comparison with the profits he expects to make from working up the gold. This will usually be true even if he melts down gold coin already in his possession. He might deposit that gold, and so reduce his expenses at the bank, either buying back his own discounted paper, or getting interest on daily checking account. If he has to borrow to get the gold, he may get it either by drawing gold from the bank directly, or by giving a check on the bank to a bullion dealer, which may ultimately lead to a diminution in the bank's supply of gold. However he gets the gold, there is bound to be some reaction, (1) on the bank's supply of gold, (2) on the supply of loanable funds in the money market, and hence (3) on the money-rates themselves. If he borrows from the money market, he affects the money-rates directly (even though probably, in a given case, not noticeably); if he melts down coin, instead of depositing it (or paying it out to others who may ultimately deposit it) there tends also to be less gold in the bank's vaults; if he buys gold with his own funds in the bullion market, the supply of current bullion for which the banks also compete is reduced. In any of these cases, the banks have less gold than would otherwise be the case. The relation between gold reserves and the supply of money-funds has been partly discussed already. We have seen that there is no proportional relation, as Fisher, and other quantity theorists contend. Loanable funds, on a given gold reserve, are highly elastic. But the elasticity calls for higher money-rates, and higher money-rates tend to reduce the volume of trading, and check the demand. Borrowings from the money market by workers in gold, therefore, are much more significant than borrowings by other manufacturers or merchants, because the latter are content with credit devices, for the most part, while the workers in gold withdraw gold itself from the money market. It is, moreover, harder for the money market to resist extra demand from the jewelers than from many other interests. The assets of the jewelers, especially from those who do not work the gold up in highly specialized forms, are exceedingly liquid. Their paper, therefore, is exceptionally good in the discount market. Usually, too, the larger jewelry houses have specially good general credit and high reputation. There is, then, less disposition for the market to look askance at an unusual supply of their paper than would be the case with many other sorts of paper. They tend to get about as low rates as anyone else in the market. A money market under centralized control seeking to protect its gold, might tend to raise discount rates on jewelers' paper, but a competitive money market is very unlikely to do so.
An increase in the value of gold in the arts would, thus, reflect itself pretty quickly in the money market, first in the form of added value for the services of money, and then, secondly, in an increase in the capital value of money. Indeed, an increase in the value of a single rental is an increase in the capital value also, since the value of the single rental is one portion of the capital value. Not only does it mean a higher capital value for gold, but it consequently tends to mean a higher "price." It does mean a higher "price" for present money as compared with future money. It tends, also, to mean a higher "price" of money in terms of other goods. Meeting higher money-rates, all borrowers tend to borrow less, and to buy less, to offer less money for goods. It need not follow, however, that the rising value of gold reduces prices. The rise in the value of gold in the arts may well be a manifestation of a general rise of values. General prosperity, rather than causes affecting the value of gold in the arts alone, may have occasioned the increasing demand for gold in the arts. This would mean rising values for goods at large. It might well be, therefore, that the rise in the values of goods would offset the rise in the value of money, and that prices of goods would rise at the same time that gold is being withdrawn from the money market to the arts.
Business in general, as well as the jewelers, may be making increased demands on the money market. This would tend still further to raise the money-rates. It would also, however, tend to increase the supply of money-funds. Commercial and industrial paper, in a time of buoyancy and expansion, is particularly acceptable to the banks, and they are likely to expand their loans despite the failure of gold reserves to keep pace. They simply get along with smaller reserves. Higher money-rates in such a case tend to reduce the volume of business, but need not actually reduce it, if there are bigger profits than before anticipated in business transactions. Not absolute money-rates, but money-rates in relation to anticipated profits from the use of money, are significant. There is large room here for flexibility, elasticity, etc. There is much slack to be taken up by the money-rates, much slack in the fluid substitutes for money in various functions, and much slack to be taken up by the volume of trade. But all this will best appear after our discussion of the money market.
I have said enough to indicate the character of the factors immediately determining the equilibrium between gold in the arts and gold in the money employments. In the preceding discussion, also, I have discussed the more fundamental factors governing the value of gold in both employments. The problem of translating the fundamental theory of value into money market terms, and of translating the phenomena of the money market into terms of fundamental values is not easy. Most of our value theory in the past has been concerned with individual psychology, Crusoe economics, trading in small markets with a few buyers, barter transactions, etc. It has been abstract and unrealistic. The practical students of the money market, who are immersed in the facts of modern money, have got little help from it, and have often been scornful of it. I hope to be able to contribute something to bringing the two methods of approach to common terms. They are correlative aspects of the same problem. Each gives highly important clues to the understanding of the other. Neither can be understood without some understanding of the other. A theory of value which cannot be applied in the money market, the stock exchange, and the great field of modern business generally, has small raison d'être.
In the next chapter I shall take up the problems of credit, and the money market.
Analysis and description are much more important than definition. Definition at the beginning of a study is frequently a fetter, rather than an aid to thought. This is especially true in a field where phenomena overlap and interlace, and where the "pure principle," "essence" or "Wesen" of the thing defined never presents itself, but is only to be reached by violent abstraction. To pick out one element—as "futurity"[503]—as marking off credit from other things would be an illustration of this. Or to take the notion of promise, or contract obligation, in connection with futurity, is likewise to limit the field unduly, on the one hand, and to include things which do not belong there on the other. Thus, a contract whereby A is to build a house for B by the end of a year, receiving at that time, or in instalments as the work proceeds, a sum of money, is not a credit transaction. We have, however, promise, futurity, and a future payment of money all called for in the contract. On the other hand, if A sends B a telegraphic order for money, which B receives three minutes after the money is entrusted by A to the telegraph company, we have a credit transaction, with no element of futurity in it. Certainly there is less of futurity there than in the case where a laborer, working all day, is paid only at night for work done in the morning. Futurity enters into the values of all goods which are not destined for immediate consumption—capital values of long-time goods are discounted present worths of future values. Contracts, promises, and beliefs in promises run through the whole range of economic life,—the domestic servant, paid weekly, illustrates all three. Yet only a special class of these economic activities are commonly counted as credit transactions. Credit is really a part of the system of economic value relations not easily marked off in economic nature from the rest. Its clearest differentiæ are juridical rather than economic. It will be the purpose of the present chapter, in part, to blur, rather than to make precise, the line between credit and non-credit in economic phenomena, and to assimilate the laws of credit to the general laws of value.
This will involve, however, a careful analysis and precisioning of certain phenomena commonly counted as credit phenomena. Buying and selling on the one hand; borrowing and lending on the other: the distinction seems clear. It is in law. But what is it in economic nature? When a merchant discounts his own note at the bank, it is borrowing. When he discounts the note of another, his debtor, it is selling. If he writes before his endorsement of the note, "without recourse," (unusual at a bank, but common enough with real estate mortgage-notes) he has made a perfect sale, and is entirely out of the transaction. Is it, however, in economic nature a different transaction from the original one in which he got the note from a borrower? Legally bonds are credit instruments, and stocks are not. Stocks represent ownership. But practically, as an economic matter, both represent the alienation of control, on faith, to a small group of men, and practically, too, the difference between preferred stocks and bonds is often very slight. Whatever the legal rights of a bondholder, under the terms of his contract, the legal fact itself often is, under the growing practice of receiverships, that he cannot exercise his right to foreclose without such difficulty that it doesn't pay to do it. Very frequently indeed the junior bondholder will come out of a reorganization as simply a preferred stockholder—which is what he practically was all the time. He couldn't vote as a bondholder, but his voting rights as a stockholder commonly mean little! As a bondholder, if he held enough bonds, he might even have more influence on the affairs of the corporation than as a stockholder. The market is moved by other forces than the legal distinctions in corporate contracts! And market facts are not necessarily correctly told by the accountant's categories either. I shall trouble myself little, in what follows, with the juridical and accountancy problems of credit, save in so far as these bear directly on the more pertinent economic aspects of the matter. I am interested in the question of credit as a part of the problem of value and prices—and particularly from the standpoint of the problem of the value of money.
What difference is made in values and prices by lending and borrowing? What kinds of lending and borrowing are there? What shall we say of bank-notes, of bank-deposits, of bills of exchange? What difference is made by the money market? Behind the legal forms and the technical methods, what are the psychological forces at work? How are these psychological forces modified by the technical forms and methods? What are the economic differences between long and short time loans? How shall we draw the distinction between the "money-rates" and the long time interest rate on "capital?" Why can some things serve as collateral in the money market when others cannot? What sorts of credit are appropriate to commerce, to manufacturing, to agriculture? Is credit capital? Is an increase in credit an increase in values? The last two of these questions imply that we have a definition of credit. Perhaps the answers to some of the other questions may have given us such a definition. But analysis and description will precede definition.
The etymology of "credit" has sometimes been taken as the clue to the meaning of the word for economics, and the idea of confidence, or belief, has been made the heart of the matter. A man has good credit when others have confidence in his integrity, etc. Men lend to others when they can trust them to repay. Doubtless something of this sort was responsible for the original choice of the word. But when loans are made on good mortgage security, or on collateral security, the personality of the borrower may count for little or nothing. Confidence there is, but not confidence in the intentions of the borrower. The confidence is in the "goodness" (i. e., the value and marketability) of the collateral. The same questions are raised by the lender here which he would raise if he were going to buy the thing, instead of lending with it as security. None the less, I think that in the etymology of the word we have an important clue. We must generalize the notion, however, beyond the limits of confidence in personal intentions. It involves confidence in the general economic situation, in the future of business, in the permanence of values, in the certainty of future incomes, etc. Thus viewed, the element of confidence, though important in highest degree, is not peculiar to the phenomena which we call credit phenomena in economics. It appears wherever there are values which depend on future events. One does not need much confidence in buying potatoes or apples or meat—though in the case of meat quite a lot of confidence may be involved—and misplaced! But whenever the future is involved, whenever capital values of any kind are involved—lands, stocks, bonds, houses, horses, manufacturing equipment, etc.—the element of belief, confidence, hopeful attitude toward the future, is quite as much present as in the case of a loan. Nor is the element of personal confidence less present, often, in these things than in the case of a loan. Very often the value of a horse may depend in considerable degree on the integrity of the man who offers it for sale; the value of a piece of land may be much enhanced if a trustworthy owner makes certain statements as to the yields he has got from it; the values of stocks (really credit instruments, from the angle of economic analysis) may depend very much on the personality of the organizers and managers of a corporation. Personal prestiges may count for much more in these cases than in the case of a collateral loan.
Further, in connection with the element of belief, or confidence. Borrowing is expensive, and men do not borrow for amusement. That borrowing and lending may increase, it is not enough that lenders have confidence in the ability of borrowers to repay. Borrowers must also have confidence in the future of their businesses, in their ability to make enough out of the loan to pay the expense involved, and have a surplus left over. I abstract here from consumption loans. They play a very minor rôle.[504] The analysis in an earlier chapter, based on Kinley's figures, showing that retail trade is less than one-eleventh of the total pecuniary transactions in 1909, and that the percentage of credit instruments used in retail trade is much lower than in other transactions, will justify us, when quantitative questions are involved, in abstracting from consumption loans. Since such loans will be chiefly employed in retail buying, and since we know that most retail buying does not result from loans for consumption purposes, we may conclude that modern credit is overwhelmingly of a different sort. Most of it arises from business activities of one kind or another, and rests on expectation of profit and loss.[505] Such loans are not made when borrowers, as well as lenders, have not confidence in the transactions they mean to put through.
So far the thing has run in terms of individual calculation of profit and loss. But even the most sagacious business men do not play a lone hand. No one is uninfluenced by the expectations and feelings of others. In general, business confidence is in large degree a matter of social psychology, resting on suggestion, contagion, etc., as well as on cool calculation of profit and loss. Even where men are able in considerable degree to free themselves from the prevailing optimism or pessimism, they must take it into account. The man who extends his business when nobody is in the mood to buy, when no one will make contracts with him, runs a very fair chance of bankruptcy, even though there be, in the technical facts of industry, no reason for the prevailing pessimism. A man with large resources, which are not fully employed, seeing that the prevailing "bad business" is "largely psychological" may, indeed, take advantage of the fact, get his labor and raw materials cheaply, and produce some staple in advance of his market. If he can afford to hold his surplus, he may make large profits by so doing. But usually business men will not, in such a situation, have the surplus resources to enable them to put through such an undertaking, and hence, even though they may recognize that the rest of the business world is irrational, they must, perforce, conform to its irrationality, and their sober estimate of the prospects of a given undertaking may be just as much adverse as if they shared the feeling of gloom which all about them feel. They meet it from the banker from whom they wish to borrow. Even if able to borrow, they meet it from the dealers to whom they are accustomed to sell their products. The prevailing gloom is as much a fact with which they must reckon as is the price of their raw materials, or the technical qualities of those raw materials.
Further, business confidence is not a matter in which each man counts one! There are centers of prestige, men and institutions whose attitude toward the future counts heavily indeed in determining the attitudes of others. These prestiges may arise from various causes. Recognized wisdom and probity may give a man great prestige in economic matters. There are financial writers and students of the market, not necessarily men of great wealth, whose opinions are exceedingly influential in making business confidence. The wisdom without the probity is not enough. Some men, known to be sagacious students of the market, have been known to succeed in their plans by telling the truth, with the result that everybody else did the wrong thing! They made business confidence, but not the sort that was complimentary to them. Other men have prestige, influence in making business confidence, by virtue of possession of large wealth. They are, first, in position to lend largely. Their decisions count directly for more than the decisions of thousands of other men. The very fact that they have confidence in the future, apart from anything else, means a tremendous increase in effective business confidence—which we are here concerned with. The optimism of a man who can neither buy nor sell nor borrow nor lend, because he himself has no economic resources, and no prestige, is like the desire of a penniless beggar for an economic good—its effect on the market is not great! But further, the fact that a rich man is lending makes possible activities which would not otherwise be possible, and so justifies confidence on the part of those who wish to deal with those to whom he lends. Such a man may, on the other hand, borrow. His borrowing, for business activity, justifies confidence on the part of those who would deal with him. Quite apart, therefore, from any influence on the opinions of others growing out of respect for his judgment, or less rational reaction to him, he can do much to make or unmake business confidence. But commonly, also, such a man is a center of prestige, as well as a controller of economic power by virtue of his wealth. Men look to him for their cue. If he has confidence enough in the future to risk his great wealth, surely smaller men with smaller interests need not be afraid. Vitally important centres for the making and controlling of business confidence are the banks. Having intimate knowledge of the affairs of many business men, of business men in many different lines, they are in a position to judge wisely of business prospects. Having great power to make or refuse loans, they can encourage or chill the enthusiasm which business men may independently develop. The whispered word of a banker may well count for more than the half-page advertisement of a promoter. But the banker is not all powerful. His influence is much greater, often, in restraining than in evoking business confidence. Bankers may during long periods be quite unable to increase their loans, though they tempt borrowing by easy rates.
Business confidence is a fact of social psychology. It is an organic phenomenon, with radiant points of control. It is a matter of inter-mental activity, rather than a thing in which each man makes an independent choice.
But this is to say nothing of credit phenomena that is not true of all value phenomena. All economic values are social values. The values of wheat or sugar or bicycles are social values. There are centers of power and prestige, growing out of the distribution of wealth, or various other social factors, which have a dominating influence on economic values, as a rule. Credit phenomena are merely part and parcel of the general system of economic motivation and control.
In Social Value (pp. 102-103) I have denied the doctrine of Meinong and Tarde that explicit belief, existential judgments, are essential to the existence of values, taking value in the generic sense, which includes æsthetic value, religious and patriotic value, legal, moral, and other values. I have pointed out that we do, at times, value ideal objects, the creatures of our imaginations. The dead sweetheart, or the Beatrice that never was (or that never was what she was imagined to be) may have tremendous value. Not merely things hoped for, but things hopelessly gone, as "The Lost Cause" to the Southerner, may be objects of value so high that other things, known to be real, may sink into insignificance beside them. Even in these cases, however, there must be a "reality-feeling" an unconscious presumption or assumption that the object valued is real. Indeed, belief, as distinguished from mere ideation, is an emotional "tang," an essentially emotional, rather than intellectual, fact. If it be present, the ideation and explicit judgment may be dispensed with.
It is, however, characteristic of economic values, particularly of the values of instrumental goods and of the goods with which business men make profits, that the tendency to raise the question of reality, to require explicit judgment, is strong. The successful business man is necessarily the man who does this, who does not too highly value the creatures of his imagination, when he imagines a vain thing. One need not, perhaps, seriously raise the question as to the reality of the loaf of bread he buys. Explicit judgment there would be superfluous. But very serious questionings come in whenever lands or houses or securities or bills of exchange come in. One needs to know what the facts are, and to make judgments based upon them. Hence, for all values of capital goods and income-bearers, for the values which pass in wholesale and speculative trading in general, the matter of belief is vitally important. Here, again, then, we have nothing in the psychological principles underlying credit phenomena to mark them off from the general field of value phenomena.
The general laws of value, then, apply in the case of credit phenomena. We find nothing unique in essence in them. The juridical relations, also, in so far as they have economic significance, shade into one another. To buy a bond from a bondholder is purchase and sale. To pay a borrower money for his personal note is lending. But from the standpoint of the theory of value and prices this distinction may be ignored. We may extend the idea of buying, selling, and price to cover all contracts where values are balanced against values, and expressed in terms of each other. Future money has its price in present money, just as much as present wheat has its price in present money. Really it is not future money against present money. It is a case of rights, which involve the payment of money in the future, sold for money, and priced in money. In general, it is rights, rather than things, which pass in economic exchange. Physical delivery does not constitute selling. Delivering a load of wheat to a railroad does not constitute sale of the wheat to the railroad; selling a farm does not involve any physical moving of the farm. Rights, in personam or in rem, are objects of economic value, and the exchange of these rights makes up the bulk, if not the whole, of economic exchange. (Exchange may be limited to the transfers of juristic rights, without value being so limited. I have discussed the relations of value and exchange in the chapter on "Value," above.) Property rights are commonly conceived of as the proper objects of buying and sale. Contracts involving the future services of free men stand legally on a different footing from contracts regarding physical goods. But economic analysis is not greatly concerned with these distinctions, except in so far as they affect the values of the things exchanged, and so the terms of the exchanges. I do not believe that the legal distinctions can be made to run on all fours with any significant economic distinctions, and shall not undertake to make them do so. In the phenomena we have simply cases of buying and selling (in a generalized sense of those terms) of rights, at prices (by a very slight extension of the term, price, to which the market is well accustomed). The terms of these exchanges, the prices, are governed by values, social economic values, in no wise different from the values which govern the prices in exchanges which we do not class as credit transactions. I say that credit phenomena are exchanges of rights. This is true of all exchanges. We do not exchange rights for money. We exchange rights to other things for rights to money. The mere physical transfer, even of money, does not give rights to the money. I may merely be giving you the money for safe keeping, or for use for my purposes. While the law makes the rights to money that has left the hands of its owner less lasting, as against innocent third parties, than in the case of other objects, and while the right to money is always, or almost always, met by returning other money of equal amount, even in the case of money it is a right, and not a mere physical transfer, that is significant.
Our problem regarding credit is, then, much simplified. We have simply to pick out certain economic exchanges to which the name of credit transactions has been applied,—a various and heterogeneous set of exchanges, in many ways—and study them, to find their peculiarities. These peculiarities will not make them exceptions to the general laws of value. They will make them merely special cases. To find essential principles marking off credit transactions, at large, from non-credit transactions is an exceedingly difficult thing. There are more differences among credit transactions themselves, than there are between the genus, credit transactions, and the class of things not called by that name.
Thus, monthly payments of rent, of wages, of college professors' salaries, are not commonly called credit transactions. The monthly payment of grocery bills, or of telephone bills, involves credit. Where is a real difference to be found? On the other hand, between book credit between grocer and patron on the one hand, and a bank-note or deposit credit on the other, the difference is large, in many practically important ways. Between a call loan and a ten year agricultural mortgage-note, the differences are even greater.
One may be disposed to find the differences between credit transactions and non-credit transactions in the fact that the former stipulate a definite sum of money, due at definite times. This would partly differentiate a bond, say, from a stock. The bond not merely calls for stipulated yearly payments, but also calls for a definite payment at the end. This would, however, exclude British Consols from the list of credit instruments! British Consols differ from safe preferred stocks in legal, rather than in economic, ways. Legally they are alike in that no terminal payment is called for. Practically they are alike in that annual regular sums may be expected. It may at least be said of credit transactions that stipulated money payments, either at a different time or a different place, are called for. This would include the telegraphic transfers of funds, and would exclude the case where A, a farmer, does a day's work for B, a neighbor, for the promise of a day's work in return at a later season. The latter transaction involves many of the elements that definitions of credit have included, but I think that we may at least limit our conception of credit transactions to transactions within a money economy, where money, as a measure of values, functions in the calculations. Shall we, however, limit credit transactions to cases where a stipulated amount of money is named in the contract, for a stipulated time?
Shall we exclude contracts where the payment of money is made contingent on anything? By contingency here I mean legal contingency. This test would exclude the highest grade preferred stock. It would include the shakiest bonds that contained, in the terms of the contract, no contingency. But where, then, would one place such an instrument as the Seaboard Airline Adjustment 5% Bonds, which may default in a given year half of the interest, if it is not earned,[506] and which yet call for the payment of the principal at a stipulated time?
What shall we say of "borrowing and carrying" transactions on the stock exchange? Is not the loan of stocks a real credit transaction? Ordinarily, when stocks are put up as collateral, one thinks of the money as being lent, and the stock merely as a pledge. But in the case of borrowing stocks by a bear to deliver next day, the transaction is definitely thought of as a loan of stock. It is sometimes paid for, the bear paying the bull a premium, instead of receiving interest on the money he has turned over to the bull as a "pledge." The more usual thing, is, of course, for the bull to pay the bear interest. But in a contract like this, there are many contingencies. As the stock rises in value, the bear must lend more money to the bull; if the stock falls, the bull must return part of the money to the bear. Both times and amounts are here contingent, even though in the end the amounts lent and repaid balance. Call loans, of course, do not call for payment at a stipulated time, and the same is true of bank-deposits and bank-notes, and of many other forms of credit. Interest on deposits in mutual savings banks is contingent, legally, as to amount. Are insurance policies credit instruments? What of endowment policies?
It is easy to draw legal distinctions in all these cases, but to show that definite and uniform economic consequences flow from these legal distinctions is quite impossible. Rather, it is easily possible to show that uniform or certain economic consequences do not, in general, flow from them.
I shall refrain from the effort to give a general, fundamental definition of credit. I shall rather discuss certain of the more important types of what have been called credit, with a view to seeing what bearing they have on the problems with which this book is concerned; the value of money, and prices. The general class of transactions to which the name, credit transactions, has been applied may be roughly designated as transactions in which the consideration on one side, at least, is the assumption of a debt, running in terms of money (though not necessarily to be paid in actual money), payable either at a future time or at another place. Objections can be found to this definition. It does not meet the fundamental test of a definition that, for the purpose in hand, it should seize upon the essential and unique characteristic of the things marked off. I am not sure that it meets the tests of inclusiveness and exclusiveness even for those transactions which we call credit transactions. Thus, if A and B go to the bank together, and A there buys B's horse, standing in front of the bank, giving B in return a check, which B immediately cashes in the same room where the check is drawn, the idea of different time or different place is not realized in any but a technical sense. A, in drawing the check is, of course, assuming a debt. The check, if repudiated by the bank, becomes a note, which A must pay. A, moreover, is paying B, not with money, but with the transfer of a claim on the bank, and the fact that his check, if unpaid, becomes a note is not the main fact about the check. Understanding our definition of credit to cover this case also, however, and attaching no fundamental importance to the definition save as a means of marking off a class of more or less related phenomena which we mean to discuss, the definition will serve.
Thus defined, we have in credit a concept susceptible to quantitative treatment. Debts, in terms of money, can be summed up, and we may have the concept of the "volume of credit" as the sum of such debts at a given time, or through a given period of time, or as an average through a period of time. We may distinguish credit transactions from credit, defining credit as the volume of debts, and credit transactions as transactions in which the debts are passed in exchange. This would be to broaden the notion of credit transactions beyond the usual conception, since it would include transactions in which A sells ("without recourse") B's note to C. It would also include cases where bonds are sold. It would exclude cases where stocks are sold, since they are not legally debts. Some would prefer to limit the notion of credit transaction to transactions in which there remains some contingent responsibility on the part of the one who uses the credit instrument, but this would be to deny the name, credit transaction, to cases where bank-notes or government paper are used in payments, as well as to deny it to the case where bonds are sold. It is not important, for my purposes, to draw a sharp line about the concept, credit transaction, however. And about the concept credit itself I have drawn a line resting on a legal, rather than an economic, distinction.
Within the field of credit, thus defined, we may single out for especial consideration certain forms of demand or short time credit, particularly bills of exchange, bank-notes and bank-deposits, and merchants' book-credit. We shall also have something to say regarding long-time credit, including bonds, and mortgage-notes that have no general market.
All these debts in terms of money, to which, in the aggregate, we have given the name, volume of credit, have grown out of exchanges. Exchange is here used in a wide sense, and is not confined to the case where goods or services are bought and sold. It is an exchange, if a man gives his note to a banker in return for a deposit credit. But, on the assumption that exchanges are made only when gains are to be realized, it follows that all debts, and so all credit, have been created in view of anticipated gains (or to avert anticipated losses). In a society where everything is in equilibrium, a "static state," where there are no "transitions" to be effected, where there is no occasion for speculation, and where exchanges of lands, etc., are negligible, the volume of all exchanges, including those where debts are passed in exchange, would be small. The occasion for the creation of the debts which make up the volume of credit would not be nearly so numerous as under dynamic conditions. The volume of credit, in other words, is largely a function of dynamic conditions, even though credit would exist in a static condition of economic life. The bulk of credit, as the bulk of exchanging, grows out of dynamic conditions, transitional changes, and the like.
This will be clearer when we raise the question as to why debts are created, as to what function debts perform in economic life. Why should a man borrow? Let us suppose that a farmer has 600 acres of land. He wishes to sell 100 acres, and use the proceeds in buying equipment for his farm. But he finds it difficult to sell the 100 acres. There is no ready market. He can sell it immediately only at a great sacrifice. By waiting, and looking industriously for a customer, or by engaging a real estate dealer to do so, he could finally find a buyer, but the thing is slow and uncertain, and he wishes to get the equipment at once. He borrows, therefore, giving his farm as security, or a part of the farm as security. He exchanges a claim on the future income of the farm for present money, and with this he can buy the equipment he needs. The net result has been that the credit transaction has transformed his unmarketable quantum of value into a marketable form of value. He has been able, by an indirect step, to do what he could not do directly—to trade a part of the farm (which in its economic essence is a prospect of future income) for the equipment. In this illustration, credit has functioned as a means of increasing the marketability or saleability of non-pecuniary forms of wealth. Credit is primarily a device for effecting exchanges that could not otherwise be effected, or for effecting exchanges more easily than they could otherwise be effected. This means that credit transactions are a part of the productive process, and that they increase values. It is the function of credit to universalize the characteristic of money, high saleability. It is the function of credit to "coin," so to speak, rights to goods on shelves, lands, etc., etc., into liquid rights, bearing the dollar mark, which are much more highly saleable than the rights in their original form were, and which often become as saleable as money itself, functioning perfectly as money.
Credit thus tends to universalize that characteristic which Menger[507] considers the unique characteristic of money. By means of credit transactions, a man borrows up to 50% of the value of the farm, makes his farm in effect, 50% saleable or fluid. The man who owns livestock may not be able, on a given day, to market them without loss, but he can use their value in the market, up, say, to 75%, by a loan. The man who owns a hundred shares of United States Steel may not be able, at a given time, to market them to his satisfaction—though in the case of articles and stocks dealt in the speculative markets saleability is very high indeed, and in the case of United States Steel, in particular, the "spread" between "buying price" and "selling price" is very narrow—but he can borrow, with the stock as security, up to 80% of its value. On a bond of the United States government, he may borrow up to 100%.[508] The process of creating credit is a process of transforming rights from unsaleable to saleable form. Often this means the subdivision of rights, preferential rights to a portion of the value of a piece of wealth being more saleable, because of greater certainty, than the total right to the whole. Another reason why partial rights may be more saleable is that the value represented by each partial right is smaller. It is easier to market things worth a thousand dollars than things worth fifty thousand, as a rule. In any case, a chief economic function of credit is,—the chief function for our purposes—to make fluid and saleable articles of wealth other than money; to universalize the quality of saleability.
This justifies us in our contention made before that all corporate securities, whether stocks or bonds,[509] are, in economic nature, alike. Driven to a legal concept for a definition of credit, we were obliged to exclude stocks from our rough definition. But corporate organization does precisely what the various other transactions that we have called credit transactions do. Lands and buildings and machinery, or the roadbed and rolling stock of a railroad, are highly specialized, often unfit for use in any form other than that in which they now appear. As concrete instruments of production, they would be highly unsaleable. In their totality, as a going concern, they are highly unsaleable, because in the aggregate so very valuable. Grouped together, however, but still subdivided, the objects of many thousands of partial rights, represented by stocks and bonds, they become saleable in high degree.
As objects other than money gain in saleability, they tend to gain in value, also. This is not necessarily true, always. If wealth is already in the best place, at the proper time, and in the proper hands, no point is involved in further exchanges. Additional saleability—or an increase in the qualities that make for saleability—could make no difference. But when objects could be employed to greater advantage if in different hands, if, in other words, there is occasion for exchange, then whatever adds to the saleability of a good adds to its value. What would otherwise have gone into the trouble and expense of marketing now is saved. In general, items of wealth tend to gain in value as they gain in saleability—though not in any definite proportion.
Further, as objects of value other than money gain in saleability, money tends to lose its differential advantage in this respect, and so tends to lose that part of its value which comes from the money-uses. If all things, including gold, were equally saleable, there would be no raison d'être for money, and gold would have only the value that comes from its commodity functions. In so far as credit-arrangements give to partial rights to wealth the capacity to serve as a medium of exchange or for other money purposes—and this is true to a high degree of bank-credit—this tends to cut under the sources of value of money. Credit thus, from two angles, tends to raise prices; it raises the values of goods; and it tends to lower the value of money. The limits on this, however, are reached when gold ceases entirely to function as money, and when all items of value are perfectly saleable. Then credit has done its perfect work for prices, and can do no more. No incentive remains for further borrowing, if all items of value that need to be exchanged are perfectly saleable.
These theses will meet objection, particularly from those who are accustomed to quantity theory reasoning, and who look upon the volume of credit as something independent of the volume of trade. On the logic of the quantity theory there is no reason why prices might not mount indefinitely, if only credit could increase indefinitely. The causes controlling the volume of credit are, on this view, quite independent of the volume of trade. I have given this line of thought sufficient criticism, perhaps, in Part II, but shall find occasion to recur to it at a later point in this chapter. However, writers not bound by quantity theory ideas, may still find reason to question these theses, and it is necessary that I should take account of various complications, and make what may well be called substantial qualifications and modifications, before the theses are acceptable.
First, objection will be offered to the doctrine that all credit is merely rights to wealth, that credit rests on wealth. It will be urged that many loans are made without collateral, or mortgage security, that the "personal credit" of the borrower is the only security, and the only basis of the loan. This objection is not serious. There are, doubtless, loans which are disguised benevolences, where the lender gets nothing good in return for his loan. I abstract from such cases. Quantitatively they are not important, and qualitatively they are not really commercial transactions. In general, when a good merchant borrows at the bank on his personal note, the bank knows very well what goods he has in stock, what prospects he has for marketing them, what other debts he has, what his "net worth" is. And the bank knows that it has legal claims, even though not preferred claims, on his wealth. When a young business man borrows capital from a neighbor, giving no security because he has no marketable wealth which would serve as security, he is, none the less, exchanging a valuable right for the loan. He is giving the lender a right to a preferential share in his future income. The lender has considered the young man's abilities as sources of income, in conjunction with the capital lent. Incidentally, the lender retains rights, preferential rights as against the young man himself, in the quantum of value he has turned over to him. If a young man borrows the resources with which he buys a farm, the lender takes a mortgage on the farm itself. Transactions of this sort frequently have in them the element of benevolence, and the considerations are not always strictly commercial. In the case of a young man of unusual ability, however, who insures his life for the benefit of the lender, such transactions may be perfectly good commercial transactions, value balancing value in the exchange. The thing traded is commonly present money (or its equivalent) for rights to future money income.