CREDIT, in the sense in which we are now to treat of it, is the trust which is given to a person when he obtains a loan of moneys or purchases any article, the payment of which is to be made at an after period. Every sum of credit, therefore, must be founded on a transfer of a corresponding sum of capital; and the whole amount of credit existing at any time can never exceed that of the lent capital. Credit is, in reference to the person who gives it, the power of lending, and to him who receives it, the power of borrowing. The basis of credit is confidence, and this is found to exist extensively only where good faith and punctuality have been allowed to grow into habit, and where laws afford to creditors the easy and certain means of recovering their debts.

In young countries, before dealings have become multiplied, we find people inattentive to their money engagements, when there is no want of property with the debtor, and even when the payment of the debt has been fixed by document to a positive term. But as transactions increase, and population presses more closely together, a knowledge of the circumstances of individuals is rendered difficult, and a necessity for punctuality 7 arises, to prevent doubts being entertained of the ability to pay. And this apprehension of discredit entertained by the debtor, and of its consequences to his future transactions, has more effect to establish and maintain good faith and exactness than the operation of the laws is able to produce.

When capital is abundant, relatively to the means of employing it, the competition of capitalists produces a facility of obtaining credit; and parties become enabled to borrow and purchase upon credit who could not do so before. Credit is then said to be high, but it is the value of the capital which, from the overstock, has become low. The capitalist, in these circumstances, grows less scrupulous about his security, that he may bring within the range of his dealings a greater body of borrowers or purchasers, and thereby be enabled to keep up his price.

When the supply of capital continues in this state for any length of time, it gives rise to an imprudence of conduct which lays the foundation of much after evil. Sales and loans are made at credits far beyond the ordinary periods; and those into whose hands the extra capital by this means passes, considering it as a fund with which they may trade, go on also extending their dealings and credits, until the whole system is put upon the stretch. In this situation any interruption to the sale of commodities occasions instant confusion and distress. The confidence[7:7:458] which had prevailed gives place to alarm and distrust, and the same effect is produced for the time by the retardment of the circulation that would have been experienced had the capital itself been withdrawn.

By the operation of credit, not only is the circulation of capital facilitated, and its employment increased; but by its means alone certain descriptions of capital can be brought into action.

When an article is sold upon credit, the seller places, for the time, a portion of his capital at the command of a party who may have no capital of his own. This person, nevertheless, by another operation of credit, is enabled to sell upon credit also, and still keep his engagement with the party from whom he bought. This he accomplishes by calling in the assistance of the money capitalist, the banker, who advances to him the amount of the sale upon his and his purchaser’s joint security, and receives in consideration a rent for. the sum advanced. By this process facility and’extension are given to circulation, beyond what could take place if the commodity could be exchanged only for immediate value; whilst an opportunity is, at the same time, afforded of employing a branch of capital which would otherwise remain inactive and without use.

It is almost unnecessary to remark, that it is by the operation of credit that a return is got from the capital of persons who are incapable of employing it themselves, and which can be put into a state of useful activity only by lending it to others.

Even the fixed capital, when leased to a tenant, may be said to be put into circulation by credit. For when a 'landholder lets a farm, suppose of the value of L.10,000, at the rent of L.400 a year, he lends the tenant L.10,000 of capital, as much as if he lent him the money, and enabled him to acquire for the time the property upon which he is to operate.

In Scotland, after the disposition to commercial pursuits began to manifest itself, the progress was retarded, by the total want of commercial capital in the country. To get the better of this difficulty, and draw to these employments any little capital that otherwise existed, it became the practice, when a commercial undertaking was to be entered upon, to associate in the adventure some persons of known substance, and, upon the joint credit of the parties forming the company, to borrow the capital necessary for carrying it on. The credit which was thus established is called company credit, and is effectual to its proposed end of borrowing or purchasing with advantage, according to the supposed responsibility of the parties of whom the company is composed.

Up to the year 1793 a considerable proportion of the manufacturing and mercantile concerns of Scotland were carried on upon this plan; and to give strength to their credit, and encourage those who had money to lend to place it with them, a rule was established, and confirmed by decisions of the courts of law, that, in case of bankruptcy, a creditor of a company should be entitled to claim upon each of the partners’ separate estates, in competition with the party’s individual creditors, for the balance of his debt unpaid from the company’s effects.

When a party purchasing or borrowing capital gives a written obligation for the amount, payable to the order of his creditor at a certain fixed period, he embodies a sum of credit capable of being exchanged again for capital; and the transference of these documents to new parties, who replace to the former creditor the capital he had lent upon them, is what is called a circulation of credit. Indeed, without the use of bills, or of some instrument of similar powers, credit must have been confined to a single operation between first contracting parties, and the circulation of capital limited to what could have been effect ed in this way. But a transferable document of the sum to be received becomes itself a negotiable or marketable article; and the collective credit of the parties through whose hands it may successively pass continuing to be engrafted upon it, a new facility is gained to circulation by every movement which it makes.

The whole of the credit embodied by bills, however, is not brought into circulation; a part only of the sellers or lenders requiring to have their capital replaced to them by anticipation. But it is according to the expected facility with which payments may be thus anticipated, that credit is at first freely and readily given; and whenever any thing occurs to impede the circulation of credit, there is an immediate disposition in the merchant to withhold or limit it.

Every transfer of capital made upon a buyer or borrower’s own obligation of payment creates a new sum of transferable credit; and this is the case, although it should be the same capital that is again and again transferred. But a sale of goods, or an advance of money upon the obligation of a third party, indorsed to the seller or lender, forms no addition to the sum of circulating credit, the transaction being the circulation, not the creation, of a sum of credit. Neither does a succession of purchases or borrowings, effected by means of the same document indorsed from the one party to the other, add to the sum of credit in circulation. For although each of these transactions is the ground of a separate obligation between the parties contracting, there is with the whole but one absolute creditor, the holder of the bill, and one absolute debtor, the acceptor of the bill, the others being merely contingent debtors to the one, and contingent creditors of the other.

Circulated credit is .o be classed into that circulated by loan, and that which is circulated by means of sale. The first is the circulation of the credit founded upon the obligation of individuals or private companies, and called private credit; the second, of that founded upon the obligations of the state, or the transfers of the stock of corporate bodies, and called public credit.

The documents of these two descriptions of credit possess different and distinct qualities, and are differently negotiable. It may be proper, therefore, to examine how they are employed as means of borrowing or purchasing, what are their separate powers, and what is the probable extent of the circulation of each.

We shall begin with those belonging to private credit, which are as follows:

First, Obligations payable to the bearer on demand, and which, being passed without recourse, are employed as money.

Secondly, Transferable obligations payable at an after date, as notes of hand and bills of exchange, which, being negotiated with recourse upon the preceding obligants, are taken as guaranteed pledges of a sum to be received when they become due.

The circulation of obligations, payable to the bearer on demand, or notes employed as money, is the circulation of a credit borrowed by the issuer of the note from the public; the holder of the note at the time is the creditor; and the property he gave in exchange for it is a loan from him to the banker.

As it is in the power of the party giving this credit at any time to put. an end to it by calling for his money, these notes circulate upon the credit of the issuer alone. No assurance of payment is required from the person from whom they are received, as is the case with bills; the payment of which being at afuture date, it is thought necessary to reserve recourse against the parties through whose hands they have passed. The circulation of notes [7:7:459]payable on demand is therefore a circulation of what may be termed single credit, and bills a circulation of collective credit.

When bank-notes are issued by a banker in discount of a bill, it may be supposed that a twofold credit is put into circulation; a credit to the party to whqm the bill has been discounted, and a counter credit from him to the issuer of the notes. But in this stage of the transaction, no circulation of credit has taken place. Credit is circulated only when exchanged for capital, and in this case it has been but the exchange of one credit for. another. The banker, indeed, in giving his notes payable on demand in exchange for a bill payable at a future date, gives what is of a quality different from that which he receives; for what he gives is immediately exchangeable for capital, and to the person receiving it is the same as capital. But still it is only credit he has parted with, which will not be in a state of circulation until it comes to be exchanged for capital. In as far as relates to circulation, the transaction is the same with that of a person lending his credit to another, by accepting a bill to him without value. A sum of credit is thereby created, but is not circulated until the bill comes to be exchanged for value.

The credit that is in circulation from the exchange of bank-notes for a bill, is a credit from the party who at the time has given capital or value for the notes. When the banker “cashes” them, he becomes the creditor, but while they remain in circulation the public is the creditor.

The amount of credit from the circulation of cash notes never can be pushed beyond what would have been the value of the specie that would have been in circulation had the currency been of the precious metals, which the notes only serve to represent. Should the notes cease to be convertible into specie, their amount, indeed, may be augmented at the pleasure of the issuer; but their value, and the credit in circulation from them, will still be regulated by this limit. The increased sum will represent the value which the smaller did before, and each note will be reduced in its value, in the proportion of the increase that may have taken place of the whole.

This description of circulating credit is of a quality different from the others. From supplying the place of capital, in its character of currency, it is lent out as capital; but loans from this fund are precarious, its amount depending upon the state of public confidence, and being liable to be diminished by every call upon the banks to replace the notes with specie.

Circulating notes, not convertible into specieţ issued under the authority of the state, have been called a fabric of unreal credit. But this currency, however unsuitable to its proper ends, affords a circulation of real credit. It is indeed exposed to constant fluctuation of value, according to the amount of it in the circle; and the party taking it is obliged, for his own safety, to include in the price of what he gives for it, sufficient to cover the difference between it and specie, and the risk of further depreciation while it may remain in his hands. Still, however, an amount of credit, to the value of what has been given for the notes, in the first instance, is put into circulation, and an amount continued in circulation, to the value always of what they are exchangeable for at the time; the holders of them always remaining creditors of the issuer, to the extent of the whole sum which the notes profess to pay.

A currency of this description, however, is inapplicable as a measure of value, and therefore unfit to be employed as a circulating medium. And as to the other object, intended by its issuers to supply an amount of funds to the state; the depreciation with which it must be issued at first, and the loss to be sustained from taking it back again at par, render it an expensive means of borrowing.

With regard to obligations payable at a future date, which constitutes the second branch of private credit, and which we are next to consider, the credit founded on them is circulated, either in the transfers of the ordinary capital in sales, as when the credit of indorsed bills is employed to purchase goods, or in the transfers of the banking capital in loans, as when the credit of indorsed bills is employed to borrow money; the transfer under the latter, when the bill is exchanged for money, being often a further circulation of a credit previously circulated under the former, when the bill was exchanged for goods.

A fictitious bill, that is, an acceptance given without value, vests in the person in whose favour it is drawn a sum of transferable credit not less than would have been the case if it had been the document of a sale, or loan of property. Mr Thornton, in his treatise on Paper Credit, established the doctrine, till then disputed, that the credit of a bill does not rest upon the nature of the transaction in which it has originated, but upon the conceived ability of the obligants to discharge the debt.

The being able to embody in bills every sum of credit, has furnished the means of employing, with incalculable advantage to commerce, a portion of the capital of the country, which otherwise, it is probable, would have remained inactive.

The security they afford for the repayment at a stipulated period of the sums lent upon them, furnishes the means of an interim employment of money held for after occasions, which the party would not otherwise venture to lend out; of money which formerly lay idle in the hands of parties unacquainted with any safe means of using it; and of the money which traders are daily receiving in the course of their business, but which they do not immediately require. These different sums collected in the hands of a banker, form what is called the banking capital of the country; and which, lent out upon such securities, produces not only a profit to him, but interest to the parties who have placed them at his disposal. The importance of this intermediary fund in the transactions of the country is such, that when, from distrust, at any time, these deposits are withheld or withdrawn from the bankers, the mercantile body is convulsed throughout.

We now come to the second division of credit, that circulated by sale; the documents of the first branch of which are, the negotiable obligations of government, as exchequer bills, navy bills, &c., and the whole of the public funds, constituting what is termed the credit of the state.

When capital is to be competed for, this credit has an advantage in the market over the former. Its price rises according to the demand; and by that means it is enabled to secure whatever share it may require of the supply. This is not the case with the credit circulated by transfers of capital upon loan, the price or stipulated rent of which cannot, whatever may be the demand, rise beyond a prescribed limit. It has the effect, in these circumstances, to force the capital applicable to this part of the circulation to seek the employment of the other; so that the inconvenience produced by an interruption of circulation from a diminution of the general capital, falls entirely upon the circulation of bill credit, the supply for the circulation of the credit transferable by sale being kept full, at the expense of that applicable to the circulation of credit transferable by loan.

Hence all additions made to the national debt have an effect to operate against the circulation of the credit founded upon bills; for every new loan not only takes a [7:7:460]large sum permanently from the fund of circulation, but adds a proportion of the newly-contracted debt to the sum to be circulated; the consequence of which is a fall in the market value of these securities, according to the change which has taken place upon the two funds. But this diminution of the means of circulation does not interrupt the circulation of government obligations, which continue to command a supply of capital, by accommodating their price to the state of the market under every pressure of circumstances. But when they happen to be in this state, their circulation enters into competition with government itself, in its biddings for the capital of new loans. For the price they bear at the time fixes the terms upon which the minister is enabled to make his bargain with the money-lenders.

When government goes on for a length of time in a course of borrowing, there is a progressive depreciation of the value of these securities, in the exact degree in which the loans take from the amount of the circulating capital, and add to the sum of credit to be circulated. This was strongly evinced in the fall of the - price of stock in the early period of the war of 1793, notwithstanding the influence at the time of an unprecedented accession of new capital, proceeding from the greatest flow of commercial prosperity which the country had ever experienced.

The transferable shares of public stock companies, from being occasionally a means of temporary investment of capital, have by some been considered as forming a part of the circulating credit of the country. But this is not the case. The stocks of these companies form a part of the ordinary circulating capital; and of consequence, the transfers of their shares are not operations of credit, but exchanges of capital between the buying and selling parties. The transfers of the premiums, however, paid in the purchase of this description of stock, which, although no part of the capital, form an immediate part of the price, may be fairly considered as a circulation of credit, to be added to the amount of the circulating credit of the country. The mode of circulating this credit being the same with that of the public funds, and its market value rising or falling with the general abundance or scarcity of capital, its circulation, when capital is scarce, immediately interferes with the circulation of credit by simple borrowing.