8. We have still another erroneous view of the nature of Credit to clear away. We have seen that the preceding errors arose from not observing the distinction between Mutuum and Commodatum and Depositum. From the. first error proceeded the erroneous notion that those who say that Credit is Capital say that the same thing can be in two places at once: from the second that Bills of Lading and Dock Warrants are of the same nature, and are Credit, as well as Bills of Exchange. The third form of error which we have now to dissipate is that Credit adds nothing to the resources of the world, because it is neutralised by something else.

Any person practically conversant with commerce, and seeing the immensely greater portion of commercial operations effected by means of Credit, would smile at the notion that Credit adds nothing to the resources of a nation: but some have been misled by a very palpable error. Henry Thornton, an able man, a banker, and one of the authors of the Bullion Report, says - "Paper constitutes it is true an article on the Credit side of the books of some men, but it forms an exactly equal item on the Debit side of the books of others. It constitutes on the whole neither a Debit nor a Credit."

So another eminent banker M. Cernuschi says - "The balance sheet of every individual contains three accounts: existing goods, Credits, and Debts. But if we collected into one all the balance sheets of every one in the world, the Debts and the Credits mutually neutralise each other, and there remains but a single account: existing goods.

"The totality of the goods, therefore, forms the general inventory. There is the first matter of exchange. The Debts and Credits are subsidiary matters. Debts and Credits are reciprocally transmitted as goods are transmitted: but however great or small they may be, and through whatever hands they pass, Credits for some, Debts for others, they add nothing to, they take away nothing from, the general inventory."

The argument of Thornton and M. Cernuschi is simply this -

Suppose A to have £100 in money, and also a three months' bill of £50 on B. Suppose B to have £100 but at the same time to have accepted a bill of £50 at three months to A, Then A's property would be stated thus £100+ £50; B's property would be stated thus £100 - £50. Now the argument of these writers is this - that the +£50 and the - £50 balance each other, and the result is 0: which according to them is the same thing as saying that these Quantities do not exist at all.

This view might perhaps seem at first sight somewhat specious, but a very little reflection will shew that it is quite erroneous.

Suppose that a landlord lets a house to a tenant. In exchange for the use of the house the landlord receives the Right to demand a certain sum, three months after date, we will suppose. The transaction is an Exchange. The Right to demand the money is an actually existing Right in the Landlord; it is his Property, which he may sell or transfer to any one else. It is, therefore, plus, +, to him, and an addition to his other Property. The tenant is bound to pay this Rent: but does that cause any diminution of his present Property? Does the Property in any of the money at his banker's pass to the landlord? Certainly not. Hence it is quite clear that this obligation to pay at a future time is no diminution whatever of his present Property. In fact he is not in Debt at all until he has had the use of the house for three months, and the day of payment has come.

Similarly if a merchant buys goods and gives a bill at three months in payment of them, the transaction is an exchange. The Right to demand payment is plus to the seller of the goods: it is his Property, which he may soil and dispose of like money. But the goods remain the entire Property of the merchant, which he may sell or dispose of: and he is not in Debt at all, till the Bill becomes due. Suppose that the landlord, or the seller of the goods, were to bring an action for the Rent, or the Price, before the end of the three months, the tenant, or the merchant, would reply that they were not in debt at all. The well known maxim of Law is that Credit unexpired may be pleaded under the general issue, which means that if a man sues another for an obligation not yet due, he may simply reply that he is not in debt at all.

Thus Mr. Pitt Taylor says - "In addition to these examples, it may be observed that, whenever the defendant can show that in fact no Debt ever existed before action brought, he may do so under the plea of never indebted. For instance if the action be for goods sold and delivered, he may defend himself under this plea by proving that they were sold on Credit, which was unexpired when the action was commenced." Hence we see that in this case, the - £50 does not mean that it is to be subtracted from his 'present Property.

This then is the paradox. The Right to receive the future Rent is the absolute Property of the landlord: and therefore in this case + means addition.

But though the tenant is bound to pay the Rent, and it is therefore - to him, it is not to be subtracted from his present Property, and is no diminution of it.

What then does it mean ?

Mathematicians have since the time of Maclaurin given Debts as an example of "Negative Quantities," but they have never given any satisfactory explanation of what is meant by this order of Negative Quantities.

The explanation usually given is this - a man's Property may be considered as positive, and his Debts as negative: subtract his Debts from his Property, and the remainder if any is his Capital. And as the national Capital is the aggregate Capital of all the individuals in it, according to this doctrine, in order to find the quantity of property in the country, all the floating debts in it would have to be subtracted from all the Property in it, and the remainder would be the amount of national Capital.

So Peacock, the distinguished Algebraist, says - "If property possessed or due could be denoted by a number or symbol with a positive sign, a debt would be indicated by a number or symbol with a negative sign, or conversely: such affections of property are correctly symbolised by the signs + and -, since they possess the inverse relation to each other, which these signs require: for if to a person A there be given a certain property or sum of money combined or added to a debt of equal amount, his wealth or property remains the same as before."

Now in a certain sense these modes of statement may be correct. If a man were going to retire from business, he would call in and discharge his liabilities, and the remainder, if any, would be his fortune.

But such a mode of statement is quite unsuitable for Economics. Debts are a species of Property of the most colossal magnitude, and are the subject of commerce, as much as any other merchandise, until they are extinguished. Economics has only to do with them while they exist, and are the subject of commerce.

The fallacy of the mode of statement of the writers we have just quoted is evident, and is precisely the one which we have already pointed out was carefully provided against in the Digest. For they evidently consider a Debt to be some of the Debtor's property set apart and pledged to the Creditor, and therefore a diminution of the Debtor's property. But this is a most grievous error: a Debt is not part of the Debtor's money or goods affected with the Negative sign, but the personal Duty of the Debtor to pay: and until the time of payment has arrived, there is no Duty and no Debt. Hence while the Right created on the exchange of the goods is an Economic Quantity which may be exchanged and sold any number of times, as indeed these writers admit, the Debt or Duty is non-existent or latent, and has no effect at all: hence the goods and the Credit given in exchange for them, are two Economic Quantities, and may both be sold and transferred any number of times. And in Economics we have only to consider the number of Economic Quantities, and their relations of exchange.

We will give a very simple example to shew how very erroneous the method of stating the question by Thornton and Cernuschi is. Suppose a banker holds a merchant's acceptance not yet due. Suppose at the same time the merchant holds an equal amount of the banker's notes. According to the method of statement of these writers, the mutual debts cancel each other, and the result is nothing. But this is manifestly erroneous: because the banker may if he pleases put the merchant's acceptance into circulation, and the merchant may put the banker's notes into circulation. Hence there would be two Economic Quantities in circulation, and producing the same effects as so much money. Hence in Economics these Quantities are not to be considered as extinguished until they are so in reality. But the same may be said of any Economic Quantity : when it is destroyed it is no longer an Economic Quantity. The same principle is true with regard to Credit, or Debt, as with any other Quantity: so long as it exists, and is capable of being exchanged it is an Economic Quantity: when it is extinguished, and only then it ceases to be one.