The divisions of credit have been classified as follows: Public credit; capital credit; mercantile credit; individual or personal credit; and banking credit; which last named includes commercial credit.

By "public credit" is meant chiefly the borrowing operations of governments, whether national, state or local, through the issue of interest bearing obligations or securities. By the issuance of such securities, the government receives a form of credit called "public credit," because it is used for public purposes. The consideration upon which it receives this credit is by its giving to lenders a promise of future performance, that is, of future payment of its obligations in the form of bonds or certificates evidencing indebtedness.

By "capital credit," or "industrial credit," is meant the credit used by corporations in procuring the necessary capital requirements for their business operations. The bondholders extend funds to the corporation in exchange for the corporation's promise to pay them at a future date the equivalent value of the bonds, with interest.

Capital investments, as for instance, by a proprietor of a business, or by a co-partnership are not "capital credit," because they work for themselves alone, and the profits of the business, whatever they may be, go to the owners alone. This is really no form of credit. It is rather a "capital investment."

"Mercantile credit" is used by producers, wholesalers, retailers, commission merchants, etc., in connection with the manufacture and sale of goods from producer to ultimate consumer. A manufacturer would buy a quantity of raw materials to be made into finished products. To obtain this raw material, he would agree to pay the producer of the raw material only after he has sold the product. In this way there arises a form of credit known as "mercantile credit," or a time obligation, that is, a promise of future payment. An indirect means of mercantile credit would be a loan from the bank by the manufacturer whereby the credit is extended by the bank instead of by the producer.

The term "personal" or "individual credit" designates that form of credit availed of by individuals, rather than by public or private corporations. It is the means by which an individual may secure goods for consumption purposes, without an immediate payment of cash. This form of credit appears in the time payment plans of the laborer and the salaried man, who might pay weekly or monthly his grocery bill, meat bill, gas or electric light bill. Equivalent terms under this heading are "consumption credit" and "retail credit," because primarily used in retail transactions. Personal credit generally does not require a security of any kind other than an implied promise or written promise to pay in the future.

The most important form of credit is "banking" or "commercial credit." Banks in this connection furnish funds to borrowers of every description, and it is to the banks that one in need of credit naturally turns. "Bank" or "commercial credit" is extended by means of the bank's own capital, and also in part from the funds which have been left with the bank by depositors in general, and what is most important of all, through the use of the bank's own credit. A bank uses its own credit in much the same way as does an individual.

The elements of credit are a reputation for business honesty and ability, some kind of security, in the form of accommodations that enter into trade, or paper having a value, or tangible property. Borrowers under this form of credit use their good name and property as a means of securing funds for immediate use. A bank, likewise if it possesses the confidence of the community, is able to extend its business by means of its credit. This is evidenced by the fact that the community entrusts its funds to the bank for safekeeping or general use, as the case may be.

But a more important way in which commercial banks use their credit is illustrated by the following: A bank knows from experience that to every cash dollar required in the operation of its business, ten times that amount in the form of credit, or transactions not requiring the use of actual money, are necessary. If, therefore, a bank has one million dollars in cash on hand, it is able, by means of its credit, to do a business equal to many times the amount of cash it has. This is accomplished through borrowing on its credit.