25. In the preceding sections we have clearly shewn that Credit is the name of a certain species of Incorporeal Property, which is of the same nature as, but inferior in degree to, Money: and that it fulfils exactly the same functions as Money as a Medium of Exchange, or Circulation: also that it is Property cumulative to Money: that is, it is over and above, or additional to, the quantity of Money in use. In the following chapters we shall exhibit the actual mechanism of the System of Credit, and shew how it is the great productive or circulating power of modern times. Credit in fact is to Money what Steam is to water: and like that power, while its use within proper limits is one of the most beneficial inventions ever devised by the ingenuity of man, its misuse by unskilful hands leads to the most fearful calamities. Credit like steam has its limits; and we have now to investigate the proper Limits of Credit, and the various methods by which it may be extinguished. It is Unextinguished Credit which produces those terrible monetary cataclysms which scatter ruin and desolation among nations. It is by the excessive creation of Credit that over-production is brought about, which causes those terrible catastrophes called Commercial Crises: and the inability of Credit-shops to extinguish the Credit they have created - commonly called the failures of Banks - is the cause of the most terrible social calamities of modern times.

The true Limits of Credit may be seen from the etymology of the word. Because all Credit is a Promise to pay something in future. And that "something," whatever it be, is the Value of the promise. That something need not be Money. It may be anything else. The practice of interest, or usury, was in force before the invention of Money. It may be a promise to do something. As an example of this we may take a postage stamp, which is a promise by the State to carry a letter. And this service is the Value of the stamp. Now every one knows that a postage stamp is a valuable thing. It passes currently as small change. People take postage stamps as equivalent to pence, because they often wish to send letters by the post. Postage stamps are Credit: and the regulation that they may be converted into money at any post office makes them in all respects part of the Currency of the country. They are in fact 1d. notes.

The only real difficulty in the case is to comprehend that the abstract "Promise to pay" is independent exchangeable property, quite distinct from the thing itself; and it may circulate in commerce, just the same as the thing itself. Every one can see the truth of this by his own experience who sees Bank Notes, Cheques, Bills of Exchange etc. circulating to the amount of hundreds of millions, and performing the functions of Money.

But of course, it is manifest that the Value of the Promise is the Thing itself: and consequently if the thing itself fails, the Promise has lost its Value. This consideration, therefore, at once indicates the Limit of Credit. Assuming Credit to be, what it is in its best known form in this country, the Promise to pay money, it is quite clear that every future payment has a Present Value, Consequently whenever the possession of Money at a future time is actually certain, the Right to receive it is an exchangeable Property, which may be bought and sold.

Commercial Credit, however, does not rest upon so solid a basis as the certainty of being in possession of Money, for then it would be as safe as Money itself, and losses would be unknown. It is baaed upon the expectation of receiving Money at a certain time. A trader buys goods, and gives his Promise to pay money, upon the reasonable expectation that he will be able to sell them for Money before the bill becomes due: or at least that he will be in possession of Money before that time. That is he produces, or brings and offers them for sale, in the hope that they will be consumed or bought. If he brings forward for sale more of any species of goods than is suitable to the circumstances of the time, so that they cannot be sold at all, or if they are obliged to be sold at a lower price than they cost, that is over-production. He must then pay his Bills out of any other means that he may possess, and if he has no other means he is ruined.

In times of great speculation, and great fluctuation of prices, there is an exceeding danger of over-production by means of Credit, especially by that abuse of it called Accommodation Paper, which we shall describe hereafter. A new channel of trade is opened perhaps, and the first to take advantage of it make great profits. Multitudes of others, hearing of these great profits, rush in, all dealing on Credit. The market is overstocked, and prices tumble down, and the Credit created to carry on these operations cannot be redeemed. Not only are the speculators ruined, but also frequently the Banks which created Credit by discounting these bills.

The institution of Banks and Bankers who create Currency by means of their Credit, either in the form of Notes, or Deposits, gives a great extension to the Limits of Credit. But, nevertheless the Principle of the Limit remains the same. The increased quantity of Currency they can issue by means of their Credit, enables them to lower the Rate of Discount. These Bank Credits take the place of Money, and serve the purposes of Money, for all internal transactions. When a banker has created these Credits, or Debts, by buying Commercial Debts, those who are indebted to the banker must obtain a sufficiency of Money, or of other bankers' notes, or of the Banker's own Notes, or Credit, to discharge their Debt. If this be done the Credit has been sound: payment in all these forms being absolutely equivalent. Hence we see that Credit is never excessive, no matter what its absolute quantity is, so long as it always returns into itself.