Commercial credit is the principal medium by means of which trade exchanges are carried on in the distribution of goods. The entire industrial organization of to-day is based upon credit giving. The process of distributing goods from the grower or original producer to the ultimate consumer involves the services of many middlemen - manufacturers, brokers, wholesalers, jobbers, importers and retailers. Each of these in turn frequently has to buy goods on credit, for few business concerns are so situated that they can always pay cash. The farmer or planter goes in debt for his seed, fertilizer and machinery, agreeing to make payment when his crop is sold; the manufacturer purchases his raw materials on time and sells his manufactured product to the wholesaler, jobber or commission agent under the same terms; and so on through .the whole chain of distribution.
Great changes have been brought about in the mercantile credit system in recent years due largely to improved means of transportation and communication. In earlier days it was necessary for the merchant to make several trips a year to the large jobbing centers to purchase his supplies. Buyer and seller met face to face and agreed upon terms of payment. There was considerable risk owing to bad roads and uncertainty of shipments. The local merchant, therefore, "stocked up' heavily once or twice a year and usually had to ask for a liberal amount of time in which to make his payments. Quite commonly he gave his promissory notes running for six months or a year. Improved railway and mail service, the telegraph, telephone and cable have greatly changed these earlier methods of merchandising. Now the buyer and seller rarely see each other. Traveling salesmen make periodic visits to the local merchant, selling by sample; or the merchant buys from catalogs or price lists sent through the mails. He may now send in smaller orders, knowing that he can get quick delivery if a good season warrants additional orders. Thus, the wholesaler takes the risk of overstocking rather than the retailer.
Changes have come, too, in methods and terms of payment and of securing credit information. Formerly the seller of merchandise determined upon the amount of credit he could safely extend to the buyer when the latter came to make his purchases for the year or the season. Now orders are received from hundreds of merchants scattered over a very wide territory of whose financial responsibility the seller personally knows little or nothing. Various agencies and institutions, such as the mercantile agencies and credit exchange bureaus, have been developed to supply the seller with information regarding the credit standing of buyers, and the large manufacturing and jobbing houses have established credit departments whose business it is to investigate the business standing of those seeking credit.
Under the old system of liberal and long terms of credit it was usual for the seller to require the buyer to give a promissory note which he could discount at his bank and so procure funds to operate his own business. With improved means of communication and better banking facilities these long-term note settlements have given place largely to short-time payments. The merchant who gave his note for six or twelve months under the old system had to pay the highest prices and the highest rate of interest. But with more liberal banking accommodations he was quick to see the advantage of borrowing money from the bank and "discounting" his bills for cash or an early settlement. This change from long-time paper has introduced into the credit system two new features, "dating" and "book accounts."