The term "credit" is used with a great variety of meanings.1 A man is said to have good credit if he has the reputation among his business associates of paying his debts promptly when due. To give credit is to accept another's promise to pay in exchange for a valuable consideration. To say that a firm gets a "line of credit" at a bank or with another business house means that it has the right to borrow or to get goods up to a certain amount by agreeing to pay sometime in the future. Credit may be broadly defined as "the power to get goods in exchange by giving a promise or contract to deliver an equivalent at some future time."2 In short, credit is a promise to pay money.
There has been much discussion as to whether confidence or futurity is the essential thing in credit; and as to whether credit is based on money or on goods. It seems clear that "futurity is the distinctive factor in credit, while confidence lies at the basis of the granting of credit."3 The time element enters into all credit transactions, yet the essence of credit is confidence on the part of the creditor in the debtor's willingness and ability to pay his debt. In certain kinds of credit transactions, as, for example, the purchase and sale of goods on credit, confidence may rest upon the character and business ability of the borrower. In other types of credit transactions, as call loans or mortgage loans, confidence rests more upon the securities or property pledged than upon the borrower's personal integrity - yet the element of confidence is present in some form in all such transactions. As to whether credit is based on money or goods, it need only be said that the promise to pay in the future involved in a credit transaction is usually expressed in terms of money, and is "completed by the payment of money, credit money, or a title to money."1
1 See Prendergast: Credit and Its Uses, pp. 8-11.
2 Johnson: Money and Currency, p. 4. For other definitions see Laughlin: Principles of Money, p. 72.
3 Hagerty: Mercantile Credit, p. 8.
The most important service of credit is to facilitate the transfer of capital and thus to promote the production of wealth. But it must be understood that credit is not itself either capital or wealth. Wealth consists of economic goods and capital consists of economic goods used in the production of wealth. Now credit is not "a thing or commodity, nor does it create anything. No more wealth, no more capital, no more goods, exist after credit is given than before." 2 If capital is in the hands of the borrower, it is withdrawn from the lender. Credit, then, is merely the agency of transfer. But to the extent that credit transfers capital from the hands of the passive owners to the borrower or enterpriser who will employ it in larger production, it increases the usefulness of capital.