But we must not overlook the dark side of our credit economy. Without expanding upon the evils of credit we may mention some of the more important of them as follows:

1. Credit frequently encourages extravagance, which is a fruitful source of fraud and embezzlement. Men who are granted credit often overrun reasonable bounds, and then in their despair resort to desperate expedients in the hope of release.

2. Credit prompts precarious speculation. Those who speculate with the capital of other people are proverbially careless. Our entire land is strewn with the ruins of businesses wrecked by men who have mismanaged the property which unwise credit gave into their hands. When such management assumes unusually large proportions, credit becomes a powerful factor in precipitating a disastrous panic and crisis.

Some writers have claimed that all productive credit credit used in carrying on a business is good, and that the evils of credit arise only in connection with consumptive credit, that is, credit which enables one to spend money for personal gratification; but while there is a modicum of truth underlying this distinction, the line cannot be so sharply drawn. Consumptive credit does frequently lead to extravagance, but it also enables many a young man to develop personal powers and to become a great artist or scholar ; on the other hand, productive credit, while normally resulting in great advantages to society, sometimes opens the way to putting business at the mercy of ignorance, incompetence, and dishonesty.

We may conclude the matter by saying that we should do all within our power as a society to preserve the advantages, while reducing the evils of credit to a minimum. It is a hopeful indication of progress in this direction that more and more attention is being given by the public to a demand for full publicity in the management of great business undertakings. Such publicity will go far toward obviating one of the most apparent and general of the abuses of credit which we have enumerated.


1.Money having proved inadequate to the needs of modern exchange, credit has displaced it for ordinary large transactions.

2.Credit means the transfer of goods in the present for a promise of an equivalent amount of goods to be repaid at a future time. Hence there are two fundamental elements to be distinguished: time and confidence.

3.The chief instruments of credit are checks, drafts, and bills of exchange, promissory notes, bank notes, and government notes, and " book accounts."

4.Banks are institutions for facilitating credit transactions; clearing houses are institutions for facilitating transfers of credit among banks.

5.Credit saves the time and labor involved in money payments; it saves capital, promotes the accumulation of capital, and makes a given amount of capital more productive.

6.Credit often leads to speculation and fraud; it encourages extravagance and waste in public and private consumption.


1.What different meanings has the word "credit"? In which sense is it most often used in economics ?

2.In what cases is there but little time advantage in credit ? Mention cases in which the element of confidence is very slight.

3.What is a check ? A bill of exchange ? A bank draft ? What is a note? A bond? What is the advantage of a note? Of a check?

4.What effect does credit have upon the productiveness of capital ? Why ? Upon the accumulation of capital ? How ? What connection have these two results ?

5.What are the evils of credit ? How do the evils to society compare with the evils to individuals?

6.What is a bank ? What functions are necessary to the idea of a bank ? What other function or functions do some banks exercise? How do banks reap a profit? Why is this proper and legitimate ?

7.What advantages has bank money? What dangers? What is the tendency to-day regarding bank-note issue ?

8.What is a clearing-house ? About what is the extent of transactions through the clearing-houses of the country? How does this compare with the amount of money in circulation ? What bearing has this fact upon the relative importance of money and credit in modern industry? How are balances paid? To whom are the balances first paid ?


See literature at close of preceding chapters. Also: — Bagehot, Walter: Lombard Street, Ch. II, pp. 21-27. Bolles, A. S.: Practical Banking, and Money, Banking, and Finance. Cannon, J. G.: Clearing-houses, Ch. XII. Conant, C. A.: History of Modern Banks of Issue. Dunbar, C. F.: The Theory and History of Banking, Ch. II, pp. 9-16. Gilbart, J. W.: History, Principles, and Practice of Banking. Knox, J. J.: History of Banking in the United States. MacLeod, H. D.: Elements of Banking. Patten, C. B.: Methods and Machinery of Practical Banking. (A book much used by bank clerks.) Scott, W. A.: Money and Banking, pp. 117-120. White, II.: Money and Banking, pp. 240-255.