WHAT IS CREDIT?

Northern Advocate, 8 November 1934, Page 2

WHAT IS CREDIT?

(By Dr. Colin Clarko.)

Credit is the function or power generated by currency, when used in business or trade. A detailed examination of this definition of credit is necessary to make it clear to everybody. In civilisation, as opposed to barbarism, men live by the mutual exchange of goods and services in order to meet their daily wants. Currency is the instrument or means whereby they do so. The essence of exchange is “Value given for value received.” If a man exchanges some value, such as a bag of flour, for money, then that money must have a content of value equal to the bag of flour and be presentable on demand. If paper money is used then obviously the paper money must be backed by real value, presentable on demand.

Consumable articles, such as food, clothing, service, cannot be used as a backing for a paper currency, owing to their nature. - They are vanishing values, and lack the essential quality of permanence. Currency is the instrument which enables civilisation, which is essentially the exchange of goods and services, to be carried on.

It is absolutely necessary for people to keep clearly in mind the fundamental difference between an instrument ' and the function it performs. Everybody knows a carpenter’s tools—saw, bradawl, screwdriver, plane, etc. —and must see at a glance that a whole bag full of tools is not carpentry, for carpentry is a function or power. It is the function of these tools to enable, carpentry to be done; without them no carpentry can be done. The fundamental difference between tool and function is beyond. dispute. Or, again, a bicycle is a machine which enables a man to ride; that is its use or function. Without the bicycle he obviously cannot ride. The possession of a bicycle is not a ride, unless one has the will to use it.

In the same way, Currency is an instrument which enables men to exchange their goods and services for their mutual benefit. That is its function; without it they cannot exchange their goods and services. The world has presented certain examples of a currency being withdrawn from a nation. The result has been an immediate collapse of civilised life in that country, owing to the absence of the instrument, which enabled the normal exchange of goods and services to be carried on. When the currency pf a country is withdrawn, the economic life of the country obviously comes to an end, and economic anarchy takes its place. It is necessary, however, to study the effects of expansion and contraction of the volume of currency on economic life.

The accompanying figure will help anyone to get a clear idea of the effects of expansion or inflation of the currency, and of its opposite, the contraction or deflation of the currency. When speaking of currency, the term is strictly limited to currency in circulation, and not currency hoarded or immobilised on deposit.

N WJ* 1C B The Exchange Bridge of Values,

Let the line represent diagramatically the exchange bridge of values. The letter A represents a producer, and the letter B represents a consumer.

The numbers 1 to 6 represent the various agents between the producer and consumer, who may be thousands of miles apart—for example, collectors, transport services, storemen, distributors and retailers. In order to illustrate the mechanism of exchange, let the production in question be butter. A, the producer, takes his butter to the first agent on the exchange bridge, and receives value in currency in return.

The value received by A for his butter depends upon two factors—credit and prices. If A brings lOlbs of butter to No. 1 agent, and the agent has 10/, then all the butter can be sold at 1/ a pound. If, however, No. 1 agent has 20/ for the lOlbs of butter, the price will be 2/ a pound, while if No. 1 agent has only 5/ for the ten pounds of butter, the price must be 6d a pound, for all the butter to be sold. There is, however, a limit to this. Credit and prices must balance. If credit contracts, then prices fall, until the price is below production cost. The amount of currency in No, 1 agent’s possession, depends ultimately upon the price that B the consumer is able to pay for it, and this is determined by his wages or income. The agents I—6 on the exchange bridge must live on the difference between the price paid by B, the consumer, and the price received by A, the producer, for his butter. It will be seen that the price level for goods and services is governed by the volume of currency available for their purchase. Halve the circulating currency, and the price level must fall 50 per cent, for goods and services. In the control of currency exists an absolute control of the price level, for credit and prices must balance. If currency is immobilised or stored, it counts as no-currency, for as far as the exchange of goods or services is concerned it is of no use, and performs no function.

Credit or exchange power is the function of the instrument curi’ency. This function or credit can only appear when the instrument currency, is put to use for the exchange of goods and services. Credit or exchange power depends upon the following factors in the currency: 1. Quality of currency or value of backing, 2. -Quantity or volume of currency in relation to volume of purchasable goods and services; this factor determines the price level.

3.—Movement or turnover of currency, which multiplies power of currency, as a truck making six journeys carries six times as much as when it moves oncfe.