What is Credit?

INVESTOR’S REVIEW November 1 1905

What is Credit?

INVESTOR’S REVIEW November 1 1905

What is Credit?

INVESTOR’S REVIEW

Credit stands for far more in the affairs of the world than the mere common acceptance of the term would indicate. Even money or cash, which is supposedly the opposite of credit, is in fact a credit itself. Of the general subject of credit, this article treats exhaustive!}’.

"YOU have fallen into the habit of using the phrase credit jobber,” people say to us; “what do you mean by it? Is it not money that the people so designated deal in?” It is and it is not. In the money markets of the world as now constituted the old-fashioned language does not fully express the nature of the commodity dealt in by bankers, bill brokers, and dealers in floating capital in general. These people deal in an abstraction which in current phrase is called money, but whose real nature is extremely composite and difficult to define offhand. We can all understand the simpler development of credit-giving, of making advances of money capital for a definite object. The cultivator gets an advance to enable him to till his land, to plant it, and pay the wages of his laborers until the crops come to maturity. When he has sold his produce the account is balanced, assuming that the year has been an average one and the loan is paid off. So with the manufacturer, the merchant on a large scale, and the retailer. They all, by means of bills of exchange discounted, by credits opened in the books of their bankers, or other expedients calculated to facilitate their operations, get the use of means not yet earned on the understanding and in the hope that their manufacturing or trading will enable them to make good their engagements with profit to themselves. From this point of view credit is an anticipa-

tion of the as yet unreaped fruits of labor, and it is a most legitimate and valuable application of actually existing capital.

But we have travelled very far beyond these simpler methods of employing accumulated wealth, lent at agreed on rates of interest in order to facilitate the production and transfer of commodities from hand to hand. Modern credit embraces an almost endless variety of other forms of capital, as it may be called, and the “money” dealt in by brokers and jobbers on the great capital markets of the world, as has often been insisted upon in these columns, may be composed of sham capital to a much greater extent than real—of capital, i.e., which is ’itself credit, a force created very skilfully out of purely hypothetical ingredients. Money market operations are no longer the simple and safe actions of men working within their definite and ascertained capacity as measured by really accumulated wealth. It has become possible to create wealth out of nothing and gravely to treat such as substantial capital which can be lent, and whose efficiency as money appears to be just as complete and potent as actually accumulated, wealth resulting from industry. All wealth may be said to be based upon labor, all stored or hoarded wealth the product of labors completed. Without human labor, assisted by tools or otherwise, there could be no realized wealth whatever; but the business of

the modern capitalist goes much further than the mere assistance of actual labor through lending the accumulations of past labor, than the lending implied in the description we have given of the simplest form of credit giving. Modern capitalists aim at securing for themselves as a narrow and exclusive class, through the manufacture and manipulation of fictitious wealth, the benefits arising from those aids to human labor brought into existence by the ingenuity of inventors, new discoveries of natural sources of wealth, such as minerals, every fresh conquest over Nature attained by human labor and ingenuity. To do this they create joint-stock companies with capitals based not upon a fair and reasonable estimate of the benefits to accrue from industry skilfully applied, bin upon the imagined assets a id the cupidities they excite, upon thefashions in gambling that mac arise to permit the founders of the company to attract to themselves more than their fair share of the proceeds of the work done. Hence in all jointstock companies now existing, or being brought into existence, we find the element called “good-will” sometimes large, even monstrous, as in the case of the Harmsworth amalgamation recently floated or the Watney Combe Reid Brewery, sometimes small; but whether large or small, this addition to the capital represented by genuine assets, buildings, tools, patents, special facilities of manufacture, ore in the ground, whatever they may be, represents the efforts of those who founded the company to lay hold of all possible benefits that might accrue from consolidation, better management, or other economies in working, or merely to absorb at once in a single coup the fruits of generations of future labor.

This kind of addition to the credit value of property, however, is treated by market and public alike as if it were genuine capital, representing a solid and durable property, and credit called money is continually put upon the market and utilized there often for the people’s undoing based upon security of this description.

Another form of credit with which we are all too painfully familiar is that represented by national debts. These also have as their real security the products of human labor, and they are all in their degree a tax upon that labor. It looks a small matter to issue a loan for a government in need of money to be spent on wars, to be thrown away in building unwieldy fleets, or otherwise wasted, in the senso of being spent without chance of profit to the community on whom the burden is placed. Those who subscribe for a security of this description rarely or ever give a thought beyond whether it will be a market success or not, but each such debt involves the fortunes of the whole community made subject to it. It is a mortgage upon the earnings of the people, as we are beginning to find out from our experiences arising out of the South African war, as we should have found out long ago. The interest charges upon the debt created for this war are equivalent to about 2s. per week deducted from the wages of nearly a million of workers, or put in another way 'are equal to a charge of about £1 per annum upon the earnings of the entire body of workers, male, female, and juvenile, engaged in the 15 most important industries carried on within the United Kingdom. Pile a burden of this description too high, and the consequence is social disintegration, the accumulation of wealth in the hands of the

few, with augmenting sufferings for the multitude. But who is to say when the load is too onerous? We can but follow general indications. Note how much has been said of late about hungry children sent to school to be taught to read and write, while insufficiently fed, and sometimes still more inadequately clad. Note also the sham “unemployed” Bill, promoted by the Government that wasted £500,000,000 in South Africa. What are these out-crops of social distress but the indirect admission that the debt and other public burdens laid upon the people by authority, although without their direct consent, are proving destructive to the wellbeing of an increasing portion of them.

All forms of modern capitalization, however, no matter whether in the shape of fraudulently manufactured capital, representing the extortionate prices at which businesses are jointstocked and sold to the investing classes, the multiplication of national debts, which are generally an unrelieved burden upon those who provide the public revenue, or the monstrous creations of those American trusts or South African mining combinations which dazzle the world and burden all markets with piles of dishonest rubbish, swelling often to mountain height, are equally useful as modern money, the money of the banker and loan jobber. No sooner is a new security created than a large proportion of it can be turned into money by the market. When the recent Japanese loan was issued some complacent bankers advanced the deposit money to their customers so that they might put in large applications. “A perfectly safe operation,” they said, and it doubtless was so, but their advances made against nothing in being

were money as long as they remained uncancelled, and one great source of the low rates generally prevalent for loans in all money markets is to be found in just this facility for creating credit out of nothing in anticipation of nothing except the forgotten and the unmeasured capacity of the toiling human animal to carry the burden placed upon his back. Each new mortgage becomes “money” of the market in proportion as it is borrowed upon—pawned. It is for reasons like these that we prefer the phrase credit jobber or dealer in credit to moneylender. Money in the old sense, Cash, is no longer in question, except in ways more and more remote from actualities in wealth. If you possess some shares dealt in on the market or otherwise, in some property, be it a mine or a mill, which has never yielded any revenue, and is never likely to yield any, but which, none the less, have a market price, no matter how fraudulently created, and can get a banker to advance upon these shares as security, the amount of that advance becomes “money” of the loan market, just as good as if it were sovereigns, good as long as the banker does not call his advance back, or stand compelled to acknowledge his loss. So with every deception of marketable security; all may instantly, up to a certain percentage of the current market price, be turned into market money, and as long as bankers do not become bankrupt and cause a break in the smooth machinery of credit, there appears to be no end or limit to the amount of fancy or faith money of this kind which may be brought into existence. The more securities representing burdens upon human labor multiply, the larger becomes the supply of such money. It does not matter whether

the security is good or bad, whether it is honest or dishonest in origin, whether the paper upon which the banker gives credit to the customer is the flimsy creation of some all-devouring trust, some wild-cat mine, or a debt laid upon a nation which may or may not be able to bear the load. As long as it can be used for the purpose of procuring advances from bankers, it is valuable as the generator of market money—as good as gold.

But if this be the origin of so much of the money dealt in on all markets, what is the use of gold at all? Gold is necessary for the soothing of the popular imagination, and, as a lastresource, should a credit disturbance arise disclosing in some degree the extent to which credit abuses have devoured wealth. In consequence of its uses in these directions, gold is valuable above everything else as a begetter of confidence in the public mind. A sub-consciousness exists in all markets that there may be unsoundness behind the fair show of perfect credit stability, and it soothes the mind to look upon a large stock of gold, or what looks a large stock. If this stock is being diminished, the uneasiness of the market mind is expressed in advancing rates for loans; if it is increasing absence of anxiety finds expression in reducing rates for advances. But the gold itself forms only one amongst the innumerable commodities upon which market money can be created. It is the last resort in all cases, but an increasing amount of the banking credit called money utilized upon all markets is founded upon paper securities. Every form of debt, public or private, may become money as well as every dishonest share creation of the companymonger.

It is for reasons such as these that we speak of credit so constantly instead of using the word money, which seems to us misleading in existing circumstances, and it is well to bear in mind the true nature of most of this credit called money. It may have a substantial basis or it may have no basis at all. One thing, however, seems reasonably deducible from this brief 'and imperfect description of the nature of the elements composing the material in which modern money markets deal, and it is that marketwealth thus brought into existence may be exhausting the community instead of enriching it. We have given the example of a national debt and what its increase implies to the workers. That is the most concrete and striking illustration the present age furnishes in all countries called civilized, but all forms of unreal capital, of capital represented by imagined assets, not by realities, are wealth chaining. They tend to the impoverishment of the people in a variety of ways—by extracting interest from them on false pretences, by prompting the dissemination of ideas of wealth and habits of extravagance, by using up savings giving nothing in return. Every pound of railway capital, whether borrowed or a mere co-partnerv share, is, if interests and dividends are paid upon it, a mortels® upon labor, but it mav reward that labor in a variety of ways easily understood. But it is otherwise with the fane}capital of joint-stock undertakings which have been over-valued by those who brought them into existence. Thanks to the overburden of false capitalization due to trust concoctors and the never-resting energy of the company promoter, the market money itself produced by the free pawning with banks of all such

forms of capital, honest and dishonest, may be a drain upon a community’s real and demonstrably fertile resources. It would take us too long* to discuss this aspect of the subject at great length, especially as we should have to restate our theory regarding the. transitory nature of all human improvements, the changing conditions of even the most solidly established industries or appliances and tools employed to lighten, supplement, or give conquering force to mere human labor. We do not believe that any undertaking should create capital to be laid as a permanent and everlasting load upon a community. Apart, however, from that far-reaching aspect of the subject, it is obvious that impoverishment, the crippling of a nation’s resources at their very source, might have made devastating progress before any suspicion of it could arise in the money market. As

long as the securities used to generate money there continue unsuspected evei*37thing runs with perfect smoothness, money is abundant and cheap on the market, and a country might onty wake up to discover that it had been eating up its real capital, anticipating the wealth of future generations, when the aerial structure collapsed. The cultivator anticipates his harvest by getting a loan from his banker, his lawyer, or other moneylender. The entire money market ma3^ be anticipating the wealth of generations yet unborn by its unreflecting trading in lavish capitalizations, its thoughtless elevation of market prices by the facilities it gives to the pawning of securities, good and bad, all utilized to create “money,” in the language of the market, and only discover the havoc played with its own and the country’s true wealth when too late.