CHAPTER VIII. ON THE “CREDIT SYSTEM,” OR THE INFLUENCE OF CREDIT IN PROMOTING NATIONAL WEALTH.

MUCH has been said in the United States of late years in reference to the important agency of what is called the “credit system,” in promoting national wealth, but few persons comparatively have examined the subject with sufficient minuteness to enable them to form a clear conception of its mode of operation. As the subject is one, however, which deserves to be thoroughly understood, I will endeavor to present it to the reader in such a way as cannot fail, I trust, to be intelligible.

The term credit is applied to that confidence reposed by one individual in another, which induces the former to permit the latter to have a portion of his capital, to be used as he may think proper, without the immediate transfer of an equivalent, but upon his stipulating to pay such equivalent at a future period, together with a compensation for the use of the capital during the time it is not under the control of its owner. Where the credit is given on a delivery of capital in the form of money, it is called a loan, and the charge which is made for the use of it is called interest. Where the credit is given on a delivery of capital in the form of other commodities or property than money, it is called a sale, and the charge which is made for the use of it is called profit. In both cases the credited party is placed in possession of something possessing intrinsic value, upon which industry can be employed, or by which it can be sustained; for even in the case where the capital consists of money, it must be exchanged for merchandise, raw materials, utensils, food, or clothing, before it can be productively employed by the borrower.

In countries where confidence between individuals does not extensively prevail, the credit system is but partially known. Happily for our country, this confidence has always existed amongst us, and for ages, amongst those from whom we are descended, and it is known to all who are acquainted with the history of the American colonies, that a system of credit was commenced by the mother country with the landing of the first pilgrim on our shores, and has never ceased to be continued to the present day. The United States owe a vast share of their prosperity to the credit system, and so manifest has this become to every well informed mind, that there are few persons with notions so antiquated as not to confess, that credit, when regulated by the rules of prudence, and not abused, is one of the most powerful stimulants to the production of national wealth.

The first subject for inquiry now is, how does credit operate in the production of national wealth? As this can best be shown by a practical illustration familiar to most people, I will explain it somewhat in detail.

We all know that a very large proportion of the settlers of our western country reach their tracts of land with no property in the world except an axe, a spade, a hoe, a gun, a cow, a few household utensils, and a change or two of clothing. They have paid a hundred dollars cash for eighty acres of land, the government price for some years past, or they may have bought it on a credit from private individuals, at a higher price; but the band is generally covered with limber, and is of no use in its present condition, for purposes of tillage. In this destitute condition, they find it absolutely impossible to commence the clearing of their lands, unless somebody will trust them with the articles of which they stand in need, until they produce a crop of some kind or other. They go to a neighboring merchant and satisfy him that they are industrious, economical and honest, and that if he will let them have on credit some of his capital, in the form of sugar, tea, coffee, flour, corn, potatoes, seed, salt provisions, winter clothing, and such other things as are absolutely indispensable for their subsistence, and for protecting themselves against the weather, they will pay him as soon as the land produces. The merchant, who has located himself in this spot for the very purpose of supplying the wants of the settlers, consents to the request, and agrees to give to his new neighbors, credit for fifty or a hundred dollars worth of things. With this borrowed capital each settler begins his labors, and when the crops are harvested, the merchant is paid in grain and other productions, and the settler finds himself, by the aid of this credit, in possession of a surplus, sufficient in part to support his family for another year, which he could not possibly have possessed, had the merchant refused to give him credit.

Here we see at once the agency of credit in creating a new capital. The settler without the credit, would have perished, or have dragged out a wretched life, whilst the merchant might have had a dead stock lying unemployed, producing nothing for its owner, or for any body else.

What has been here described in reference to the poorest class of settlers, is equally true of those who emigrate to the western country with a moderate share of wealth. There is scarcely an individual amongst them, who for the purpose of extending the culture of his land, or adding to his improvements, does not, at some period of the year, purchase goods or implements on credit of the neighboring merchants, in anticipation of his next crop, thereby acquiring the means of augmenting the products of his farm, and consequently of creating a capital which could not have existed but for the credit he obtained. Most especially is this true, in regard to a large proportion of the planters of the cotton growing states. These planters, it is well known, are in the practice of obtaining large supplies of clothing and subsistence for their slaves, and of every article for their own consumption, upon credit from the neighboring merchants, in anticipation of the next year’s crop; and it is hence manifest, that the wealth of those states is eminently promoted by the operation of credit.

And now, whilst I am on this subject, it may not be amiss to trace to their source the further operations of credit, by which the country merchants have been enabled to aid the settlers and planters in augmenting the national wealth. Few or none of these traders, have a capital of their own adequate to carry on business to the extent they do. They are themselves obliged to obtain most of their supplies upon credit from the wholesale merchants of the large interior towns and the Atlantic cities, whilst these in turn avail themselves more or less of credit with the European manufacturers. This, it is true, is not the case at the present day, as much as it formerly was, owing to the gradual accumulation of domestic capital; but, nevertheless, it not unfrequently happens that a settler in the remotest region of Missouri ploughs his land and produees his crop by means of credit obtained, it may be, through three or four successive links, from a manufacturer of hardware in Birmingham, or of one of dry goods in Manchester. And yet, with such facts before our eyes, there are still to be found amongst us, a few remains of that weak-minded prejudice against foreign capital, which was at no very distant day so universal, that it was deemed by many of the states unwise to borrow foreign capital at five per cent., that could be productively employed at a profit of ten per cent., upon the ground that it would drain the country of specie equal to the interest. Happily, however, new views have broken in upon the minds of most of our legislators, and although there are still laws prohibiting the free introduction of foreign capital into some of our local investments, yet foreign loans upon the security of public stocks and of those of improvement companies, and banks have of late been carried to quite a sufficient extent.*

It is not, however, to those engaged in agriculture alone, that credit is beneficial. The merchant frequently undertakes a voyage with a cargo purchased on credit, which, when successful, adds to the national wealth. The manufacturer, too, who has physical power applicable to the production of commodities, but no raw materials to work upon, finds himself, by the aid of credit, enabled to procure the raw materials of other people, to which he adds a value by the application of his labor, and consequently also augments the national wealth. The same remark may apply to mechanics and even to day laborers, and there is hardly in the community an individual engaged in any species of business who has not at some period found himself benefitted by the exercise of credit.

With such advantages resulting from the use of credit, so palpable and so well known to every body, it is not extraordinary that the “credit system” should be so much extolled. It is indeed a great moral power, without the employment of which our country could never in so short a period of time have attained to its present advanced state of wealth and prosperity. Whilst seeing and acknowledging, however, this important truth, we must not lose sight of another truth equally important, which is, that nothing but capital, that is, something which possesses an intrinsic value, can possibly be the means of enabling the person who obtains it on credit to produce a new commodity or a new value, and we must be particularly careful to remember that the credit system thus extolled, is not the banking system, as some would endeavor to inculcate in their speeches and writings.