SECTION I.

INVESTIGATION OF THE NATURE OF CRedit.

DEFINITION OF CREDIT-ON THE DISTINCTION BETWEEN A BAILMENT AND A DEBT-ON THE AMBIGUOUS MEANING OF THE WORD LOAN-ON CERTAIN ERRONEOUS IDEAS AS TO THE NATURE OF CREDIT-ON THE APPLICATION OF THE THEORY OF ALGEBRAICAL SIGNS TO ECONOMICS.

The Definition of CREDIT.

1. CREDIT, in Legal and Commercial language, is a RIGHT of ACTION against a person for a sum of money.

It is the Name of a species of Incorporeal Property, which is also very frequently termed DEBT in popular language. It would be a great advantage if the words Debt and Credit were distinguished, as we shall afterwards point out: but there does not seem any probability that the popular usage of the word can be amended. Much confusion is undoubtedly owing to the circumstance that the word Debt is used both to denote the Right to demand money, and the Duty to pay money.

Credit is the lowest form of an annuity: it is an annuity of one term: an annuity in general, is the right to demand a series of payments: Credit is the right to demand a single payment.

An operation on Credit in commerce is a Sale, or an Exchange, in which one, or both, the Quantities exchanged is a Debt. The System of Credit consists in the Creation, the Sale or Transfer, and the Extinction of Debts.

It is divided into two branches

1st. Commercial Credit; which principally consists in the sale, or exchange, of commodities for Debts.

2ndly. Banking Credit; which consists in the sale or exchange of Money and Debts for other Debts.

Before, however, we proceed to the exposition of the system, we must clear up certain obscurities and ambiguities which are the cause of much misapprehension on the subject.

On the Distinction between a BAILMENT and a DEBT.

2. We must now call especial attention to a point of the greatest importance, which may be called the pons asinorum of

Economic Science. It is, perhaps, somewhat of a subtle nature, and would not be perceived by any one not conversant with law and commerce. But it is one of those delicate subtleties which occur in all sciences, upon which the most important consequences turn, and it is, in fact, a confusion on this point, which is at the root of most of the false theories of Currency and Credit, which have produced such terrible catastrophes in the world.

There are two species of paper documents which are in general use in commerce, and which have some superficial resemblances—that is, they both convey rights to certain things, and are similarly transferable, and are therefore considered by many to be of the same nature, but which are yet fundamentally distinct in their nature, and in this radical distinction is contained the basis of the Theory of Credit. These species of paper documents are

I. BILLS of LADING, DOCK WARRANTS, and all other TITLES to specific things.

II. BANK NOTES, BILLS of EXCHANGE, and other forms of CREDIT.

In order to show clearly the fundamental distinction between these two classes of paper documents, we will explain how each of them arises.

When a man ships goods on board a vessel, he receives from the captain a paper document, acknowledging the receipt of the goods, and promising to deliver them to whomsoever shall be the owner of the paper. This document is called a BILL of LADING.

The shipper of the goods sends the Bill of Lading to the consignee, who, directly he receives it, may negotiate it, i. e., transfer it by indorsement to whomsoever he pleases, in all respects like a Bill of Exchange, and it may pass through any number of hands, and whoever is the owner of it at any time may go and demand the goods from the captain.

Similarly, when goods are deposited in a dock warehouse, the dock master gives a paper document, or a receipt for them, of a similar nature to the Bill of Lading, which is called a Dock Warrant. This is transferable in all respects like a Bill of Lading, or Bill of Exchange, and whoever is the owner of the Dock Warrant is the owner of the goods described in it,

and is entitled to demand and receive them from the dock master.

Now, it is especially to be observed in these two cases that, although the goods are delivered into the temporary custody of the captain or dock master, they have no property in them. The property in the goods remains with the shipper or depositor, and is transferred by him along with the Bill of Lading, or Dock Warrant. The captain, or dock master, is the mere BAILEE, or TRUSTEE, of the goods, and not the OWNER. He has no right to convert them to his own use, and if he did so, it would be a robbery, and he would be liable to be punished as a thief. Thus the Bill of Lading and the Dock Warrant form one property with the goods, and cannot be separated from them. The

goods travel with the paper document. Thus it may be said in this case that the paper document represents goods. In this case there is no exchange, and these documents have no value, i. e., they are not exchangeable separately. They are not exchangeable for goods generally, but are titles to certain specific goods and no others. No one ever spoke of the value of a Bill of Lading, or a Dock Warrant. Such documents are not Credit, because the owner of them does not simply believe that he can obtain goods in exchange for them, but he knows that he has become the owner of certain specific goods. Such a transaction is not an exchange, but is what is called in law a BAILMENT.

So also a man may take a bag of money to his Banker, and may ask him to take care of that specific money, and give it back to him, or any one else he may name, on demand. In such a case, no Property in the money would pass to the Banker. He would have no right to use it for his own purposes, and if he did so, he would be guilty of theft. If he gave a receipt for it, promising to deliver it to whomsoever it might be transferred, that receipt and the money would be one property as in the case of Bills of Lading and Dock Warrants. The money and the receipt could not be separated, and the property in that very money wonld always pass along with the receipt. The Banker in such a case would be merely the BAILEE, or TRUSTEE of the money, and not its OWNER. In the cases of the captain, the dock master, and the banker above described, the relation of Debtor and Creditor does not arise between them and the owners of the paper documents.

But this is not the ordinary case of a Banker and his customer. When a customer pays in money to his account at his Banker's, the Property in the money passes absolutely to the Banker. He is not the Trustee, or Bailee of the money, but he becomes the OWNER of it, and is entitled to use it in any way he pleases, for his own purposes. In exchange for this money, he creates a CREDIT in his customer's favour, promising to deliver an equal amount of money on demand. This transaction is, in fact, an exchange, or a sale. The Banker buys the money from his customer, by selling him the right to demand an equal quantity of money at any time he pleases. Here, therefore, a NEW PROPERTY is created. The customer may transfer this property to whomsoever he pleases, and it has value, because the owner of it can exchange it for money, or anything else. It is called CREDIT, because the owner of it only believes he can obtain money in exchange for it, but it is not appropriated to any specific sum of money. The Banker is not the trustee of the money, but he becomes the debtor to his customer, and, if unfortunately he should happen to fail, his customers, or creditors, are only entitled to have his property divided among them, and they must take their chance of having their debts paid in full.

It is exactly the same in all cases of Credit. If a merchant sells goods on credit, it is absolutely essential to the nature of the transaction that he should part with the property in the goods to the buyer, and receive only the abstract right to demand payment. Without the cession of the Property there is no Credit.

Hence we see the radical and fundamental distinction between Bills of Lading and Dock Warrants on the other hand, and Instruments of Credit of all sorts on the other.

Bills of Lading and Dock Warrants are absolutely bound down and fixed to certain specific goods, and cannot be separated from them, and therefore they form only ONE property with them. They always arise out of a BAILMENT, and never out of an EXCHANGE, and they may justly be said to represent goods. They in themselves are nothing, and are no addition to the mass of other exchangeable property.

On the other hand, it is the fundamental legal requisite of an Instrument of Credit, that it shall be absolutely severed from any specific sum of money. It is even forbidden to be made payable out of any particular fund. It is nothing but an abstract

An

right against the PERSON, and that is the very circumstance from which it takes its name, because it must be received on the simple belief that it can be exchanged for money. If any specific money was appropriated to it, it would not be Credit. Instrument of Credit always arises out of an Exchange, and never out of a Bailment. Bills of Lading, &c., alway go along with goods &c., Bank Notes, &c., are always exchanged for money, &c. Bills of Lading represent goods, but are not of the value of goods, because there is no exchange, and "there can be no value without an exchange. Bank Notes, &c., do not represent money, but they are of the value of money, because in their case there is always an exchange. And Credit, in all its forms, is an addition to the mass of other exchangeable property: as, indeed, is admitted by every Lawyer, every Merchant, and every Economist.

From this it clearly follows that Bills of Lading and Dock Warrants can never exceed in quantity the goods they represent; if any one were to negotiate such documents without any 1. goods to which they were attached, it would be an indictable fraud. But Instruments of Credit, of all sorts, immensely exceed in quantity the money in the country-on the lowest calculation, tenfold. Credit is in itself a merchandize, and the subject of a gigantic commerce. It may be said that all commercial crises arise out of the excessive creation of that species of property called CREDIT. What are the due limits of Credit is a question of the most momentous consequence, which will be clearly shewn in a subsequent section.

It is of the most fundamental consequence to understand clearly the distinction between Instruments of Credit on the one hand, and Bills of Lading and Dock Warrants on the other. Many able Economical writers recently have fallen into the grievous error of classing them together as all being of the same nature, and as Credit. Some of the most terrible financial catastrophes have been caused by adopting systems of paper money founded on this error. It will suffice here to say that John Law's Theory of Paper Money, of which we have given an exposition in a subsequent chapter, was entirely founded on this misconception.