CREDIT

Otago Daily Times, Issue 138, 25 April 1862, Page 5

CREDIT

(From Chambers' Political Economy.')

Creilit is the tnking a promise to pay money, instead of the actual payment of it. A person who sells is said to give credit,' when, instead of taking the price immediately from the purchaser, there is an understanding that it is to be paid at sonic future time. "Wherever any person is by law liable to pay money to, another, but does not pay it, he is said to be a debtor, and the person to vyhom he owes the money is called a creditor. Thus, debt and credjt would seem to be mere private matters between individuals ; but they are often connected with such extensive and complicated arrangements, that they have, a vast influence on the public at large. Credit would be a good arrangement, if,all debts were paid at the time when they are promised. It has its good and its bad influence, and in that case the good only would be in operation. From what is stated of the nature of money, it will be observed that it is always costly to a community, and that the public would be gainers if business were transacted without it. Credit dispenses with it, at-least for a time, and sometimes renders it altogether unnecessary. To understand how this can happen, let us suppose two merchants, John Thomson and Richard Smith. John Thomson buys from Richard Smith £500 worth of teas, and. gets credit for the £500. Afterwards Richard Smith desires to buy wheat and beans from John Thomson; he buys to the value of £400, and gets credit. Again, Thomson buys from Smith sugar to the valne of £100 on the same terms, and Smith buys from Thomson £200 worth of cheeses. ]Jw, when these two compare "their accounts, they will find that each is due the other exactly the same sum, and that there is nothing to pay between them. Thus will they have conducted business with each other without the aid of money. There arc many mercantile transactions which have turned out very profitable, which would not have been carried on had there not been credit. An instance like thp follo'iying frequently occurs : —A merchant in some distant place sees, a quantity of goods which would sell well in the English market. We shall suppose that he is in Africa, and that the goods consist of ivory tusks, lie has not money enough, however, to buy them. The oymcr, haying confidence in him," takes his bill, or engagement to pay. the money. The buyer sends the ivory to a merchant in Liverpool. This merchant cannot, however, afford to pay fur the goods, and ho also gives his bill. He sells the goods by auction, for ready money to the ivory-turners,; and if the transaction has been successful, he fs enabled to pay his bill to the person who sent the ivory, and keep a profit to himself. The purchaser in Africp, has ,now got money, and can pay the person from whom he originally bought the ivory. Here, then, is some good effected by means of credit, since a profitable Largain has been made which otherwise would have been abandoned But we shall see that such operations are attended with great risk,"and should be conducted with caution. If the cargo hai been lost on the way. the Liverpool merchant could not have paid the purchaser of the ivory in Africa ; and the purchaser could not have paid the original lender. Thus, these parties would have heavy claims against each other, and if they did not happen to bu in good circumstances, some of them might be driven into bankruptcy. /, But credit is still more dangerous and inexcusable in dealings with popple who are nof merchants. ■ A person who 'has a uniform fixed income Jcnpws his means of paying for what he buys. He is not like the merchant whose resources may depend on the sale of a cargo, and who candidly makes an agreement from the beginning, that he is not to pay for it until it is sold. When, therefore, the former asks for credit, he admits that he is going beyond his means, by

buying what he cannot pay for. From such beginnings, people sometimes g.i on until they have accumulated debts which they are never able to pay. Whatever niuy be s-p.in of credit in commercial mailers, in such instances as this its elects are almost entirely mischievous.

Accordingly, a tlifj" renco is made between tho two cases in bankruptcy.-- A man is said to bo bankrupt when his means are quite unfit to pay his debts. In such cases, the system of bankruptcy provides that liis means shall be immediately collected and sold. The money is divided among the creditors, and is generally called a dividend. If the creditors are paid half their debts, they are said to have got a dividend of 10s. in the pound. When the debtor'^ difficulties have been brought on by trade and speculation, he is discharged if he has acted honestly, and may ; carry on business without being liable to these old debts. But a debtor who has not lost by trade, but whose debts have been brought on by his personal extravagance, is not allowed this privilege. In order to understand how. far systems of credit arc sometimes carried, and how. far the use of money is thus superseded, it will be useful to understand the nature of a bill of exchange." Here is an ordinary form of such a bill :— London, Ist September, 1851. £100. . Sixty days after date, pay to me or order, at the Bank of England, one hundred pounds, for value received. * . KiciiAßD Smith. John Tiiomsox. To Mr. John Thomson, \ Merchant, Liverpool. J Hichard Smith i 3 said to draw the bill, or to be the drawer. ,It is drawn upon John Thomson ; lie is supposed to be the debtor of Richard Smith. When he agrees to the terms, and signs his name, he is called the acceptor, and lie becomes liable to pay the bill. This bill may sometimes be used two or three times as money, before it is paid. Iticlmrd Smith who is the owner ot it, n'jiy incur a debt to William Simpson. If William Simptou have reliance on John Thompson paying the bill when it is due, he will, perhaps take it from Richard Smith as money, holding him liable if John Thompson fail to pay. To transfer it to John Thompson, Richard Smith endorses it to him— .that is say, writes his uame on tho back of it,and hands it over. Now, will William Simpson also find it necessary to use the bill as mouey,un;l he, too, endorses, 'it to his creditor. To this creditor, John Tomson and Richard Smith becomes liable ; and if they^should fail to pay, William Simpson continues liable to him. Very often a peson who has ■n. bill in his hands obtains money for it, dodnct'ing interest until the time when it is due. This is called discounting the bill. The parties who usually discount bills are bankers. If John Thonmson pays the bill when it becomes due, no harm has been done by the arrangement. But perhaps he lias accepted the bill because he had not money to pay his debt, and he may still find, when the bill conies .due, that lie has not money. If the bill has been in the meantime endorsed, and used as money, there will be great confusion. The person to whom William Simpson has endorsed it wants payment for the bill, aud cannot get it, so he calls on William Simpson to pay him. William Simpson is in the same situation, and calls on Hichard Smith to pay him and so on. In this instance, we have supposed that John Thomson was indebted to Hichard Smith, and that he has accepted the bill as an obligation to pay the debt. But sometimes bills are drawn and accepted when there is no such justification for them. It then appears as if the one party were owing money to the other, when lie is really not so; and this is done for the purpose of employing the bill as money, or, more properly speaking, of raising money on it. A bill of this kind is called an accommodation-bill, because it is intended to accommodate one of the parties with money. The fabricating and negotiating of this spurious kind of bill usually leads to disastrous ■ consequences, and is repudiated by all who are engaged in a sound system of commerce. Such are inland a id home bills of exchange. There is another variety of bills called foreign bills of exchange, They are drawn-in foreign states on parties in this' country ; and for the sake of security, in case so important a document should be lost, it is written three times. The three are called a set. Should the first not come to hand, a second transmitted by next post, may be more successful. The third is retained for the purpose of being transmitted should intelligence of the loss of the two previous ones arrive. Only one of the set can be negotiated by the party receiving the bills. Foreign bills of exchange are a marketable commodity in the place where they are drawn. The fo lowing is an example of the manner in which they are sold, bought, and employed in commerce : —A merchant in New York is owing £1000 to a merchant in Liverpool, fora quantity of cotton goods. The question with him is, how is to pay this sum in the least expansive way. He might send payment in gold coin ; but there is a risk that it might be lost, and if he were to insure it from loss, that would be costly. At the same time,it might not be easy to get together so much cash of current coinage. He therefore resolves on sending payment in the form of a bill. With this resolution, he inquires if any other merchant lias £1000 owing to him in England, for whi»h he wishes, payment by bill. Finding a merchant in these circumstances, he buys his bill from him, endorses it and sends it to his creditor in Liverpool. This creditor negotiates the bill so received; and thus, by one' piece of paper trausferred fro.in hand to hand, two debts of--equal amount are paid, without a single coin crossing the sea. - To pursue this example ;if the demand for bills in New York to send to England be greater than the supply, the price will rise ; and il less than the supply, the price will fall. Tho amount of rise is called premium, and the amount of all is called discount. In buying a bill of a £1000. perhaps as much as £1005 may be paid for it. The premium cannot rise to a very great height, because if it exceed a sum, it will be more convenient to send coin. If it be cheapsr to insure and pay for thefreight of £1000 in cash, to.buy a bill, payments in bullion will take piace. The rate at which foreign bills can be bought, is called the rate of exchange. Sometimes the demand is exactly equal to the supply :in this case there is neither premium nor discount, and the exchange is said to be at par. This equality of supply and demand in foreign bills arises from the circumstance, that the imports of a country •are equal in value to the exports. One pays for the other. When bills drawn in New York on England are selling at a premium, the exchange is said to be in favor of England ; that is to say, England has been sending more goods to America than America has been sending to England. When the rate is in favor of America, England | has been importing more than it has exported to ! that country. ' . . In the manner now explained, settlements in. trade with foreign countries take place. A vast .system of commerce is carried on, with a remarkably small interchange of coined money, the transmission of which is always attended with danger and expense. When it is said, that a country pays for its imports by its exports, it will be understood that it doos not actually barter one for the other. The debtors for the imports pay the debtors for the exports j and so all parties are clear. Thus, when England is said to pay in cotton goods for corn, it is in reality the debtors for the cotton goods who pay the creditors for the corn, and by a subsequent transfer the settlement is effected. But, in principle, this is equivalent to an actual barter. This method of making payments between different countries is immediately connected with the principles of freetrade. It is owing to this method of settlement that a country which imports goods must export others to pay for them. Wherever the British troops are stationed abroad, they draw their pay bills on the Govern^ ment authorities in England. These bills, as safe draughts for money," are readily purchased by merchants, and remitted in settlements for goods. Tho publishers of the present volume, for example, occasionally receive payment for works sent to booksellers in the colonies, in tho form of bills drawn by British officers on army agents in England. • Practically the buying and selling of these and all other foreign bills of exchange is conducted by bankers in the localities where they are drawn, by which means merchants are relieved of the necessity of inquiring in person for sellers or buyers of bills on the open market. But this arrangement does not alter the'nature of the preceding explanations j it only interposes an agent between the seller and the buyer. Further, to save merchants trouble, the rates of exchange are usually published in the principal newspapers of different countries. - ' • There are many other forms adopted in credit/

sometimes with a good, and sometimes with a bad, effect. Nearly all the transactions with bankers are connected with credit, anil even bank-notes are letters of credit. -The safest kind of credit is that which is given on property, not un the faith of the debtor. To explain this, let us -suppose the owner of an (stale, or of a ves-ci, in want of a sum ufready nmii6y. Ho Ls kiiown to have valuable property, ami not Id he uuit-lu. He may be certain that a bunker, or so;ue other person who lias money to invest, will make she advance desired, knowing how sure lie is uf being repaid. But if the person wishing ,111 c money has tip .suc-.it jproperty, there, .will; be a risk in the advance to him ; and in a country where such advances are too readily made; there will be many debts un;paid, and much -biinl'i'upii'.v and misery. ' -.

A. common case id winch credit is used to good purpose is this : A young man is starter! in life with good abilities and good character ; but he has no capital, or not enough to conduct the business which he wishes to assume. His older friends, however, whb have perhaps gone through the same ordeal themselves, have reliance on him, ■ and wish to help him. They offer-.to'become security for him to a certain extent. To that extent he obtains credit with a bank, and thus has the use of capital for a time. If the young man make a bad use of it and fail of success, liis friends lose from becoming security for him. In England the matter is managed by discounting his bills ; in Scotland, thcre«is a more systematic arrangement', by which he draws the money out of the bank from time to time, as he requires it.

The use of a well-adjusted system of credit, is* chiefly in making payments without the use of money. As we liavo ssen, a. person who has money in !i bank pays with a draft, and his creditor is satisfied. When'the creditor goes to the bank for payment of the draft, he gets the notes of the bank, and is content with them—so that still no actual money is used in the transaction. But we shall suppose that the person that has money in the bank desires to go abroad. Instead of taking a ponderous bag of gold and silver with him, he gets " a letter of credit." This is a letter from the bankers ;to those with whom they deal abroad, desiring them to supply the holder with money to a certain extent. The bankers and their correspondents have probably many transactions with each other. Sometimes the balance is against the one,.and sometimes against the other. If we suppose the balance in favor of the bankers—that is to say, that the house with which they deal abroad, is due them money—then, in paying money to the person who holds the lette, of credit, these foreigners pay so much of their debt to the hankers. Thus, the letter of credit is a; useful arrangement to all parties, and it will naturally remove in a great measure the risk of losing money by accident or depredation in transferring it.

Insect Life. —Professor Agassiz says, more than a lifetime would be necessary to enumerate tlie various species of inseeis, and describe their appearance. Melger, a German, collected and described 0,000 species of flies, which he found in a district ten miles in circumference. There have been collected in Europe 27,000 species of' insects preying upon wheat. In Berlin two professors are engaged in collecting, observing, and describing insects and their habits ; and they" have already published five large volumes upon insects that attack'Torcst trees.