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erable extent. Within comparatively modern times a credit system has succeeded the systems of ancient and mediæval times. It should not be understood from what has been said that these periods of barter, money and credit exchange are sharply marked off from one another, or even that they shade into one another by imperceptible degrees. On the contrary, the facts in the case seem to show that there was extensive overlapping, and that fairly advanced ideas of credit were developed quite early in the period of money exchanges; while barter, as is well known, has persisted in many parts of the world down to modern times and has even been broadened and confirmed since the close of the European war because of the inadequacy of the money and credit systems of Europe, as seen in the shipment of materials from the United States to Europe and the return of finished goods made from such materials in payment therefor. There are thus no distinct "periods," in the chronological sense, which may be marked off from one another as indicating the duration of the systems of barter, money, or credit. It is possible to speak of "periods" in this connection only in the sense that the predominant characteristic or controlling method of exchange employed at any given time may be said to have been that of either barter, money, or credit. Speaking in this restricted sense, it is fair to regard the sixteenth century as a period characterized by a wide use of money, while the nineteenth century and the beginning of the twentieth particularly the years after 1850 was essentially a credit period and accordingly one in which banking was brought to a development which had previously not been known.

VI. CREDIT AS A FORM OF EXCHANGE WITHOUT MONEY.

The term credit has already several times been used and a credit transaction has been incidentally defined as denoting an uncompleted exchange. Since modern banking proceeds upon a money basis in the sense that the banker obligates himself to pay money on demand, the practical current definition to be given to credit should be that of exchange in which no money passes, or as a form of ex

change which is conducted without the use of money. Objection may be made that this would admit barter transactions which in no sense are credit operations. If, for example, A exchanges skins for grain which has been raised by B, the transaction is closed when the exchange takes place and no money has intervened. Narrowly speaking, therefore, primitive barter of this kind would be included within the definition of credit which has already been suggested. A means of further safeguarding the definition might be found by introducing the so-called time element and regarding credit transactions as those that are closed only after the lapse of a certain length of time. Indeed, many writers on the subject regard the time element as the essential or characteristic feature of credit. This does not seem to be a well-warranted view of the case. As will be seen at a later point, many transactions which result in an immediate closing of obligations contain no time element, as, for example, when A purchases goods from B and pays B with a check on his bank. This, as will be seen in later pages, is unmistakably a credit transaction, yet it involves no postponement of settlement as between A and B. Recognizing the possible difficulties to which the definition is thus open, the idea of credit as a system of indirect exchange or exchange without money-hence at any given moment uncompleted exchange-is accordingly adhered to. VII. DEFINITION OF A BANK, BANKING SYSTEM, CREDIT SYSTEM.

A commercial bank, for the purposes of the present discussion, is an institution of credit or an institution whose purpose it is to facilitate or effect exchanges without the use of money. Every bank maintains a money reserve and has money transactions over the counter. It is not true, therefore, that it carries on its business without the use of money, but merely that in practice it reduces the use of money to a minimum. Nevertheless, it remains entirely true that the object of the bank is to facilitate exchange without the use of money-that is to say, to provide or

furnish credit as a means of exchange. It is a credit institution.

Banking and credit are thus the two correlative ideas whose analysis and treatment should proceed together. The ideas of money and monetary science should, so far as practicable, be dissociated from the discussion in its early phases. They have a bearing upon it which will be referred to at a later point, but that bearing is only incidental.

By a banking system is meant the relationship which exists between banking units or institutions, and in some cases the mechanism of general control or union between banking units which has been established by law. From this standpoint, banking legislation or banking enactments constitute an important element in the banking system as such.

By a credit system is ordinarily meant that whole mechanism for exchanging goods without money which exists in any community. The banking system is the nucleus of, or central element in, the credit system. There are many credit transactions which take place without the aid of banks, but the banking organization of the country furnishes the underlying means of liquidating credit and of settling outstanding obligations.

VIII. COMMERCIAL AND INVESTMENT BANKING.

Banking may be recognized as distinguished into two separate branches-commercial banking and investment banking. By commercial banking is meant that phase of banking which has to do with short-term credits—credits based upon or intended to provide for the exchange of goods. By investment banking is meant banking which has to do with credits whose purpose is the development of production. Through it capital goods such as machinery are brought into the hands of those who will use them for the productive purposes of business. It thus serves to supply business houses with the permanent capital they require, while commercial banking merely supplies those

houses with the working capital which they need for temporary purposes and expect shortly to repay. Both investment banking and commercial banking thus bring about a redistribution of the capital in existence, though they do this in different ways and for different purposes.

CHAPTER II

CREDIT AND BANKING

I. DIFFERENCES BETWEEN DIRECT AND INDIRECT EXCHANGE.

ACCEPTING for the moment the definition and analysis of credit furnished in the foregoing chapter, the question now presents itself: How does a credit system operate or in what way does it differ from a system of direct exchange? It is clear that the essential difference between such direct exchange and the credit or indirect type of transfer is found in the fact that the parties to the transaction have not realized the values growing out of it, so that in every such transaction there is:

1. Uncertainty of actual or eventual settlement, which raises a question of security.

2. Uncertainty of payment in or convertibility into money, which raises a question of what is called liquidity or liquidating power.

II. CLASSES OF CREDIT.

Writers on credit enumerate various kinds or species of credit, including:

1. Personal credit. This is currently taken to mean credit which effects the transfer of goods or money to an individual on his mere assurance and without security.

2. Commercial credit. This is probably the broadest and vaguest term currently used, but is frequently taken to mean credit represented by all grants of time within which to settle for merchandise bought at wholesale for resale or manufacture.

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