Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D.
BOOK II: Exchange and Money
Chapter 3 - Credit-Time-Barter
Because man has memory, he has been able to evolve a form of barter
which expanded exchange to a degree almost unimaginable. This is known
as credit.
As has been pointed out before, credit is the exchange of goods in
the present upon the promise of the receipt of other goods at some
future time. More exactly. it is the voluntary surrender of the rights
to goods in the present upon the promise of the rights to other goods
to be received at some future time. Credit is time-barter, that is. it
is barter over a period of time.
Credit may have arisen simultaneously with the evolution of ordinary
barter, although it probably preceded it. A native, desperate with
hunger, may have begged his neighbor for food promising to give some
game in return the next time he caught some. Such an act may have
given to man the idea of exchanging goods.
History teaches that credit probably arose through the borrowing of
seeds. At the end of the harvest period, the borrower was expected to
return some other seeds from the crop together with some of the
produce, Some of the earliest records of the Seventeenth Century
indicate that in America occasionally credit was extended to the
Indians. When their crop of corn was low, they obtained corn on credit
from the colonists, especially from the Dutch in New York and from the
English in Massachusetts. In return, the next year they would give
their creditors other goods such as beaver skins.
The colonists extended credit to one another in the form of food,
seed, powder or shot in return for an agreed-upon portion of the
following year's crop. On the frontier, where the settlers were all
faced with the serious problems of food and protection, it was
considered almost a duty to grant credit to a frontiersman and
questions as to financial responsibility were not raised.
Merchants have always granted credit. For example, shortly before the
Civil War many wholesale dry-goods merchants extended credit to
western and southern retail merchants. The retailer would be sent the
dry-goods he desired upon his promise to pay for them, usually within
a year in money and in other goods. The retailer often would pledge
not to seek credit from anyone else until his indebtedness was
discharged. This credit was granted by the wholesaler based on his
knowledge of the buyer and his judgment of the retailer's ability and
character.
The retailer, in turn, would often grant credit to his customers. A
prominent 18th century merchant, Edgward D. Page, stated that in rural
areas "the country bank was almost unknown: its functions, so far
as they were the needs of a rural or semi-rural community, were
performed in large measure, by the retail merchant himself, who traded
upon an elaborate system of accounts receivable and payable, which
needed very little cash. My father, who graduated from one of these
country stores, has often told me that they frequently went through a
week's business without so much as five dollars in real money."[1]
Today, a huge volume of credit is granted by commercial outfits
directly to their customers. This is carried on the books as accounts
or notes receivable. Payment may be in 30, 60, 90, or 120 days.
Credit initially was granted on verbal promises, such as occurred on
the frontier. However, as commerce grew, verbal promises had to give
way to written promises. It was not only that memories are short but
communications between merchants usually were written because of the
distances and the quantities of goods involved. A retailer would give
a wholesaler a note promising to pay for the goods purchased. Many of
such notes were three, five or ten days after sight, which means after
presentation of the note for payment. They were written in terms of
money. In the colonies, because the money in use varied so much,
consisting of Spanish, Portuguese and English coins, as well as coins
of other countries, the notes usually designated the specific currency
desired.
Instead of being immediately presented for payment, these notes, or
domestic bills of exchange, as they were called, often were endorsed
and passed from merchant to merchant in payment of debts until finally
presented for redemption. In like fashion, a promissory note of a
wealthy man would often pass from hand to hand for several months,
helping to make exchanges of goods much as money did. (The nature of
this process will be explained in the chapter on money-aids.)
The length of time for which credit was usually granted in colonial
times is not too well known, possibly because there were no customary
terms. Probably the time involved was for one, three, nine or twelve
months although some records indicate that some merchants granted
credit on active accounts for as long as five years. Most of the early
credit dealings were pure barter transactions over time with no money
involved and were known as 'trusting' transactions. They were based on
friendship and neighborliness.
By the 18th Century, importer-wholesalers usually granted credit for
about twelve months to their retail customers, shopkeepers and country
general stores. "In 1737, Peter Faneuil, the active young
merchant who built and gave Faneuil Hall to Boston, wrote to M. Miguel
Pacheco da Silva, London, that he had sold imported goods at '12 &
15 Months Credit & if I can get paid for them in two Years time I
shall account myself well of." [2]
Storekeepers needing credit were quite willing to buy merchandise at
higher prices than the cash prices. People, today, who buy on the
installment plan pay as much as one-third more than for cash. As is
true today, wholesale and retail merchants in earlier days were forced
by competition to accommodate their customers with credit or else they
would lose business.
Initially credit involved only ordinary goods. However, when money
arose it was perfectly natural that it would become part of the credit
system. 'Country pay' was perfectly acceptable in early American life,
when conditions were relatively primitive. This was payment in terms
of goods produced in rural areas, as corn and home-made articles. But.
as money became increasingly available, debts were incurred in money,
or at least in terms of money. Today, most credit dealings involve
money. The debtor receives goods upon promising to pay money to the
creditor at a later date, as when one purchases a radio or television
set on time. Now, of course, credit involves not only the borrowing of
goods to be paid for subsequently in money, but the borrowing of
money, itself.
Two factors of prime importance are involved in credit. The first is
trust; the second is time.
No credit will be extended if there is no trust. The creditor ponders
the likelihood that the borrower will live up to his promise. Is he
trustworthy? Will he live up to his obligations even it he sustains a
loss by so doing? Is he likely to live long enough to fulfill the
contract? Does he have the capability of completing the transaction?
Many questions will rise in the mind of the creditor, all of which add
up to a question of trust.
If the creditor trusts the borrower, then the question of time
enters. For how long should he extend credit? If the time desired is
too long, then, no matter how much he may trust the other party, he
will not extend credit. Few men will grant credit for more than forty
or fifty years. Loans ordinarily do not run for longer than a
generation. Most are for relatively short periods, probably less than
five years, with the greater proportion for less than a year.
The time element is not only the concern of the creditor but of the
borrower. He wants to borrow food today for he needs it in order to
live. A retailer needs goods today, or he will lose many sales.
That credit is time-barter may appear peculiar to the reader for it
is not ordinarily viewed in that light. However, the credit
arrangements in colonial America may help convince the reader that
such is the case.
The famed country storekeeper would barter with his customers over a
period of time. The grain, butter, cheese, eggs and household
manufactures, as yarn and hand-made nails, which were produced in his
area would be turned over to him. He would give credit to the sellers
toward future purchases of city goods. When the goods arrived, the
customers would take the articles desired to the extent of the credit
which they had built up. In other words, a farmer would barter his
present goods --- his farm and household products -- for future goods
-- the city goods. This was barter over time.
The storekeeper, in turn, bartered with city wholesalers over time.
Usually, the wholesaler extended the credit to the storekeeper. He
would ship combs, knives, imported dress goods, handkerchiefs, paper,
cloth, crockery, glassware, sugar and salt. These were paid for over
periods of six, nine or twelve months with grain, cheese, eggs and
household goods. i.e., 'country goods'.
Such transactions were clearly barter arrangements. However, a money
terminology was used and the goods credited or debited were in terms
of money. The storekeeper would credit a farmer for his 'country
goods' at prices agreed upon between them, Similarly, his dealings
with the city wholesalers were in terms of money.
Barter was carried on in city areas as late as the latter part of the
l8th century. In 1768, an advertisement indicated that such trade was
carried on quite extensively in a center as large as New York City. A
store offered rum, molasses, tea, pepper and other articles in return
for most kinds of country produce.[3]
The reader nay be a bit puzzled why so much emphasis is placed on the
fact that credit is the exchange of present goods for future goods. It
is because as credit evolves into complex forms, and particularly with
the intrusion of governments in monetary matters, people tend to lose
sight of what credit really is. If the reader will mentally substitute
'time-barter' whenever the word credit appears, he will most likely
have a better understanding of what is occurring.
It should be obvious by now that credit, as defined in this book,
means that banks, which are assumed to be the greatest grantors of
credit, actually are not. Since credit is the exchange of present
goods for future goods, it is clear that the true grantors of credit
are the producers of goods. To the extent that banks extend credit in
the form of actual money, they give credit, but this is a relatively
small amount.
This does not mean that banks do not play a tremendously important
part in credit transactions, for they do. Highly complex machinery has
been evolved to assist in the extension of credit, and banks are in
the forefront in rendering such aid. But this function is not so much
the granting of credit by banks, as it is the guaranteeing of trust.
As the first and most important element in credit is trust, obviously
if some means can be devised by man which will reduce the problem of
trust to minor proportions, then credit transactions will be aided
immensely. Banks perform this function, as will be shown subsequently.
To make credit a bit clearer, it might be wise to review the
fundamentals more explicitly. Bearing in mind that credit is the
exchange of the rights to present goods for the rights to future
goods, the following is an hypothesis of how it probably evolved.
First an individual would ask another to extend credit in the form of
some good, such as food, in return for his promise to return another
good in the future.
Next, credit took the form of exchanging a good in the present upon
the promise of receiving a particular good in the future, that good
being money. Today, it is known as installment credit. People purchase
appliances in the present and promise to pay for them in the future in
installments.
The third step would be the extension of credit in the form of money
being lent in the present upon the promise of receiving other money in
the future. These are classified as loans of money.
Although initially credit was carried on a verbal basis, it probably
was not long before evidence of the credit granted involved some form
of written proof. It could be that upon receiving an apple, a man
might have written a note to the effect that he would give his friend
an orange the next day. It is not likely that this would actually
happen in such a simple transaction but when credit was extended in
the form of large quantities of goods and for money, verbal promises
would certainly be supplanted by written ones. They would start out by
being simple IOU's such as 'I owe John Angle Three dollars'. This IOU
might ultimately be extended to include time and place of payment and
might include other provisions. Today, we have sophisticated IOU's,
such as the demand deposits of commercial banks. No matter how complex
IOU's may be today, they are nothing but aids to enable the actual
producers of goods to extend credit to other people. Most people are
probably unaware of this. They believe that IOU's, or credit
instruments as they are usually called, such as bills of exchange,
bankers' acceptances, banknotes and demand deposits are some of the
mysterious devices by which banks directly or indirectly create money.
But all of them are merely IOU's no different in principle from the
very first one written by some primitive merchant.
Parenthetically, it might not be amiss to point out that there is a
subtle distinction between a credit transaction and a loan. Since
credit is barter over time, it means that an orange today is being
bartered for an apple tomorrow. On the other hand, a loan implies that
the identical article of wealth loaned will be subsequently returned.
If a friend lends you a book, he may be quite annoyed if later you
return a copy of it rather than the identical one as you had lost his.
In lending money, the identical coins may not be expected in return,
but it amounts to the same thing as people are indifferent as long as
the returned money is of the same quality and amount.
The contrast between a credit and a loan transaction may be a
distinction without a difference for they tend to be considered alike.
One difference which may have some significance is that a loan tends
to come out of savings. A credit transaction, on the other hand, is
more likely to be the result of ordinary business dealings.
In the case of credit, banks are guaranteeing that the buyers will
deliver the money for the goods purchased. In the case of loans, banks
should lend actual money, that is wealth. Instead, they ordinarily
give the borrowers banknotes or, credit them with demand deposits,
that is, the banks give their guarantees. But guarantees, while they
may be important are not substantial. They are not something material.
Conservative economists have always insisted that commercial banks
should lend funds on capital or real estate only to the extent that
the banks have received deposits of what are termed savings, i.e.,
time or savings deposits. By so doing, these economists are actually
making a distinction between credit and loans. They are making a
distinction between a bank putting up its guarantee and a bank putting
up actual wealth -- money. (It is true that this distinction is not
clear cut inasmuch as money is considered to be the banknotes of a
nation's central bank as well as gold or silver. Nonetheless, the
distinction is there.)
When a nation tinkers with its money and thereby loses the confidence
of the peoples of the world so that no one will accept its money, the
people in that country are still able to make exchanges among
themselves and with foreigners. It is done quite clumsily, but it is
still accomplished. As between nations, it is done through barter
arrangements. The nation with worthless money usually establishes some
agency with a fancy title, as Exchange Stabilization Bureau, which
makes deals with other nations. The goods exchanged may be at ratios
determined by the prices of the nation with the sound money or of a
third nation. This is inefficient, but it works.
It were not for the fact that fundamentally all exchanges are barter
exchanges, the interference of the State in monetary matters would
make exchanges impossible. It is somewhat analogous to water flowing
down a hill. Despite all the obstacles which man may erect, the water
still finds it way to the bottom. Similarly, despite all the
interferences in monetary matters by the State, exchanges will go on
although at much greater cost to the people than if the State had not
interfered.
Recapitulation
Credit is time-barter. It is the bartering of goods over a period of
time. More exactly, it is the bartering of the rights to goods over a
period of time, With the advent of money, it became largely the
bartering of goods in the present for money in the future, or the
bartering of money in the present for money in the future.
The two principal factors involved in credit are trust and time.
Trust is primarily a consideration of the creditor as he considers
whether he will extend credit. The time element is a consideration of
both parties. Banks are very important in facilitating credit, their
principal function being the reduction of the problem of trust,
thereby acting as a guarantor of trust.
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