THE CREDIT SYSTEM AND THE FUNDAMENTAL PRINCIPLES OF CREDIT

Credit has been a greater factor in the development and progress of the world than money. Had the development and progress of the world been limited to the use of money only this generation would now be in a state of development that existed centuries ago. Credit has stimulated labor, industry and commerce. A slight disturbance in the credit system is felt in every line of business, and its ramifications are such and its operations so internationally extensive that this disturbance reaches foreign business as well as domestic. Present-day commercial life would be demoralized if credit should cease.

Property is represented by hard money, which is the standard or measure of value, and hard money is represented equally as much by credit, and it so thoroughly supplies the place of money that in most commercial transactions the actual transfer of money from one party in a transaction to the other rarely ever takes place.

The banking system is probably the most highly developed and best regulated branch of the credit system. Practically all business operations are liquidated by the credit system through the medium of the banks, and to-day they are as much a clearing house of credit as they are a clearing house of money. However, as the subject to be dealt with in this book relates to mercantile credit only, no discussion of the system of banking credits will be undertaken.

Much of the business of this country is to-day done on credit through what is known as the Open Book Account System. Under this system a buyer places an order for merchandise, either verbally or in writing, which the seller fills, relying upon the promise and ability of the buyer to pay for the property at some future date. Often the promise to pay is merely implied. Orders are placed most generally without any definite promise to pay. The transaction is largely one of faith, supplemented by information the seller has as to the character, reputation, financial standing and ability of the buyer to pay.

Where salesmen are employed, the buyer's written order is usually obtained, and the terms of sale are shown on the order and a copy of the signed order is left with the buyer. If the character of the business does not make it practical to obtain written orders, or when a written order is received from a buyer by mail, the order should be acknowledged, so that there is no

misunderstanding as to what is to be shipped and in order that the buyer's attention may be called to any discrepancy. A shipping ticket, or a charge ticket, is then made up, from which the goods are shipped, and an invoice is mailed to the customer and on the first of the month a statement of account is rendered. The buyer's duty is to check over the statement or bill, and if correct pay the amount shown, which is usually by check or draft. It is a remarkable tribute to the good faith of human nature and belief in our fellow being that there are not more losses in business under this loose system of open book account credits.

In some cases merchandise is sold under what is known as the Conditional Sales Contract. This enables the seller to retain title to the goods furnished until the purchase price has been paid by the buyer. Pianos, victrolas, machinery, farm implements, wagons and buggies, automobiles, sewing machines, and most mechanical devices sold on the installment plan are sold under the Conditional Sales Contract. Sellers of this class of merchandise usually require a cash payment with the order large enough to cover the wear and tear and depreciation in case they are compelled to take back the property because of default on the part of the buyer. A complete outline of the method of making sales under conditional sales contracts will be later outlined in a separate chapter.

In money transactions the extensions of credit is

usually represented by a promissory note, either se cured or unsecured. The security may be collateral, such as stocks, bonds or other evidence of indebtedness, or may be in the form of a mortgage on real estate or personal property. For practical purposes, however, a distinction should be made in mercantile transactions between secured and unsecured notes, in that an unsecured note really represents credit based wholly upon the integrity and ability of the maker to pay, whereas a secured note is merely an evidence of indebtedness in which the ability, and frequently the integrity of the maker are not much of a factor, the holder of the paper relying upon the real estate or collateral pledged as assurance of ultimate payment, almost wholly regardless of the ability of the maker to pay the indebtedness from the proceeds or realization of trading in other assets.

Another instrument of mercantile credit is the trade acceptance. The most important function of the trade acceptance is to liquify open book accounts and make them available for discount at banks. As distinguished from a promissory note, which is a "promise to pay," a trade acceptance is an "order to pay" and is based entirely upon current transactions. The use of such instruments in this country is comparatively new and a separate chapter will be devoted to the subject.

Many contingencies often prevent the buyer from carrying out his obligation, and the following chapters

point out the dangers, outline the methods and suggest some remedies for preventing losses which frequently could have been prevented if the seller had handled the situation properly.

One of the first requisites a buyer must have is character and honesty. It is often dangerous to extend credit to one who has all the other necessary requisites to enable him to pay; in fact, credit men must always be on the alert to prevent their employers from being defrauded by buyers who have the ability to pay but, lacking character and honesty, try to make it profitable to themselves by avoiding wherever possible the payment of their just debts. In a retail trade, for instance, much of the credit that is extended to buyers, particularly covering the necessities of life, is extended solely upon the character and honesty of the buyer.

Another fundamental attribute of credit is faith— faith on the part of the seller that the buyer can and will carry out his obligation with a reasonable degree of promptness and certainty; and faith upon the part of the buyer that the seller can and will deliver what he has contracted to deliver or agreed to deliver, within the time, and of a quality, agreed upon. This faith upon the part of the seller must extend further than a mere belief that the buyer can meet his obligations. It is the duty of the credit man to ascertain the facts that will make this faith tangible. The seller must have faith, not only in the character and honesty of the