So Melon says: "To the calculation of values in money, there must be added, the current credit of the merchant, and his possible credit."
So also Dutot says: "Since there has been regular commerce among men, those who have need of money have made bills, or promises to pay in money. The first use of credit, therefore, is to represent money by paper. This usage is very old; the first want of it gave rise to it. It multiplies specie considerably. It supplies it when it is wanted, and which would never be sufficient without this credit; because there is not sufficient gold and silver to circulate all the products of nature and art. So there is in commerce a much larger amount in bills than there is specie in the possession of the merchants."
Mr. Banker: While it is true, as a general principle, that by the sale and transfer of the same property, as we have seen in the case of the woolen goods, many credits are granted and a corresponding amount of debts are created, it is also true that a single debt in the form of a promissory note, check, draft or bill of exchange, may be the medium of exchanging or transferring many different pieces of property. This is just the reverse of the transaction that Mr. Manufacturer has explained to us.
Mr. Farmer: That is right. I want to tell you fellows something. One day about six months ago I was thinking of taking an automobile trip, but hesitated on account of the weather signs. I hung around town here for an hour or two and happened to drop into the office of a certain lawyer (I never go there any more now). We talked politics. While there, I asked him what he thought of the weather, and the political situation, and then went out. At the end of the month I got a bill from that lawyer for $50. I called upon the gentleman (I suppose I have got to call him a gentleman on account of his neighbor here) to find out what his bill meant, and he claimed that while we talked about politics, the Presidential election prospects and the weather, that I had pumped him about some very important legal matters upon which he had given me valuable advice. Upon my soul I never knew it, but what could I do. My only possible escape was to pay some other lawyer, possibly Mr. Lawyer over there, $100 to defend the case. As is the practice nowadays, I took the short cut and paid it by sending him my check. That lawyer indorsed and gave that check to a neighbor of mine for a Jersey cow. My neighbor indorsed and gave the check to a country grocery store out there and paid his bill with it. The country storekeeper indorsed and gave the check to Mr. Merchant over there for $50 worth of boots and shoes. Mr. Merchant indorsed and gave the check to Mr. Manufacturer for $50 worth of clothing. Mr. Manufacturer indorsed and deposited that check with Mr. Banker, right here, who charged it up to my account. Now, by Jove, you wouldn't think that was possible, but here is the check with those five indorsements.
Mr. Manufacturer has just given us an instance where the same identical property worth only $10,000 in Lancashire, England, was sold five times, and that credits amounting to $88,000 were being granted, and a corresponding amount of debts were created. Now here is a case where my debt to that blasted lawyer acknowledged by my check, paid him $50; paid my neighbor for a Jersey cow $50; paid the country grocery store for groceries $50; paid Mr. Merchant for boots and shoes $50; paid Mr. Manufacturer for clothing $50; paid the bank on account of Mr. Manufacturer's debt $50; or six separate debts in all, amounting to $300. And the joke is, I never ought to have given the check at all. This is the reverse side of the use of credit. The instance given by Mr. Manufacturer was one illustrating the tremendous expansion of credit. The instance I have given is one of the contraction of credit.
Mr. Banker: Right on that point Mr. MacLeod says that sixty years ago almost the entire circulating medium of Lancashire, England, consisted of bills of exchange in no way different from Mr. Farmer's debt, and that they sometimes had as many as 115 indorsements upon them before they came to maturity. So that the useful effect of a bill of exchange is indicated by the number of indorsements upon it, supposing that every transfer is accompanied by an indorsement, which is not always the case. We see here the fundamental difference between bills of lading and bills of exchange, because the indorsements on the former denote the number of transfers of the same identical property; the indorsements on the latter denote the number of transfers of distinctly different property.
Mr. Merchant: Mr. Banker, in every form of credit granted so far and debts created, we have certainly been dealing only in a legitimate way with consumable commodities, the necessities of life, and ordinarily, if not always, this kind of credit will take care of itself. And yet the marvelous facility and power of credit has been illustrated so vividly, that I am sure all of us appreciate it and can readily see how it might be abused and lead to disaster if not confined to the actual production of articles of food, clothing and daily use, or, in a word, to the production of the necessities of life.
Mr. Farmer: I object to your including that lawyer's bill as one of the necessities of life.
Mr. Lawyer: I beg your pardon, but we lawyers are a necessity. Possibly necessary evils, but nevertheless, I insist that we are necessary.
Mr. Banker: Passing over this little quarrel between Mr. Farmer and Mr. Lawyer, Mr. Merchant has hit upon the vital distinction that should always be maintained in commercial banking as distinguished from investment banking as we shall soon see.