2nd. When time is given a certain amount must be added to the price of the goods to compensate the seller for the use of his capital between the date of sale and the maturity of the account.
The additional price, thus received, is of no advantage to the producer or to the seller of the commodity. The addition to the price is consumed by losses from bad debts and in interest on capital. In fact, the additional prices charged, when properly analyzed, are not for the goods, but for the risk on the credit and for interest on capital. The net selling price of the commodity is not increased. Experience has proven that men who sell for the lesser price for cash in hand are more apt to succeed than those who charge the higher rate on the credit system.
Credit is always burdened with interest. If interest is not directly charged, the goods are sold at an advance on the cash price equal to the interest, which amounts to the same thing. Interest acts on commerce like friction on machinery. As friction absorbs a portion of the motive power, so interest absorbs a part of the value of all commodities sold on credit. Interest, the necessary accompaniment of credit, produces no wealth; but, on the contrary, absorbs wealth and tends to concentrate it in the hands of the few; and, necessarily, in the same ratio it takes from the masses the power to purchase the things they desire and would otherwise consume. Its ultimate result must be to lower prices. Credit burdened with interest, as it always is, may temporarily increase the demand for a certain commodity and consequently temporarily raise its price; but it must do this at the expense of other commodities. Like a stimulant administered to a human being, it may produce spasmodic results of extraordinary power; but when the stimulant has spent its force it leaves the individual weaker and in a worse condition than he was before the stimulant was administered.
Henry Thornton, an English economist, attempts to prove that a bill of exchange is money, and that, being money, it acts on prices. He says:
Let us imagine a farmer in the country to discharge a debt of £10 to his neighboring grocer by giving him a bill for that sum, drawn on his corn-factor in London, for grain sold in the metropolis; and the grocer to transmit the bill, he having previously indorsed it, to a neighboring sugar-baker in discharge of a like debt; and the sugar-baker to send it, when again indorsed, to a West India merchant in an outport; and the West India merchant to deliver it to his country banker, who also indorses it and sends it into further circulation. The bill in this case will have effected five payments, exactly as if it were a £10 note payable to the bearer on demand. A multitude of bills pass this way between traders in the country, in the manner which has been described; and they evidently form in the strictest sense a part of the circulating medium of the kingdom.
Mill in his “Political Economy” quotes this illustration with approval. Is the conclusion arrived at correct?
Suppose that instead of a bill of exchange for £10, a horse worth £10 had been made use of, and the farmer had delivered the horse to the grocer in satisfaction of his debt, and the grocer had turned it over to the sugar-baker, and the sugar-baker to the West India merchant, etc. The horse would have paid the five debts in precisely the same manner that the bill of exchange did, but would such a use of the horse have made the horse, in the strictest sense of the term, a part of the circulating medium of the kingdom? I think not! A bill of exchange is not money, but an order for money, and would be valueless unless honored by payment on presentation. From the time the bill was drawn until finally paid an amount of money equal to the demand of the bill must be held out of circulation for its payment. It adds nothing to the circulation, and in no sense does it constitute a part of the circulating medium. It may, possibly, increase the rapidity of circulation, but it is difficult to see how it could do even this. The £10 held out of circulation for the payment of the bill would have paid the debts in the same manner that the bill of exchange did, and I fail to see why they would not have made the circuit as quickly. If a horse had been made use of in the settlement of the debts mentioned by Mr. Thornton, it would have been barter, pure and simple, and not a money transaction.
That the contraction of the volume of credit will not tend to depress prices in the same manner and to the same extent that a contraction of the volume of money would will be apparent from the following illustration.
The most conservative estimates place the national, municipal, corporate, and individual debts in the United States at $30,000,000,000. The Secretary of the Treasury estimates the amount of money in circulation at $1,600,000,000. There is not, in fact, one-third of the amount available for use; but for the purpose of this illustration we will take the Secretary’s estimate as correct. Now let us suppose that the volume of credit should be reduced to $28,400,000,000, either by the payment of $1,600,000,000 of the debt or by bankruptcy proceedings or in some other manner. If that amount of the credits were extinguished by payment, business would be stimulated. That sum of money, or at least a considerable portion of it, would pass into the hands of the creditor class, where it would seek investment, and the tendency would be, not to contract, but to expand prices. If that amount of the credits were extinguished by bankruptcy proceedings in which no money passed in either direction, such an extinguishment could not depress or expand prices; it could have no influence upon them.
Now suppose that $1,600,000,000 of the money, every dollar now claimed to be in circulation in the United States, should be withdrawn from the channels of trade, it would not be difficult to see that prices would fall; would, in fact, be completely annihilated. There would be no money with which to make purchases or to pay debts, civilization would go backwards, and universal bankruptcy and ruin would ensue. Suppose that only one-half or one-third of the money available for use should be withdrawn from circulation; even then business would be paralyzed, the money remaining would be hoarded or would be collected in the great money centres, prices would fall, and business men all over the country would be forced into bankruptcy. I think that it must be perfectly apparent that a contraction of credit does not act on the general level of prices in the same manner and to the same extent that a contraction of the volume of money does; that, in fact, it does not act on the general level of prices at all.