Office Of Credit In Exchanges

Henry George
The Science of Political Economy

Book V, Money -- The Medium Of Exchange and Measure of Value

Chapter IV
The Office Of Credit In Exchanges

[Showing That The Advance Of Civilization Economizes The Use Of Money]*

[Tendency to over-estimate the importance of money -- Credit existed before the use of money began, and it is now and always has been the most important instrument of exchange -- Illustration of shipwrecked men -- Adam Smith's error as to barter -- Money's most important use today is as a measure of value.]** 01

I have sought to explain the common understanding of money and the part that it plays in exchanges by supposing a number of travelers. I did so because it is in such small and immediate exchanges as a traveler must make among strangers that the peculiar usefulness of money is most clearly felt. I did not mean to assume that the difficulties of barter in all places and times are so great as those that in the vicinity of New York at the close of the Nineteenth Century would attend the effort of a traveler to supply his personal needs by that means of exchange.


On the contrary there are even now parts of the world where a traveler might find a properly selected stock of commodities more readily and advantageously exchangeable than money itself, and the difficulties of barter have certainly increased not merely with the greater use of money, but with such modern appliances as post-offices, steamboats, railways, telegraphs and telephones, and with the greater concentration of population and exchanges that result from them. Even in our own civilization barter must have been a more efficient means of exchange in the times that preceded the great industrial development of the Nineteenth Century than it is now because people were more generally accustomed to it. The old traveling merchants and even the old foreign merchants, who sent their ships over the maritime world, were largely barterers, and the stated fairs of which we have now only faint survivals, but which formed so important a part in the industrial life of our ancestors, gave place and occasion for the meeting of those who wished to make a direct exchange of commodities for commodities or services for services that are wanting now.


The effect of the general adoption of the more elaborate and on a large scale more efficient methods of an advanced civilization is always to relegate to forgetfulness the simpler methods previously in use. We have become within a few years so accustomed to the electric telegraph that we are apt to think that without it men would be reduced in carrying messages to the means of transportation by land or water, and to forget that telegraphs were in use before electric telegraphing was dreamed of. The convenience of the lucifer match has made its use so universal, that most of us if thrown on our own resources without matches, would find it a most serious difficulty to light a pipe or make a fire. A hunting party of civilized men, if deprived by accident of their ammunition, might starve to death before they could kill game even where it was abundant. Yet at the beginning of this century lucifer matches were unknown, and men killed game before firearms were invented.


And so it is with money. Its use is so general in our high civilization and its importance so great that we are apt to over-estimate that importance and to forget that men lived and advanced before money was developed, and both to underrate the efficiency of the means of exchange other than that of money, and the amount of exchanging that even now goes on without any more use of money than that of a counter or denominator of values.


It is not only that the simplest form of exchange, the transfer of things desired in themselves for things desired in themselves, still to some extent continues; but the advance of civilization which in an early stage develops the use of money as a medium of exchange begins in later stages to develop means for dispensing with or much economizing this use of money. The exchanges between different countries are still carried on without the use of money, and so in great measure are domestic exchanges, even in the same locality. Not merely in the rural districts and in small transactions is there much exchanging without actual transfer of money, but in the greatest cities, the largest transactions, habitually spoken of and thought of as though they involved the transfer of money, really take place without it. The richer people in fact use comparatively little money, even in personal transactions, and I fancy that a man of good credit who kept a bank-account might, if he tried to, live from year's end to year's end, even in a great city like New York (and with less effort in a smaller place), without a penny of actual money passing through his hands. His income, if not received in small amounts, he would get in checks or similar transfers. His larger expenses he could of course pay for in checks, and even such things as newspapers, tickets for street-car lines or railways, or admission to theaters, postage-stamps, etc., he could with a little effort get in the same way.


Now all this economizing in the use of money, which we are accustomed to think of as, and indeed in some of its forms really is, the latest development of a civilization that for immemorial ages has been accustomed to the use of money, is really in essence a return to something that must have been in use for the facilitating of exchanges before money was developed among men. That something is what we call trust or credit. Credit is today and in our highest civilization the most important instrument of exchange; and that it must have been from the very first appearance of man on this globe the most important instrument of exchange, any one can see, if he will only discard the assumption that invalidates so much of our recent philosophy and philosophic history -- the assumption that the progress of civilization is a change in man himself -- and allow even prehistoric man the same reasoning faculties that all we know of man in historic times shows to belong to him as man.


Imagine a number of totally shipwrecked men swimming ashore in their buffs to an uninhabited island in a climate genial enough to enable them to support life. What would be their first exchanges? Would they not be based upon the various forms of the proposition, "I will do or get this for you, if you will do or get that for me?" Now, no matter where or how they got into this world, this must have been the position of the first men when they got here, and all that we can reason from with any certainty goes to show that these first men must have been essentially the same kind of men as we ourselves.


If there is any difference in priority between them, credit must, in the nature of things, have preceded barter as an instrument of exchange, and must at least from the very first have assisted barter. What more natural than that the man who had killed a deer, or made a large catch of fish, should be willing to give now while he had abundance in return for a promise expressed or implied that his neighbor when similarly fortunate would in the same way remember him? The organization of credit into more elaborate and finer forms goes on with the development of civilization, but credit must have begun to aid exchanges with the very beginnings of human society, and it is in the backwoods and new settlements rather than in the great cities that we will today find its direct forms playing relatively the most important part in exchanges.


In explaining the origin and use of money, Adam Smith much overrated the difficulties of barter, and in this he has been followed by nearly all the writers who have succeeded him. Of the condition before the use of the metals as money he says (Book I, Chapter IV of the Wealth of Nations):


    One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But, if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another....

    ...The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for.

Though this explanation of the difficulties attending barter has been paraphrased by writer after writer since Adam Smith, it is an exaggeration so gross as to be ridiculous. The differentiation of such trades as that of the butcher, brewer and baker, the fact that men habitually devote their labor to the production of more of certain commodities than they themselves can consume, implies a division of labor that could not possibly take place were exchange impossible under the circumstances that Adam Smith assumes. And it is evident that such circumstances would impose no insuperable difficulty to exchange even though a true money had not yet come into use. The butcher, with meat that he wanted to dispose of, would not have refused the exchange offered by the brewer and baker because he himself was already provided with all the bread and beer that he had immediate occasion for. On the contrary, he would say, "I have no immediate use for bread and beer because I am already supplied, but I will give you the meat you want on your promise to give me its equivalent in bread and beer when I call for them." Nor need he necessarily wait for his own supply of bread and beer to be exhausted before calling on the baker and brewer for the fulfillment of their promises, for since man's wants are not satisfied with meat, bread and beer alone, he might want from the tailor a coat, from the grazier a bullock, from the carpenter a house; and since they could not take from him at once full payment in such a perishable commodity as meat, he could help out his part of the exchange by telling the baker and brewer to give to them the bread and beer they had promised him.


That is to say, it is not necessary to an exchange that both sides of it shall be effected at once or with the same person. One part or side of the full exchange may be effected at once, and the effecting of the other part or side may be deferred to a future time and transferred to another person or persons by means of trust or credit. And by this simple and natural device, and without the intervention of money, salt could be exchanged for less quantities of beef or mutton than are likely to spoil before a single family could consume them. The truth is that the difficulties of incidence which Adam Smith speaks of here as if they were inseparable from barter are always avoided by the use of trust where trust is possible. It is only where there are no other exchanges going on and it is not probable that the parties concerned will come into contact directly or indirectly again, as in a desert or at sea, that owing to want of incidence no exchange can be made between them.***


It is really in exchange between those who are unknown to each other and do not expect to meet each other again that money performs its most indispensable office (as illustrated in Book V, Chapter II). The use of money, by which the traveler can easily carry with him the means of supplying his needs, has greatly facilitated traveling; yet in the bill of exchange, the letter of credit, Cook's coupons, and the book of certified checks, which are so largely displacing money for the use of travelers, we come back again to the use of trust.


Trust or credit is indeed the first of all the instrumentalities that facilitate exchange. Its use antedates not merely the use of any true money, but must have been coeval with the first appearance of man. Truth, love, sympathy are of human nature. It is not only that without them man could never have emerged from the savage state, but that without them he could not have maintained himself even in a savage state. If brought on earth without them, he would inevitably have been exterminated by his animal neighbors or have exterminated himself.


Men do not have to be taught to trust each other, except where they have been deceived, and it is more often in our one-sided civilization, where laws for the collection of debts have weakened the moral sanction which public opinion naturally gives to honesty, and a deep social injustice brings about a monstrous inequality in the distribution of wealth, and not among primitive peoples, that the bond is oftenest required to back the simple word. So natural is it for men to trust each other that even the most distrustful must constantly trust others.


And trust or credit is not merely the first of the agencies of exchange in the sense of priority; it yet is, as it always has been, the first in importance. In spite of our extensive use of money in effecting exchanges, what is accomplished by it is small as compared with what is accomplished by credit. In international exchanges money is not used at all, while the great volume of domestic exchange is in every civilized country carried on by the giving and cancelation of credits. As a matter of fact the most important use of money today is not as a medium of exchange, though that is its primary use. It is that of a common measure of value, its secondary use. Not only this, but with the advance in civilization the tendency is to make use of credit as money; to coin, as it were, trust into currency, and thus to bring into use a medium of exchange better adapted in many circumstances to easy transfer than metallic money. The paper money so largely in use in all civilized countries as a common medium of exchange is in reality a coinage of credit or trust.

* Heading not complete in MS. See Prefatory Note. -- H.G., JR.

** Ibid.

*** But even here there is often something of the nature of exchange, although it may lack the element of certainty. When a boy, passing through a street in Philadelphia during a sudden rain, I met a gentleman standing in a doorway and proffered him the shelter of my umbrella, going a little out of my way to take him to his destination. As we parted he said, "You and I are not likely to meet again, as I am a stranger here; but one good turn deserves another, and I will try to return your service to me by doing such a service for some one else, telling him to pass it along." Possibly that little kindly service, which I would have forgotten but for the impression his words made, may be "passing along" still. Both good and evil pass on as waves pass on. Yet I cannot but think that in the long run, good outlives evil. For as to the normal constitution of the human mind, evil must bring the wider and more permanent pain, the impulse to its perpetuation must meet the greater friction.