Why Do We Use Credit Instead of Money as Dollars?

The barter society.

SOCIETY, in its most basic state, conducts trade by means of barter. As it develops, it still conducts trade on this basic principle. One person exchanges his commodity for another.

Whether it is gold and silver coin, private loans, or dollar bills, they all are merely instruments used to facilitate trade, or barter. The goal is to exchange one quantity of goods for another. These instruments allow exchanges to occur without requiring both sides to supply precisely the commodity the other party wants. This "coincidence of wants" is avoided when using instruments.

As a society develops, barter becomes inconvenient. Thus, the first instruments of trade, the precious metals (gold and silver) are used as a measure of value. They are portable, steady in price, and capable of subdivisions. The government can fix a stamp on them to certify their quantity and purity.

Using Money in Trade.

The precious metals, when uncoined (as bullion) are themselves commodities. However, when minted as money, they are used merely as a measure of value of other commodities. They may be converted back into commodities, at any time. This is one recommendation for their use in trade.

Since money (gold and silver) has so many advantages, why use credit (dollars, notes, bills) in trade rather than money?

More advanced trade.

While money (gold and silver) is portable, to carry it in quantities carries risk and inconvenience.

Suppose ten manufacturers in Detroit sell their products to ten stores in Cleveland. Further, suppose ten manufacturers in Cleveland sell their products to ten stores in Detroit. It would be unlilkely that the ten stores in Detroit would need to send money to Cleveland, once all transactions for a year are finished. Instead of trading money and incurring the expense of transport, security, and handling, it is better to just keep track of the transactions in a record, and settle at some point in the future.

The process of keeping track of the transactions during a year, would involve sending letters from place to place. They would acknowledge the receipt of goods and who is owed. So, the Detroit stores would have a record of their obligations to the Cleveland manufacturers. The manufacturers would receive letters from the stores saying the goods have been received and that they owe an amount.

These letters are called bills.

Now, suppose the Detroit stores have customers who owe them money in Cleveland. Rather than send money to Cleveland to pay the manufacturers, they would use their letters to instruct their customers to pay the manufacturers instead.

The manufacturers use these letters or bills and exchange them for money, from the customers. Thus, the letters become a "bill of exchange."

Bill of exchange.

A "bill of exchange" allows the debt of one person to be exchanged for the debt of another; and the debt, due in one place, for the debt in another.

Credit and debt are simply opposing sides of a lending exchange. With the advantages of credit in cost, convenience, and security, it is used in the form of dollars in our transactions today, rather than money.