CREDIT. - It is an exchange of wealth by means of which wealth available at the present moment is transferred in return for a promise of future repayment of the value lent. An essential element of credit is therefore the trust that the debtor will honor at maturity the undertaking to repay; often, however, credit, rather than being founded simply on trust in the borrower, is secured by real guarantees of various kinds: a pledge on movable goods or a mortgage on immovable goods.
A further characteristic of credit is the payment by the debtor of interest, which represents the price of the use of the capital obtained as a loan. Throughout the Middle Ages a rigid extension of the laws combating usury prevented interest from being charged on sums lent. At present its lawfulness is admitted, as compensation for the renunciation of the immediate availability of wealth and for the risk inherent in every loan, because it has been observed that interest proves ineradicable from the economic point of view, inasmuch as it allows the practically unlimited demand for loans to be adjusted to the limited mass of present capital.
The demand for credit may be made either for productive purposes, that is, to increase the capital invested in enterprises and thus to increase production (productive credit), or for consumption purposes, that is, to have at one's disposal the monetary means capable of expanding or anticipating consumption (consumption credit).
The principal distinction among the different forms of credit is based on the length of the period of the loan of a capital. Thus there is short-term credit in the case where a sum is granted for a period usually not exceeding a year, whereas loans extending over several years, often up to 15 or 20, constitute long-term credit.
The whole of the transactions concerning short-term loans gives rise to the money market; to this flow the liquid funds that the respective private owners or the banks cannot invest durably, whether because these are capitals of which they have only a temporary availability, or simply because they intend to keep them in liquid form while awaiting the moment when they will employ those same funds for the long term. The level of the remuneration due to those who make short-term loans is regulated by the discount rate, which rises or falls according as the demand for this type of loan is greater than the supply or vice versa.
The transactions concerning long-term loans, on the other hand, form the so-called financial market, whose function consists in distributing capital to those enterprises that need it for rather lasting investments. The equilibrium between the supply and the demand for long-term credit is regulated by the movement of the interest rate. The term "interest," which serves to define generically the price of every type of loan, applies specifically only to long-term ones.
From the practical as well as from the scientific point of view, however, there is no clear and absolute separation between the money market and the financial market, since the two markets merge into one another and both influence each other, in the sense that the variations of the discount rate and of the interest rate end up being correlated.
If by credit is meant the whole of the operations that lead to it and take their origin from it, one can easily determine what its functions are. The distinction between short-term and long-term credit is useful here. The bodies that carry on short-term credit activity, which essentially comprise the deposit and discount banks or, more generally, the institutions of commercial or ordinary credit, after having gathered the liquid funds and the savings existing in the form of metallic money or banknotes, grant to depositors and to those to whom they have precisely granted short-term credit the faculty of drawing checks; the typical operation by which these banks grant credit is represented by the discounting of bills of exchange. In this case, therefore, the function of credit consists in substituting for metallic money, banknotes and the mass of bills of exchange that particular type of means of payment which checks are. At present, in the economically most advanced countries, in the composition of the circulating medium the largest percentage falls to checks.
The banks that carry on long-term credit, which are given the specific name of credit institutions, gather newly formed savings and channel them toward investment in productive enterprises. In this situation credit performs the function of allowing savings to be transformed into capital and to be distributed in the most efficient of ways among the productive sectors where capital is precisely most required.
A third function that can be attributed to credit is the one connected with what is called the creation of credit (v. BANCA). By means of this operation the monetary means necessary to increase consumption or to carry out other investments beyond what the availability of savings would permit are provided. The criterion on the basis of which credit is granted, with particular reference to long-term credit, consists in taking into account the remuneration that can be derived from it, that is, the interest, and the risks inherent in the repayment of the sums lent. In relation to this criterion there would be productive activities which, independently of any consideration of risk, could not have access to credit since they are not in a position to pay a sufficient interest. To meet the needs of the enterprises belonging to these sectors of production, in many countries special credit institutions have come into being, under the patronage and often with the aid of the government; thus those for the exercise of agricultural credit, land credit, naval credit, building credit, etc., which in general make loans at an interest rate lower than the market rate.
Often credit activity is carried on by bodies of such dimensions and power that on the part of the state organs a direct intervention aimed at coordination and control becomes necessary. In Italy, for example, as indeed also elsewhere, the mixed banks have been suppressed given their dangerousness, and the exercise of long-term credit has been centralized in state entities of the type of IRI (Institute for Industrial Reconstruction), IMI (Italian Securities Institute), etc. The exercise of long-term credit centralized in the hands of the State has been deemed appropriate in relation to the particular delicacy of the function of investment. Indeed, research on economic fluctuations of a cyclical character has brought to light how periods of expansion are marked and provoked, among other factors, by an excess of investments over savings, whereas in phases of depression there is a reversal in the sense that the mass of savings is excessive relative to investments. It follows therefore that, even independently of the regulation adopted in Italy, the public organs cannot leave to the discretion of individual institutions the exercise of a function that involves the entire course of national economic life. A control is furthermore directed at preventing the larger organisms with a monopolistic tendency from hindering and compromising the functioning of the banks and of the smaller institutions.
As economic progress increases, the importance of credit increases in parallel, and at the same time the tendency toward a more effective control of it is consolidated, in order to improve its utilization and to avoid the possibility that it may be used for purposes not in harmony with the economic and social well-being of the community.
Bibliography4 works
Ercole Calcaterra