CREDITO. — This is an exchange of wealth whereby wealth available at the present moment is ceded in return for a promise to repay the value lent in the future. An essential element of c. is therefore the trust that the debtor will, upon maturity, honor the repayment commitment undertaken; often, however, c., rather than being based simply on trust in the borrower, is secured by various forms of collateral: a pledge on movable property or a mortgage on immovable property.
Another characteristic of c. is the payment by the debtor of interest, which represents the price for the use of the capital obtained on loan. Throughout the Middle Ages, the strict enforcement of the laws combating usury prevented interest from being charged on sums lent. Today its legitimacy is acknowledged, as compensation for relinquishing the immediate availability of wealth and for the risk inherent in every loan, because it has been established that, from an economic standpoint, interest cannot be eliminated, since it enables the limited mass of capital currently available to meet the practically unlimited demand for loans.
The demand for c. may be made either for productive purposes, that is, to increase the capital invested in enterprises and consequently to expand production (productive c.), or for consumption purposes, that is, to provide the monetary means needed to enlarge or bring forward consumption (consumption c.).
The principal distinction among the various forms of c. is based on the length of the period for which capital is lent. Thus, there is short-term c. when a sum is granted for a period usually not exceeding one year, whereas loans extending over several years, often up to 15 or 20, constitute long-term c.
The totality of transactions concerning short-term loans gives rise to the money market; liquid funds flow into it which their private owners or the banks cannot invest permanently, either because they are capital of which they have only temporary availability, or simply because they intend to keep it in liquid form until the moment when they will employ the funds themselves over the long term. The level of remuneration due to those making short-term loans is regulated by the discount rate, which rises or falls according as the demand for this type of loan exceeds the supply or vice versa.
Transactions concerning long-term loans, on the other hand, form the so-called financial market, whose function is to distribute capital to those enterprises that need it for relatively lasting investments. The balance between the supply and demand for long-term c. is regulated by the movement of the interest rate. The term “interest,” which serves generically to define the price of every type of loan, is applied specifically only to long-term loans.
From both the practical and 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 variations in the discount rate and the interest rate ultimately become correlated.
If c. is understood as the complex of operations connected with it and originating from it, its functions can readily be determined. The distinction between short- and long-term c. is useful here. The bodies that carry out short-term credit activity, essentially comprising deposit and discount banks or, more generally, institutions of commercial or ordinary c., after collecting liquid funds and savings existing in the form of metallic currency or banknotes, grant depositors and those to whom they have granted short-term c. the power to draw checks; the typical operation by which these banks grant c. is the discounting of bills of exchange. In this case, therefore, the function of c. consists in replacing metallic currency, banknotes, and the mass of bills of exchange with that particular type of means of payment represented by checks. At present, in the more economically advanced countries, checks account for the largest percentage of the composition of the circulating medium.
Banks that conduct long-term c., specifically called credit institutions, collect newly formed savings and channel them toward investment in producing enterprises. In this situation, c. performs the function of enabling savings to be transformed into capital and distributed in the most efficient manner among the productive sectors where capital is most needed.
A third function that may be attributed to c. is connected with what is called the creation of c. (v. BANCA). Through this operation, the monetary means necessary to increase consumption or to undertake other investments beyond what would be permitted by the available savings are provided. The criterion according to which c. is granted, with particular reference to long-term c., consists in taking into account the remuneration that may be obtained from it, namely interest, and the risks inherent in the repayment of the sums lent. In relation to this criterion, there would be productive activities that, independently of any consideration of risk, could not obtain c. because they are not in a position to pay sufficient interest. To meet the needs of enterprises belonging to these sectors of production, special credit institutions have been established in many countries under government patronage and often with government assistance; such are those for agricultural c., mortgage c., naval c., construction c., and so forth, which generally grant loans at an interest rate below the market rate.
Credit activity is often conducted by bodies of such size and power that direct intervention by state authorities becomes necessary for purposes of coordination and control. In Italy, for example, as elsewhere, mixed banks have been abolished because of their dangerousness, and the conduct of long-term c. has been centralized in state bodies such as IRI (Istituto per la ricostruzione industriale), IMI (Istituto mobiliare italiano), and so forth. The concentration of long-term c. in the hands of the State has been considered appropriate in view of the particular delicacy of the investment function. Indeed, research on cyclical economic fluctuations has shown that periods of expansion are marked and caused, among other factors, by an excess of investment over savings, whereas in phases of depression the situation is reversed, in the sense that the mass of savings is excessive in relation to investment. It follows, therefore, that, even independently of the system of regulation adopted in Italy, public authorities cannot leave to the discretion of individual institutions the exercise of a function that affects the entire course of national economic life. Control is also directed toward preventing the larger monopolistic bodies from obstructing and compromising the functioning of smaller banks and institutions.
As economic progress increases, the importance of c. grows correspondingly, while at the same time the tendency toward more effective control of it is strengthened, in order to improve its utilization and prevent the possibility that it may be used for purposes incompatible with the economic and social welfare of the community.