CREDIT INSTRUMENTS. - These are the legal tokens of capital lent under a loan contract (bills of exchange, promissory notes, bonds, interest-bearing certificates, loan certificates) or of companies (shares): in common usage, this name applies only to representative instruments, in fixed denominations, of contracts with standardized clauses.
The holder of the first kind of instrument (bonds, etc.) is a simple creditor, more or less privileged, of the borrowing person or entity, and is entitled, upon maturity of the loan, to full repayment of the capital lent plus a fixed interest at the agreed rate, without being able to claim any intervention in or control over the undertaking financed. With the second kind of instrument (shares), on the other hand, one becomes a partner and co-owner of the undertaking financed, bearing its risks, including that of total loss, but participating in its management through shareholders’ meetings and the appointment of directors and auditors; and instead of fixed interest, it entitles one to a share in the distribution of net profits (dividend).
I. VARIOUS TYPES OF SECURITIES
Bonds, notes, and certificates issued by the State or State bodies, Provinces or Municipalities, as well as by public bodies, consortia, and sometimes even by large industrial concerns, are generally bearer securities, and may be perpetual, that is, never redeemable (State annuities), or temporary (Treasury Bills, industrial bonds, etc.), redeemable in five, ten, twenty, or more years according to various methods (at maturity, gradual amortization, drawing by lot, with or without premiums). Industrial shares, too, may be bearer or registered; or of mixed form, with the certificate registered and the coupons payable to bearer, as is presently the case in Italy.The bill of exchange represents circulating capital, has its own legal rules, and is traded by banks through discount and rediscount operations. Other securities are bought and sold in the appropriate markets called stock exchanges, which assign each security a daily value (maximum or minimum, average, opening, closing, after-hours) on the basis of the prices actually negotiated and listed in an exchange bulletin. Purchases and sales must be made exclusively
through authorized brokers, called stockbrokers; for cash or forward delivery. This second type speculation (v.), since it may give rise to artificial financial manoeuvres and degenerate into stock-jobbing. On commodity exchanges, securities representing goods are bought and sold (bills of lading, warehouse receipts or certificates of deposit, pawn tickets, and the like).
The bond type, having no real guarantees, or only partial ones, is subject to monetary depreciation; from this point of view, shares, which represent real values, are more fully protected.
The history of economic progress is one with the history of standardized contracts (that is, each reduced to a type) and of the securities that represent them.
II. CAPITALIZATION TRADING
The overcoming of the grave economic crisis at present and the establishment of a lasting equilibrium between supply and demand in the market depend above all on the ability to channel large masses of savings toward investments with long and very long maturities; this makes evident the enormous importance of easy trading in securities, particularly industrial ones (capitalization trading). Whereas cash trading and credit trading at short maturity are supported and guaranteed by a complex of intermediary-contractual-insurance institutions (banks, current accounts, discounting of bills of exchange, etc.), so that they do not present appreciable [risks] to trading, capitalization trading is almost entirely lacking a corresponding technical-legal apparatus capable of assuming and offsetting the serious risks of this kind of trading, arising from the difficult ascertainment of the quality of the securities concerned, the prolonged immobilization of capital, and the inherent danger of devaluation (v.). Stock-exchange prices say little about the actual value of securities, since they are exposed both to the nervous sensitivity of masses of uninformed operators and to the maneuvers of speculators.A first step, entirely empirical and modest, along the path that could give industrial securities a degree of marketability comparable to that of money and bills of exchange, is to be found in the type represented by “shares in investment and financial companies,” which to some extent provide insurance against investment risks: but they have so far gained little in marketability, and can do even less against devaluation. Real and important progress is possible in this direction (Investment Trusts and the English and American Trustees Associations): the proposals of the Italian Economic School are interesting in this regard (v. HALLESISMO). Innovations in economic technique in this field are destined to yield practical results far greater than any, however grandiose, expedient of economic policy, even at the international level, because they address the original causes and substantive deficiencies underlying the greatest economic imbalances.