CREDIT INSTRUMENTS. - These are the legal symbols of capital lent by contract of loan (bills of exchange, IOUs, bonds, interest-bearing certificates, annuities) or of companies (shares): in common usage this name is given only to the symbols representing contracts with unified clauses, in fixed denominations.
The holder of the first kind of security (bonds, etc.) is a simple creditor, more or less privileged, of the borrowing person or entity, and is entitled at the maturity of the loan to the full repayment of the capital lent plus a flat-rate interest at the agreed rate, without being able to claim any interference with or control over the financed enterprise. With the second kind of security (shares), one instead becomes a partner and co-owner of the financed enterprise, bearing its risks, including that of total loss, but participating in its management through the general meetings and the appointment of directors and auditors; and instead of a fixed interest, it confers the right to a share of the net profits (dividend).
I. VARIOUS KINDS OF CREDIT INSTRUMENTS
Bonds, vouchers and certificates issued by the State or by state bodies, provinces or municipalities, as well as by public bodies, consortia and sometimes even by large industrial firms, are generally bearer securities, and may be consolidated, that is, never redeemable (state annuities), or temporary (Treasury bills, industrial bonds, etc.) redeemable in five, ten, twenty or more years according to various systems (at maturity, by gradual amortization, by drawing lots, with or without premiums). Industrial shares too may be bearer or registered: or of mixed form, with the registered certificate and bearer coupons, as is currently the case in Italy.
The bill of exchange represents circulating capital, has its own legal rule and is traded by banks through the operations of discount and rediscount. The other t. are bought and sold in the special markets called stock exchanges, which assign daily to each t. a value (maximum or minimum, average, opening, closing, after-hours) on the basis of the prices actually contracted, listed in a stock exchange list. Purchases and sales must be made exclusively through authorized commission agents, called stockbrokers; for cash or for forward settlement. This second kind of contract lends itself to speculation (v.) since it can give rise to artificial financial manoeuvres, and degenerate into market rigging. On the commodity exchanges one buys and sells t. representing goods (bills of lading, warehouse receipts or deposit certificates, pawn notes and the like).
The bond type, having no real guarantees, or only partial ones, is subject to monetary devaluation: more protected from this point of view are shares, which represent real values.
The history of economic progress is one and the same with the history of unified contracts (that is, each reduced to a type) and of the t. that represent them.
II. COMMERCIO DI CAPITALIZZAZIONE
The overcoming of the current severe economic crisis and the establishment of a lasting equilibrium between supply and demand on the market depend above all on succeeding in channeling large masses of savings toward long-term and very long-term investments; this makes evident the enormous importance of an easy trade in securities, particularly industrial ones (trade of capitalization). While cash trade and short-term credit trade 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], for capitalization trade there is almost entirely lacking a corresponding technical-legal apparatus that would assume, by compensating them, the serious risks of this kind of trade, deriving from the difficult ascertainment of the quality of the relevant securities, from the prolonged immobilization of capital and from the inherent danger of devaluation (v.). Stock Exchange prices say little about the actual value of securities, inasmuch as they are exposed both to the nervous sensitivity of masses of ignorant operators and to the maneuvers of speculators.
A first step, entirely empirical and modest, on the road that could give industrial securities a degree of marketability equal to that of money and bills of exchange, is to be found in the type "shares of movable and financial companies," which to a certain extent carry out the insurance of investment risks: but they still gain little as regards marketability, and even less can they do against devaluation. Real and important progress is possible in this direction (English and American Investment Trusts and Trustees Associations): interesting in this regard are the proposals of the Italian economic School (v. HALLESISMO). The innovations of economic technique in this field are destined to yield practical results far greater than any even grandiose expedient of economic policy, including on the international plane, because they touch the original causes and the substantial deficiencies of the major economic imbalances.
Bibliography9 works
Mario Baronci