American economist Joseph French Johnson said in 1893, while he was professor in the Wharton School of Commerce, that “Credit is the power to obtain goods or service by giving a promise to pay money (or goods) on demand or at a specified date in the future.” Through that definition, we discover that credit is a power which is owned even though it may never be used.
Henry Dunning Macleod wrote in 1889 in his work "The Theory of Credit", “A credit is the present right to a future payment”. In this reference, credit becomes something real; it is the potentiality which has become an actuality. It is in this sense that business credit managers think of credit. It shows that the creditor has something at stake and that credit gives the seller a right of action against the borrower. These characterizations of “credit” are shared in Josiah Tucker’s explanation in his writing in 1749 when he defined credit as: “The transfer of something valuable to another, whether money, goods or services, in the confidence that he will be both willing and able, at a future day, to pay its equivalent”.
Although these definitions differ from each other in their expression of the elements of credit, there is one central fact which is: The most important characteristic of credit is confidence. Confidence is the necessary element in every credit transaction, as a credit transaction involves the future, and when we are dealing with the future, uncertainty is always present.
Credit and debt
To understand credit, it must be distinguished from debt. As insinuated above, credit is a power, capacity or ability. Debt, by contrast, represents the unpaid portion, or the outstanding balance of past transactions created on credit. Credit varies with different appraisals of a credit analyst’s view of a transaction and the buyer’s debt-paying power; while debt constitutes a legal claim of creditors for specific amounts resulting from actual past credit transactions.
The Credit Research Foundation is frequently asked, “What is the collective amount of credit extended in the business to business financial system?” That amount is quantitatively inexpressible since the largest portion of it is potential, and not real; but what is more determinable is the amount of debt created through credit transactions. The financial catastrophe that is driving the world’s economies today can be blamed largely on a blurred line between credit and debt. Credit allows people and organizations to do things that they would otherwise not be able to do. Debt is the consequence. Credit is abstract. It is the result of an analytical hypothesis based on purported facts at a given time. On-the-other-hand, debt is real. Debt is the tangible result of what people and organizations have done when credit was not treated with respect.
Terry Callahan
Vice President Credit Research Foundation
www.crfonline.org