Lesson 1: The Emergence and Challenge of the Credit Economy

Transition from Barter Economy to Money Economy

Barter is the exchange of goods and services without the presence of money.
Plunder or Robbery is the brute force and strength of acquiring goods that were owned by
someone.
In primitive times, recognition of private property was established so things that are
already owned by one individual can be conveyed unto another, either as gifts or in
exchange for other articles.
Barter is inefficient methods of exchanging goods because goods offered in exchange were
of quiet different values
A common medium of exchange was developed such as fish-hooks, sea shells, cows,
slaves, cotton, beads, cattle, tobacco, hoes, knives, and many others.
The Need for Money
Adam Smith author of the book, Wealth of the Nations, who entertained the belief that money
originated from mans rational effort to meet the necessity of finding some medium of exchange.
Multiplier Effect In the beginning, the use of money was not intended for production, but for consumption.
This explains that taking interest on money lent was not only looked upon with disfavour
but actually forbidden.
For Aristotle, money is barren and it does not breed. As such, he concluded that it is
intended to be used only in exchange but not to increase at interest.
In due time, it was modified and justified the thought of governing interest through history
such as the doctrines of damnun emergens (that is suffering of a loss by the lender) and
lucrum cessans (that is the loss of chance to gain).
The Birth of Credit
Credit comes from the Latin word credere which means to trust; means borrowing of money;
is essentially a transfer of goods, services or funds giving rise to obligations that must be
discharged in the future.
Two Parties Involved in Credit
1. Debtor credit to him represent power or the ability to obtain goods without an actual
tender of payments.
2. Creditor as a seller of goods or services on credit, has both the moral and legal right to
demand of his debtor to pay the obligations when due.
Other Meanings of Credit
In Banking refers to an entry in the books of a bank showing its obligation to a customer.
In Bookkeeping is an entry showing that the person named has a right to demand
something but not necessarily money.
In Commerce is an exchange transaction.
In Buying on Credit or Extension of Credit involves the purchase and sale of goods and
services with money payments to be made at some future time.
The Use of Credit
The Use of Credit is the life-blood of business.
Business entities and individuals find credit a distinct convenience.
The customers are able to obtain the desired goods even at a time when they suffer from
lack of cash or purchasing power.
Advantages of Credit
1. Credit facilitates and contributes

Disadvantages of Credit
1. Credit, at times, encourages

2.

3.

4.

5.
6.
7.
8.

to the increase in wealth by

making
funds
available
for
productive purposes.
Credit saves time and expense by
providing a safer and more
convenient means of completing
transactions.
Credit
helps
expand
the
purchasing
power
of
every
member
of
the
business
community from producer to the
ultimate consumer.
Credit
enables
immediate
consumption of goods thereby
providing for an increase in
material well-being.
Credit helps expand economic
opportunities through education,
job training and job creation.
Credit spreads progress to various
sectors of the economy.
Credit makes possible the birth of
new industries.
Credit helps buying become more
convenient for customers.

speculation.
2. Credit also tends to contribute to
extravagance and carelessness
on the part of people who obtain
it.
3. Because
of
credit,
many
entrepreneurs resort to overexpansion.
4. Owing to the observation that
business can be expanded or
contracted rapidly through the
use of credit, businessmen are
not susceptible but eventually
succumb to an air of confidence
or pessimism.

The Cost of Credit

Interest charge for the use of credit.
Operating Expenses
Risk
Foundations of Credit
1. Creditors must have absolute confidence in the personal character and in the ability as
well as the willingness of their debtors to accept, honor and settle the obligations.
2. Proper facilities must exist for performing credit operations.
3. The money standard must be stable.
Classes and Kinds of Credit
1. Personal/Consumer Credit
a. Charge Account (Open-Book Credit, Open Charge Account, 30-Day Credit)
facilitated using credit card.
Advantages
1. It is a very convenient way of shopping.
2. It eliminates the inconvenience as well as the danger of carrying too
much money.
3. Charge accounts enable customers to buy goods only at the time they
want them.
4. Charge account enables consumers to obtain goods even before they
have the money.
5. Charge accounts provide a valuable means of reference in many
business transactions.
Disadvantages
1. Non-essentials will be purchased without much consideration, and less
care will be used to get the most value for the money spent than when
the purchase is made for cash.

2. The amounts being charged from time to time will not be kept in mind.
b. Installment Credit
Considerations on Purchasing via Installment
1. What are the cost, the carrying charge, and the total cost of the goods?
2. What is the amount of each payment; what are the time, the place,
and the condition under which the payment are to be made?
3. What is the penalty if the buyer fails to make a payment on schedule?
Does he have any privilege of resintating the contract if this should
happen?
4. In the event that the goods are repossessed by the seller, is there any
condition by which the buyer can obtain them back?
5. Are there any other fees, such as legal or recording fees besides the
purchasing price and the carrying charge which the buyer must
shoulder?
6. Before the regular payments are completed, is the buyer entitled to
the privilege of paying the total amount due and settling the contract
ar a reduction in cost? If so, what are these conditions?
7. Besides the chattel mortgage or conditional sales contract, is the buyer
required to put up additional security?
Chattel Mortgage a conditional transfer of rights in movable property
as security for a debt or obligation, insuring the debtor reversion of
ownership upon payment of the obligation.
8. Who shall insure the merchandise: the buyer or the seller? Who shall
shoulder the payment of premiums?
9. What happens if the merchandise is destroyed or stolen? Does the
buyer stand the loss or shall it be borne by the seller?
c. Personal Loans
Promissory Note is a written promise that the amount borrowed will be
repaid on a certain date.
Signature or Character Loan borrowing of a person by his signature alone
(with good credit standing).
Co-Signer responsible for paying the debt should the borrower fail to pay.
Collateral anything used as security for a loan.
Secured Loan a loan backed by security.
Endorser becomes responsible only after the lender has used all other
means of collecting payment.
2. Mercantile/Commercial/Trade Credit is granted by manufacturers, wholesalers, and
jobbers as an incident of sale.
3. Bank Credit - an agreement between banks and borrowers where banks trust a borrower
to repay funds plus interest for either a loan, credit card or line of credit at a later date.
Types
a.
b.
c.
d.
e.
f.
g.

of Transactions Commercial Banks Finance

Commercial loans
Agricultural loans
Industrial loans
Real estate loans
Personal loans
Packing credit advances
Trust receipts

4. Investment Credit consists of advances that have been made to a business enterprise
to enable it to purchase or construct the necessary plant and equipment.

Purposes of Investment Credit

a. In order to meet the needs of business enterprises for fixed and working capital.
b. To meet the needs of national, provincial, and local governments that wish to
undertake projects requiring an expenditure in excess of their current revenue.
c. For the purchase and improvement of real estate.
5. Agricultural Credit
6. Export Credit
7. Public Credit