What is money?
Money is nothing more than a way for people to exchange labour.
Paper money can be thought of as a ticket entitling the holder to a certain amount of someone else's hard work.
While man lived a savage existence in history, he was not able to perform all functions necessary to break out of the routine of kill, eat, grow, harvest, without the skills gained from the labour of another.
Barter is the simplest form of trading labour, but it is inherently inefficient. If you cannot easily locate someone with the exact item you want, you are out of luck. (I wonder if I can find someone to trade a chicken for this Web page?)
Before paper money (which is nothing more than debt) was created, we had hard money and we had a hard time giving it up.
For something to serve as money it had to be:
- Desirable - Precious metals are more desirable than. You can compress more value into a relatively small package with gold and silver.
- Portable - It can't be too heavy. You don't see coins made from iron, do you?
- Divisible - You have to be able to divide it up into smaller portions without considerable work. Spanish pieces of eight were often cut into bits. Two bits equalled a quarter of a dollar. "Two bits, four bits, six bits, a dollar, all for ______ stand up and holler."
- Durable - Don't have to replace it often. It won't easily wear and tarnish.
So what is credit?
Credit is a method of exchange of labour in lieu of money.
If you earn £20,080 a year (£10/hr.) and want to buy a car worth £30,000, you would need to work 3,000 hours to pay for it (actually about 3,900 hours because you have to pay all your taxes and deductions off the top).
Rather than wait until you have gathered the necessary money by working the hours, you can pledge your future labour as a guarantee towards that obligation and get the car now. Your history of how you honour those types of obligations is your "credit rating."
It could be said that credit is simply a state of mind that all will honour their obligations.
What is debt?
Debt is what you create from a credit transaction and are obligated to pay back.
Credit and debt walk hand in hand. However, the levels of credit and debt are often not equal.
If you purchase a rare painting with debt and it rises in value, the present value will be more than the debt. You will have earned extra credit (current sales price - debt = credit).
However, if you purchase, say a caravan, it will be worth less when you try to sell it than your debt against the home. You will be the proud owner of debt (current sales price - debt = debt).
Why do I need confidence for credit?
The largest factor in the continued extension of credit is confidence. Without confidence by consumers in the economy and producers in consumers, credit will dry up.
So if credit is used in place of money, what else is also used? Bank cheques are. The difference is they are not pledges of future labour but for labour stored in your bank account.
What about the credit card, is that like a check? No. Much like a bank cheque is used to exchange stored labour, a credit card is used as a tool to exchange present and/or future labour. A credit card is nothing more than a mechanism to do this - a financial tool.
If you write a cheque for the purchase and do not carry the balance on the card, the credit card has merely been a tool to conduct the transaction. Nothing more, nothing less.
What about people who say that having a credit card made them spend more? It didn't. Overspending is not caused by the tool. It is caused by the desire for things that bring us pleasure, often to compensate for issues in other parts of our lives. What causes problems is the over-pledging of future labour for a term that cannot be met. For example: You pledge 3,900 hours within five years to pay for a car, but in combination with your other credit pledges (vacations, clothes, dining out, etc.) you cannot possibly work enough hours or gather enough money to satisfy your debt before it is due. That's what gets people in trouble.
So why don't I put all of my money in my mattress it until I need it? That doesn't help either. If everyone stashed their money, it would lead to a stagnation of production and work for the exchange of, guess what, money. Money keeps us busy and active as a society. Without a steady level of activity our economy would be nothing but periods of starts and stops. Credit helps to level it all out. It is not desirable for our country or individuals to be completely debt-free if we want to keep the economy stable.
