Part 1. History of Credit Introduction by Edward S. Winfrey
On my journey to understand credit and how it works, I decided to start to take a look at the history of the concept. When it comes to credit, people have mixed emotions about the concept. Some people see it as a good thing and some people see it as the work of some evil unseen force. We all know that the concept of credit has cause good and adverse consequences within society today.
To get a good understanding of a concept, We must observe its historic use and how it evolved. The concept of trading products and services in form of a promise of payment, in the near future developed during the time trade, begin amongst humans. some of the most common ways that credit was implemented are unknown from the earliest stages of human history. It is most likely that credit begins amongst family members and close associates within the private sector.
There is evidence which has been recorded as early as 2000 B.C. of Installment loans for real estate. These loans were made between the Egyptians in the time of the Pharaohs. By 1500 BC in the Middle East in the land of Babylon, Cannon and Assyria people gave loans on the security of mortgages including forms of advancements. By 1000 BC the land of Babylon had developed a form of the Bill of exchange. According to the credit encyclopedia, in Babylon, a creditor merchant could direct the debtor merchant in a distant place to pay a third party to whom the first merchant was indebted.
Merchants in Northern Africa, Greece and Rome used credit as well. The roman empire during its declining period used credit bills of exchange or promissory notes were widely used to reduce the dangers and difficulties of transferring money through unorganized trading areas.
In the middle ages bills of credit were essential when trading among the city-states of Italy. Borrowing and lending along with selling and buying using credit were a frequent practice. The relationship between debtors and creditors was found in all classes of society. Kings, dignitaries, and popes with other officials of the church use credit conducting their daily business and campaigns.
One of the most widely used forms of credit was what is called a sea loan. According to the business encyclopedia a “sea loan” whereby the capitalist advanced money to the merchant and thus shared the risk. If the voyage was a success, the creditor got the investment back plus a substantial bonus of 20 to 30 percent; if the ship was lost, the creditor could lose the entire sum.”
Another form of credit that was widely used was a fair letter. A fair letter was given at fairs that were held on holidays and special occasions. It was a form of a promissory note that was paid when the fair was over or when the next fair begins. This help merchants to secure goods on credit if they were short on cash. The goods that were obtained on credit was sold at the fair and this gave the fair the ability to get more merchants to sell goods thus making the fair a success.
Part 2. Credit in The Americas
This brings us to part 2 credit in the new world. According to MC Dennis, the discovery of the New World provided new opportunities for the growth of capitalism and the expansion of credit. The first recorded use of open credit in early America took place with the establishment of the first permanent colony in New England. In September 1620, the Mayflower set sail from England for Virginia. Because of bad weather and navigational errors, the Pilgrims ended up off the coast of Cape Cod and eventually established the village of Plymouth in Massachusetts. While the journey itself was a tremendous achievement, so was its financing.
The Pilgrims had spent three years of arduous negotiations in England attempting to raise the funds necessary for the trip. A wealthy London merchant financed the trip and provided for “all credit advanced and to be advanced.” In return, the Pilgrims contracted to work for a period of seven years. At the end of that period, payment would be made to the creditors based on the size of the individual investment.
The original credit of $1,800 could not be paid at the end of seven years, so an alternative arrangement was agreed upon: $200 to be paid annually for a term of nine years. This arrangement had to be renegotiated and finally, after 25 years, the last payment was made. This was the first example of credit in early America.
To finance the American Revolution, the Second Continental Congress made efforts to finance the Army of the United Colonies. The Congress had only three alternatives: borrow the money from sympathetic countries abroad which were an impossible task since the Colonist’s credit in the world stood at zero; impose taxes which was unpopular and the very cause that had brought about the American Revolution, or issue bills of credit.
In June of 1775, the Continental Congress authorized the printing of $2,000,000 in various denominations ranging from one dollar to eight dollars. Trouble for the Continental currency began almost at once; each note had to be hand signed which was not a simple task considering 49,000 of them had to be signed. Counterfeiting of the currency was rampant. The principle behind the Continental currency was, in essence, a promise to pay the final bearer, at some point in the future, the face value of Spanish coins, the coins in widest circulation at this time.
In 1783, the Treaty of Paris was signed bringing an official end to the war and official recognition of the United States by England. Trading resumed and American importers and wholesalers extended generous terms to their customers. Generally, sales were made on terms of 12 months but even where six- or nine-month terms were offered, it was not uncommon for an account to remain unpaid for a much longer period, up to 24 months or more.
With the restoration of pre-Revolutionary trade customs and habits, credit references assumed importance, although, in most instances, proper information was still lacking. Some prospective purchasers took the precaution of using the names of prominent people they knew when placing orders on credit. Credit references accompanied orders, however, in most cases, merchants took their chances.
Terms of sale, as they developed during the 1800s, reflected the changes in the rapidly expanding economy. The 12-month period, which had prevailed, showed a tendency to become shorter. By the 1830s, the average term of sale was about six months.
Hard financial times hit the country in the mid-1830s. The population was rapidly growing and business was expanding. The sale of land on credit went virtually unchecked. The banking system was not centralized. By the summer of 1837, bank after bank closed its doors and thousands of businesses went into bankruptcy. The financial panic of 1837 saw the beginnings of the Mercantile Agency, established in 1841 by Lewis Tappan. It was this credit information agency which eventually became Dun & Bradstreet and helped transform credit, and with it, the course of American commerce.