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Although the study of money is important for the understanding of the way
in which our economic system operates, we must recall this point that most
exchange transactions in this system are carried on today without the use of
actual money, i.e. Those are carried on by means of credit and credit
instruments rather than money. While money still forms the basis of credit
and deferred payments, it is necessary to examine the nature of credit
operations, and the instruments and institutions trough, which these
operations are carried on, in considerable detail.
bases of credit are character, capital and capacity; or the man and the
means; or reliability and resources.
TYPES OF CREDIT
The verities of credit may be classified in numerous ways- according to the
status of eh debtor, according to the status of the creditor, according to the
time for which the credit is granted, and so on; but the most fruitful
classification usually indicates the use to which the credit is put.
2. Band Credit:
In Comprehends all kinds of promises to pay off banking institutions,
including demand deposits, time deposits, notes, bankers, acceptances,
cash, letters of credit, debentures, and bonded obligations. Frequently, the
term bank credit is restricted in use to refer only to the demand deposit
liabilities of the commercial banks, and one must constantly be on guard to
recognize the employment of the term in this restricted sense. As a subclass of bank credit, central bank credit is of outstanding importance in
modern monetary system it includes the central bank's circulating notes and
its deposit liabilities, the better consisting chiefly of the reserve balances of
the commercial banks.
3. Investment Credit.
The credit structure, business if found upon examination to consist very
largely of two forms of credit. Investment credit is extended through loans,
the proceeds of which are put into the fixed assets of a business enterprise.
If the owners of business cannot themselves furnish all of the capital
necessary for investments in land, buildings and equipment. Obviously what
they need is loans of capital running over a considerable period of years.
4. Commercial credit
In addition to seeking credit in long term investment in fixed assets, most
business periodically ask for credit in the form of short term loans.
Commercial credit is business supplier for current business operations, such
as manufacturing and marketing of goods. It often take more business
capital than business can themselves supply to pay for raw materials, to
make the outlays for wages and to carry inventories of finished goods until
they can be converted into cash. To help finance such operations short-term
loans usually running from thirty days to six months are negotiated.
Commercial loans like investment loan must ultimately be paid out of
accumulated earnings of a business. But if the business earnings are of
immediate future, such loans can be safely made and promptly paid.
Commercial loans are base done quick assets, such as raw material and
finished goods, which are in constant process of liquidation and thereby
provide the cash with to extinguish loans.
not supposed to furnish them with the means of repaying the loans the loan
must be repaid out of the income of the borrowers.