Iniiuencc of Credit on Prices 3 



bers into means of payment, and by purchasing new materials, 

 employ additional labor, and increase their product. The sold 

 goods are used as the basis of a loan at a bank. The bank buys 

 the right to receive $10,000 ninety days from date; the firm gets 

 the right to draw $10,000 (less discount) on demand."^ 



In harmony with the preceding view of typical credit. Pro- 

 fessor Laughlin marks out two funds from which the purchasing- 

 power of a country may be derived. These funds are ( i ) the 

 general wealth in goods and (2) gold and silver. The gold and 

 silver are already in the form of purchasing power, but not all 

 the general wealth in goods, he holds, can be coined into credit, 

 because it is not all bankable property.- No objections can be 

 made to the above except on the ground that the classification is 

 incomplete. There is a third fund of bankable property, viz., 

 goods not yet produced, or future goods. In other words, the 

 total fund from which purchasing power is drawn is not only 

 the general wealth in goods plus the gold and silver, but the 

 goods which are expected to be produced. For example, a new 

 company for mining copper is formed and the shares of the com- 

 pany are placed upon the market. The price of these shares will 

 bear little relation to the amount of wealth in possession of the 

 company, but the price will have direct reference to its expected 

 earning power. The shares represent, therefore, not only present 

 goods but future goods ; so when these securities are tendered 

 the bank as collateral for a loan, is it not in reality the goods 

 which are yet to be produced, as well as the goods on hand, that 

 are the basis of the loan ? 



The use of stock exchange securities as collateral is a very 

 prominent feature of the financial world today, so much so that 

 a loan based upon collateral in the form of securities approaches 

 the typical method of extending credit. The rise of the prices of 

 securities increases the amount of collateral available for loans, 

 and the fall of prices decreases the collateral. The relation be- 

 tween stock exchange prices, credit, and commodity prices — a 



'Laughlin. Principles of Money, 79-80. 

 ^Ibid.. 112. 



43 



