Introduction
A century before Benjamin Franklin was born Shakespeare’s Hamlet raises the issue of credit when Polonius advises his son, “Neither a borrower nor a lender be; For loan oft loses both itself and friend” (I.iii. 23). Two centuries after Franklin’s death, questions of credit remain omnipresent in our lives and our discussions of economics, as we struggle with housing foreclosures, historic levels of student loan debt, and a deficit that makes us fear our nation’s overseas creditors. Enlightenment thinkers, including Franklin, took a different view of credit than Polonius, believing that credit is often a necessity for the creation of prosperity. However, writers in the Enlightenment also understood the need for prudence and responsible behavior in handling credit, lessons that may have been ignored over the last several decades. Indeed, in an era in which a credit-based economy was still a novelty, writers like Franklin, Smith, and Defoe viewed credit as a deeply personal responsibility that directly reflected the character of the individual. To have poor credit was to be untrustworthy, and to be successful required maintaining good relationships with creditors and debtors, alike. The Enlightenment texts we have covered this semester, the ideas presented on our blog, and secondary sources on credit in the period reveal an inextricable connection between ideas of credit and individual character in the Enlightenment era.
Economic Theory of Credit in the Enlightenment
The inclusion of credit as an important facet of a prosperous economy was still a developing idea in the Enlightenment era. Social methods of providing credit had been part of economic systems since ancient periods, but in the 18th century, financial institutions were struggling with questions of how to better provide individuals with the opportunity for short-term borrowing (Poitras, 59). Institutions like the Bank of England began issuing bank notes as a method of short-term loaning, but generally, credit in this period relied on more personal mechanisms between private bankers and clients, unlike the more impersonal systems of lending in the modern financial system (61). Questions of national credit and debt, similar to the ones we see today, also appear in this period. In 1762, King George III struggled with members of his cabinet to determine how much debt the United Kingdom could take on during its numerous wars without destroying the nation’s credit (Schweizer, 22-23).
In The Wealth of Nations, Adam Smith gives an account of the function, benefits, and potential pitfalls of using paper money as a system of credit for a nation’s economy. Smith explains:
“When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time present to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them” (389).
In other words, the “paper money” that Smith here describes is not the same as our paper currency, but refers to bank notes that promise to pay a certain amount of money upon redemption. The banks lend these notes to their customers, who can use the promissory notes to pay financial obligations, which the bank will cover. Later, the original borrower of the promissory note pays the bank back with interest. Smith explains that this results in a system in which “twenty thousand pounds in gold and silver perform all the functions which a hundred thousand could otherwise perform.” By this, he means that because many different promissory notes may be circulating at any time and they will not all return to the bank to be redeemed at the same time, the bank can lend much more capital than it simultaneously holds in gold or silver. The benefit of this practice of credit is that it allows the banks to free up gold and silver, which can be sent abroad for profitable investment (390). According to Smith, this foreign investment can be used in two profitable ways: 1) the carrying trade, in which a country “purchas[es] goods in one foreign country in order to supply the consumption of another…whatever profit they make will be an addition to the net revenue of their own country” or 2) the purchasing of tools and stock “in order to maintain and employ an additional number of industrious people, who re-produce, with a profit, the value of annual consumption” (391). In these ways the practices of credit can help strengthen a nation’s economy. However, Smith also warns of potentially damaging practices that can arise from this system, noting, “If they employ (capital) in purchasing foreign goods for home consumption, they may…purchase such goods as are likely to be consumed by idle people who produce nothing,” which would “promote prodigality, increase expense and consumption, without increasing production.”
It is interesting that in Smith’s initial description of this type of credit, he uses the qualifying clause, “When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker.” This necessary condition acknowledges that the system Smith describes is dependent on the reliability of the individual creditor, tying personal integrity to economic practice.
As technical as he sounds, these parameters that Adam Smith lays out seem simple compared to our current systems of credit and finance. In Jonathan Braun’s blog post, “Back to Basics,” he points out both how “disheartening” and “refreshing” it can be reading Enlightenment-era writings on credit and finance compared to financial news from our own astoundingly complex economic world. Refreshing because of how simple and true the economic principles of the day were, and disheartening because of the fear that we are unable to return to these more basic economic principles. However, these fundamental proposals of Adam Smith on issues of credit have undoubtedly contributed to the creation of our own, much more convoluted, financial system.
Benjamin Franklin’s Prudent Advice on Personal Credit
Like Adam Smith, Benjamin Franklin sees the value of credit in its ability to generate wealth, but while Smith focuses on the wealth of entire economies, Franklin focuses on an individual’s fortune. In Franklin’s 1737 edition of Poor Richard’s Almanack, he includes a section titled “HINTS for those that would be Rich,” in which, he notes, “For 6 l. a Year, you may have the Use of 100 l. if you are a Man of known Prudence and Honesty” (1203). Like Smith’s hypothetical banker, Franklin ties the possibility of credit to the merits of the individuals in the system. If his readers are believed to be honest, people will lend to them, increasing their economic potential. He goes on to provide certain tips by which his readers can most effectively use credit to increase their wealth, rather than seeing their money lost. Among his advice, Franklin warns,
“He that sells upon Credit, asks a Price for what he sells, equivalent to the Principal and Interest of his Money for the Time he is like to be kept out of it: therefore He that buys upon Credit, pays Interest for what he buys. And he that pays ready Money, might let Money out to Use: so that He that possesses any Thing he has bought, pays Interest for the Use of it” (1204).
Here, Franklin asks his readers to consider that while buying on credit means paying interest, if one buys with available funds, he/she is using funds that could have been lent for a profit. Therefore, in Franklin’s estimation, some potential money is lost either way. However, Franklin ultimately concludes that “’tis best to pay ready money” because he believes sellers charge more on credit to make up for losses incurred from those who do not pay their debts.
This type of practical advice for the average citizen is characteristic of Franklin’s writings on credit. In Advice to a young Tradesman Written by an Old One, Franklin begins a paragraph with the powerfully simple admonition, “Remember that Credit is Money” (320). In Cary Corrigan’s blog post, “A Basic Understanding of Credit Goes A Long Way,” Corrigan notes the connection between Franklin’s fundamental advice in this work and the problems of our current economic situation. Perhaps if borrowers in our own time realized that credit is indeed money, and they followed Franklin’s advice to “pay punctually and exactly to the Time he promises,” then they would experience the “prolific generating nature” of money that Franklin describes. However, as Corrigan points out, people seem to have forgotten the basic concepts that Franklin describes, leading to modern day problems like the American mortgage crisis.
Credit as a Reflection of Individual Character
Both Adam Smith and Benjamin Franklin have alluded to the idea that a system of credit depends to some degree on the integrity of the individuals involved. Without a banker who is known to be reliable, no one will accept credit in the form of promissory notes as valid, and if a borrower is deemed untrustworthy, no one will want to lend to him/her. When Franklin is giving advice in “Advice to a Young Tradesman, Written by an Old One,” a shift seems to occur from a discussion of pure finances, to a discussion of character. He begins discussing how others’ perceptions affect one’s credit:
“The most trifling Actions that affect a Man’s Credit, are to be regarded. The Sound of your Hammer at Five in the Morning or Nine at Night, heard by a Creditor makes him easy Six Months longer. But if he sees you at a Billiard Table, or hears your Voice in a Tavern, when you should be at Work, he sends for his Money the next Day” (321).
In this passage, Franklin relates how one’s character is tied to the idea of one’s credit. If potential creditors see their borrower as hard-working and industrious, they are likely to continue extending credit to that person. However, if creditors see in their borrower a lack of virtue and a tendency to carouse instead of working, they will be less forgiving. In Scott Singer’s blog post, “Credit of Two Sorts,” Singer points out that Franklin seems to be interested in two different aspects of credit: both financial credit, and personal credit. While Franklin acknowledges that it is important to remain in good credit for the sake of one’s bank account, it is equally important to be considered credible as a person. Singer goes on to argue that this latter definition of credit is one which could be helpful in our current economic situation. If more banks searched for evidence that their clients were hard-working before giving out loans, as they apparently did in Franklin’s time, then perhaps the American banking industry would not have experienced the turmoil it has in recent years.
Franklin’s advice that it is wise for one to pay attention to others’ perceptions of one’s character also reminds me of Alex Tapper’s blog post, “Adam Smith, Social Scientist.” In this post, Tapper explores Smith’s claim in The Impartial Spectator that the way for an individual to judge his/her actions is by stepping outside of oneself and looking at one’s own actions through the perspectives of other people. In a similar way, Franklin is saying that to maintain good credit, one must be conscious of how his/her creditors view his/her actions.
In Franklin’s autobiography, he gives an anecdote about credit in his own life that carries the connection between one’s individual character and his credit relationships even further. While living in Britain, Franklin relates how his friend Ralph owed him money. However, Franklin soon “attempted familiarities” with a woman with whom Ralph was romantically involved, leading Ralph to proclaim that Franklin had “made a breach between (them), and…had cancell’d all the Obligations (Ralph) had made to (Franklin)” (99). While this may have just been Ralph’s excuse not to pay his debt, the idea that a debtor’s obligation to his creditor can be dissolved because of unjust actions by the creditor further highlights the notion that credit has a connection to personal character. While Ralph’s debt to Franklin is monetary, this passage suggests that a personal wronging can be evaluated against monetary debt. In this case, Ralph believes Franklin’s actions place him at least equally in debt to Ralph as Ralph’s borrowing of money places him in debt to Franklin. The idea that monetary debt and personal debt are interchangeable highlights how the concept of credit is inextricable from one’s personal character.
Notions of Credit in Robinson Crusoe
Daniel Defoe’s Robinson Crusoe further blurs the lines between one’s credit and one’s individual character. An example of a credit relationship is established early in the novel when Crusoe is rescued at sea by a European ship. The Spanish captain of the ship offers to buy Crusoe’s ship with “a note of his hand to pay (Robinson) 80 pieces of Eight for it at Brasil (their destination)” (Defoe, 28). This moment is interesting because, in a way, Crusoe is extremely indebted to the captain for saving his life; however, the financial arrangement they create makes Crusoe the creditor. Furthermore, Crusoe expresses that he is willing to give the captain his boat for whatever price he wants in response to the captain’s generosity to him. This reflects Benjamin Franklin’s suggestion that goodness of character makes credit relationships easier to establish.
A very different relationship to credit is established when Crusoe gets shipwrecked on a deserted island. He realizes that he is now completely outside of the financial realm in which he previously existed, proclaiming of money, “O drug!...what art thou good for?” (47). However, completely separated from monetary considerations, Crusoe still frames his new life in terms of credit, creating a leger on which to “state…very impartially, like debtor and creditor, the comforts (he) enjoy’d, against the miseries (he) suffer’d” (54). The idea of credit seems to be so engrained in Crusoe’s conception of his personal situation that even on a deserted island, he attempts to frame his world in these terms.
Once Crusoe finds a companion on the island when he rescues Friday from the cannibals, the relationship between the two seems to further explore the relationship between creditor and debtor. Out of gratitude to Crusoe, Friday shows him “signs…of subjection, servitude, and submission,” indicating that “he would serve (Crusoe) as long as he liv’d” (163). In Brett Kaup’s blog post, “Cannibalism: Then and Now,” Kaup describes this relationship as a type of colonialism, in which Crusoe is trying to save Friday from his savagery. While this is certainly a relevant interpretation, I also think one can read Friday’s subordinate position to Crusoe as a function of his debt to Crusoe after Crusoe has saved his life. Later in the narrative when Friday’s father and a Spaniard are added to the group, Crusoe explains that his “people were perfectly subjected…they all ow’d their lives to (him) and were ready to lay down their lives, if there had been occasion of it, for (him)” (190). In this instance, Crusoe feels as if his debtors owe him for the ultimate credit that he has given them: their lives. This extreme scenario gives Crusoe ultimate power over his debtors to the point that he feels like their king. This moment brings the debtor-creditor relationship to a new level as the credit being owed now refers to individuals’ lives.
Conclusion
In the 18th century, Enlightenment writers and thinkers were struggling to understand the potential forms, functions, and consequences of new types of credit in an ever-changing global economic system. Many of the questions these writers asked are still wrestled with today by economists, politicians, and individuals. There existed a sense among people like Adam Smith and Benjamin Franklin that to tap into the full generative powers of wealth, credit was a necessary component of a functioning economy. At the same time, we see in Franklin’s work the understanding that credit is tied to notions of individual character and honor and should not be treated irresponsibly. This notion of credit as a reflection of individual character seems to have been lost in modern times, changing the way we view credit along with the changing institutions that issue credit. Defoe’s Robinson Crusoe demonstrates the ubiquity of ideas of credit in this period by showing how, even when taken out of civilization, one cannot escape the fundamental principles of credit. These many facets of the issue of credit in the Enlightenment era demonstrate how credit was both fundamental to emerging economic practices, and also a reflection of character for the individuals who gave and received it.
Works Cited:
Braun, Jonathan. "Back to Basics." English 274: Benjamin Franklin and the Enlightenment. N.p., 20 Sept 2011. Web. 12 Dec 2011.
Corrigan, Cary. "A Basic Understanding of Credit Goes A Long Way." English 274: Benjamin Franklin and the Enlightenment. N.p., 21 Sept 2011. Web. 12 Dec 2011.
Defoe, Daniel. Robinson Crusoe. London: Penguin Classics, 2003.
Franklin, Benjamin. Advice to A Young Tradesman, Written by an Old One. Philadelphia: 1748.
Franklin, Benjamin. The Autobiography of Benjamin Franklin. 2nd ed. New Haven: Yale University Press, 2003. Print.
Franklin, Benjamin. Poor Richard's Almanack. 1737. Print.
Kaup, Brett. "Cannibalism: Then and Now." English 274: Benjamin Franklin and the Enlightenment. N.p., 29 Sept 2011. Web. 12 Dec 2011.
Poitras, Geoffrey. The Early History of Financial Economics, 1478-1776. Northampton, MA: Edward Elgar Publishing, Inc., 2000. Print.
Schweizer, Karl. Statesmen, Diplomats and the Press-Essays on 18th Century Britain. New York: The Edwin Mellen Press, 2002. Print.
Shakespeare, William. Hamlet. 2nd Ed. New York: Pearson Longman, 2005. Print.
Singer, Scott. "Credit of Two Sorts." English 274: Benjamin Franklin and the Enlightenment. N.p., 22 Sept 2011. Web. 12 Dec 2011.
Smith, Adam. The Wealth of Nations Books I-III. New York: Penguin Books, 1999. Print.
Tapper, Alex. "Adam Smith, Social Scientist." English 274: Benjamin Franklin and the Enlightenment. N.p., 8 Sept 2011. Web. 12 Dec 2011.
