Importance of credit in the American colonial economy

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Importance of credit in American colonial economy

Much of the success and prosperity of the American colonies and its inhabitants was due to the use of credit. Credit allowed colonists to defer their payments for goods and services until a later time, which was a more favourable payment option than cash or barter. Although extending credit carried risks, most notably the inability of a debtor to repay the loan, the concept was accepted very well by all institutions in the American Colonial Economy. Furthermore, a variety of loans were invented to service a wide spectrum of trades. Overseas and domestic loans, as well as credits of various payment options, durations and sizes were developed to aid the economic growth of the American Colonies.

Credit, cash and barter[edit]

The advantages of purchasing goods on credit over cash in the Colonial Economy was avoiding currency exchanges and facilitating faster trades. The American Colonies did not have a centralized monetary system and a well defined currency until the 1780s. With many currencies and coins in circulations, there were additional costs to facilitating some trades which was avoided by the use of credit. The advantages of credit over barter are even more pronounced, as there was a chance that trades would not happen at all if the match between the good demanded and supplied was not achieved in the marketplace.

Overseas and domestic credit[edit]

Colonists relied on international funds, primarily from England, for their early development. Majority of this overseas credit was in the form of a mercantile credit. The English merchants, for example, would ship goods to the American Colonies and demand payments only after 6 months or a year. These overseas loans where available to colonists who developed close ties to English merchants, and not everyone was able to get such credits. The overseas credit allowed colonists to develop a system of domestic credit. The domestic credit was administered in two forms: book credit and promissory notes. Promissory notes are very similar to bonds, because they detailed the amount of debt, date of issue, date of redemption, form or repayment and an interest rate. Because of these characteristics, promissory notes could be traded and they were considered a less risky for of a loan to issuers.

Repayments and loan durations[edit]

The typical ways of repaying the loan in the American colonial economy was cash, bills of exchange and goods. Debtors could also repay their loans through physical work, or the sometimes third party settlements would occur. Although lacking technology, merchants developed a very sophisticated system of keeping track of payments and debts.

Typical loans domestic loans were issued for a time period of several months to a few years. The overseas loans were usually issued for 6 months to a year. This means that some domestic loans were issued more than the overseas loans, and these were typically promissory note loans. The longer term horizon explains the need for detailing the conditions of the issuance and the specifics of the promissory note loans, as the risks of default are higher for a long term maturity debt.

Interest rates[edit]

Because of the issuance of long term credit, the merchants introduced interest rates to protect themselves from the possibility of losing their investments. The average interest rates the merchants charged on an annual level were between 3.5% and 7%. However, some merchants charged interest rates as high as 10% on certain loans.

References[edit]

Baxter, W.T. The House of Hancock: Business in Boston, 1724–1775. Cambridge: Harvard University Press, 1945.

Main, Jackson Turner. Society and Economy in Colonial Connecticut. Princeton: Princeton University Press, 1985.

External links[edit]