[Market Economy Guide] Creditworthiness Is Capital

In 1949, Frank McNamara, an American businessman, invited important clients to dinner at a famous restaurant in New York. But just as the meal ended and he was about to pay the bill, Frank realized that he did not have his wallet. He had left it at the office. Caught in an unexpected predicament in front of his clients, Frank broke out in a cold sweat. Not long afterward, however, that incident led him to devise a means of payment that could be used like cash when one had no cash on hand: the Diners Card, the forerunner of the modern credit card.

The First Appearance of the Credit Card in 1949

Today, with a single small piece of plastic called a credit card, people can buy and sell a wide variety of goods and services without paying cash on the spot. They can shop for groceries, use public transportation, pay various utility bills, and receive medical treatment at hospitals. They can even purchase new products from neighboring countries across the sea through the internet as much as they like.

As the functions of a credit card suggest, the economic meaning of the word “credit” is the ability to pay for goods received in a transaction at a later date—in simple terms, the ability to pay. Thus, all transactions in a market economy are based on mutual credit between the parties involved, and without credit, one cannot participate in any transaction. Credit is especially important in long-term transactions, because transactions in a society where contracts are doubted and often broken produce completely different economic outcomes from those in a society where contracts are faithfully honored.

A Society That Keeps Promises and Contracts

In a society where promises are not well kept and dishonesty and falsehood are widespread, economic actors become fearful that what is theirs may be taken away and anxious about breaches of promise, leading them to avoid long-term economic activity. As a result, an economy with a weak credit foundation cannot help but contract. By contrast, in a society where promises are kept and where economic actors can trust one another in their dealings, long-term economic activity can flourish. The reason financial industries such as insurance developed in Britain is also that, within a social and cultural environment that valued credit, long-term contracts among market participants were faithfully observed over a long period of time.

Credit is not something proven overnight, but a value that must be demonstrated through ongoing transactional relationships, and so it is not something anyone can easily possess. However, once built up in the market, credit tends to sustain transactions over a long period and progressively generate new ones. That is why companies do their utmost to earn customers’ trust, and firms that gain customer confidence through good quality and service see their brand value rise and become able to generate substantial profits continuously. In that sense, credit can be said to be another form of capital that creates profit.

In the business world, credit is core capital. The reason Hyundai Engineering & Construction was able in 2013 to become the first in the history of Korea’s construction industry to achieve overseas orders totaling $100 billion was also the deep reservoir of credit it had built up over many years in overseas construction markets. Hyundai Engineering & Construction became the first Korean construction company to enter the overseas construction market when it won a highway construction project in Thailand in 1965. Thereafter, for 48 years, it expanded its overseas construction business while placing credit first. The trust Hyundai Engineering & Construction accumulated with overseas clients will serve not only as an asset from the past but also as an important foundation for winning even more projects in the future.

Capitalism and Credit

Countries as well see their trading relationships change according to their creditworthiness. The rating that indicates a country’s level of credit is called its sovereign credit rating. A sovereign credit rating is determined by a country’s ability to repay its debts (foreign debt) and is assessed on the basis of its overall economic strength. If a country’s sovereign credit rating is high, not only can foreign investors purchase its bonds smoothly, but it can also attract foreign investors to its bond and stock markets. This reduces financing costs. In addition, because a country’s economic strength is recognized through its sovereign credit rating, companies belonging to that country can also receive relatively high credit evaluations.

The capitalist economic system makes credit the core of voluntary exchange. That is why economic activity is carried out vigorously through voluntary transactions among market participants, ultimately allowing the flower of economic growth to bloom.

● Please remember

In a society where promises are kept and where economic actors can trust one another in their dealings, long-term economic activity can flourish. The reason financial industries such as insurance developed in Britain is also that, within a social and cultural environment that valued credit, long-term contracts among market participants were faithfully observed over a long period of time.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 신용도 자본이다

Author: Sung-no Choi

Date: 2019-09-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=12&idx=20471