If a person has a sum of Money, he may expend it on his household requirements; or in gratifying his personal tastes by buying books, or statues, or pictures, etc. Money spent in this way is not Capital.

But if he buys goods of any sort for the purpose of selling them again with a Profit: then the money so employed is Capital, and the goods so purchased are also Capital, because they are intended to be sold with a Profit.

So Money lent out at interest is Capital.

In a similar way any material thing may be used as Capital. If a landlord lets out his land for the purpose of Profit, it is Capital. Some great noblemen possess tracts of land upon which great part of London is built: that land is Capital to them, And so on in numerous other cases.

25. All modern Economists class personal skill, abilities, energies, and character, as Wealth because persons can make a Profit by their use.

Hence they may be used as Capital as well as any material objects.

If a man digs in his garden for his own amusement, such Labour is not Capital: or if he sings, or acts, or gives gratuitous lectures on any subject to his friends, such Labour is not Capital.

But if he sells his Labour in any capacity for Money: then such Labour is Capital to him. Thus Huskisson said - "that he had always maintained that Labour is the poor man's Capital." So Mr. Cardwell addressing his constituents, said - "Labour is the poor man's Capital." And a writer in a daily paper, speaking of agricultural labourers justly said - "The only Capital they possess is their Labour, which they must bring into the market to supply their daily wants."

So if a man expends Money in learning a profession such as that of an advocate, physician, engineer, or a profession of any sort which he practises for Profit, the Money laid out in acquiring such knowledge is Capital: and his skill, abilities, and knowledge are also Capital. He makes an income which is measurable and taxable just in the same way as if he had made Profits by selling goods. Now any exertion of human abilities which is paid for is Labour, with which we are not concerned in this work.

26. But a man may use his personal Character, Skill, Abilities, Energy, and Probity for the purpose of Profit in another way besides the direct exchange of his Labour for Profit.

He may use them for the purpose of purchasing goods, materials, etc, by giving a Promise to pay in future instead of actual payment in Money, and selling these goods again with a Profit. In popular language this Purchasing Power of Character is called Credit. And a trader makes a profit by trading with his Credit precisely in the same way as if he traded with Money.

Thus Smith says - "Trade can be extended as stock increases, and the Credit of a frugal and thriving man increases much faster than his stock. His trade is extended in proportion to the amount of both, and the sum or amount of his Profits is in proportion to the extent of his trade: and his annual accumulation in proportion to the amount of his Profits."

So Mill, who says that Wealth is anything which has Purchasing Power, says a multitude of times that Credit is Purchasing Power. But as human abilities, skill, and energy do not come within the domain of Economics until some exercise of them is made which is paid for; so a merchant's general Credit, or Purchasing Power, does not come within the domain of Economics until he actually makes some purchase with it; and then he gives his Promise to pay in exchange for the goods instead of actual money. Now this Promise to pay, this Debt, or Right to demand payment is the Economic Quantity called Credit; and it may be bought and sold like any material Chattel.

Suppose that a person buys, or discounts a Commercial Debt; he gives a less Price for it than the amount; hence the Debt is always increasing in value every day; and therefore it is Capital to him.

So any other Economic Quantities of the third order, or Rights, may be Capital. If an author writes a successful Work, the Copyright of it is Capital to him: or if he sells it to a publisher it is Capital to the publisher. If a man buys into the Funds they are Capital to him. There is a class of traders whose business is to buy and sell the Funds and Shares in Commercial Companies. They are called Stock Jobbers: and they keep a stock of this Property on hand, just as other traders keep a stock of material goods.

27. Now there are two fundamentally distinct ways in which Capital may increase -

1. By direct and actual increase of quantity; thus flocks, and herds, corn, and all the fruits of the earth increase by adding to their number or quantity.

2. By exchange: that is by exchanging something which has a low value in a place, for something which has a higher value.

Now it is clear that Money produces a Profit, and therefore becomes Capital, by the second of these methods. Money is used as Capital by exchanging it for some goods or labour, the produce of which may be sold or exchanged again for a greater sum than they cost. And it is also clear that any Economic Quantity whatever which is used as a substitute for Money to purchase goods for the purpose of Profit is Capital as well as Money, by the very force of the definition which Senior says that all Economists are agreed upon.

Money becomes Productive Capital by being employed to purchase things to be sold again at a Profit. And if a man can purchase things by means of his Credit, that is if he can purchase them by giving his Promise to pay at a future time, and by so doing can sell the goods at a higher price, and so has a Profit after paying and discharging his Debt, it is quite clear that his Credit has been Capital to him in exactly the same way that Money would have been.

Let us take a very simple example to illustrate this. Suppose a tailor wants to make clothes for a customer. He pays say 10l. in money to the cloth merchant, and after making up the cloth, he sells the clothes perhaps for 15l. Then he has used his Money as Capital. He has 10l. at the beginning of the operation, and 15l. at the end of it: or he has made a profit of 5l.

Suppose the tailor has no money to buy the cloth with, then if he cannot buy it on Credit, he cannot make the clothes, and he cannot have any Profit.

Suppose, however, that the cloth merchant believing in his honesty and capacity to pay, sells him the cloth in exchange for his Promise to pay money three months after the time. As the payment is deferred, and as of course there is some risk of loss, he will by way of insurance, charge the tailor a somewhat higher price in Credit, than in Money. Suppose he sells his cloth in exchange for the tailor's promise to pay 11l. three months after the time. This is as much a Sale as if the Price had been paid in Money. The Property in the cloth has gone to the tailor, and what the cloth merchant has received in exchange for it is, the Right or Property, to demand 11l. three months after date. And this Property is called a Credit or a Debt.

The tailor having purchased the cloth by creating a Debt against himself of 11l., payable in three months' time, makes up the clothes as before, and is paid 15l. by his customer. At the end of the three months he pays 11l. out of this to the cloth merchant, and has of course remaining for himself a Profit of 4l. Now by the Cash operation he is better off at the end by 5l.: and by the Credit operation he is better off by 4l. than he was at the beginning. It is true, he has not made so great a Profit by Credit as by Cash. But still he has made a Profit by his Credit, which he could not have made without it. Hence by the very definition his Credit has been Capital to him, and has produced exactly the same circulation of commodities, and given employment to the same quantity of labour that Cash would have done. Hence we see that Credit is Productive Capital in exactly the same way, and in the same sense that Money is.