Cyclopædia of Political Science, Political Economy, and the Political History of the United States
DISCOUNT. An allowance paid on account of the immediate advance of a sum of money not due till some future period. It is usually said to be of two kinds, viz., discount of bills, and discount of goods; but they are essentially the same.
—When a bill of exchange is presented at a banker's for discount, it is the practice to calculate the simple interest for the time the bill has to run, including the days of grace, which interest is called the discount; and this being deducted from the amount of the bill, the balance is paid over to the presenter of the bill. This is the method followed by the bank of England, by the London and provincial bankers, and by commercial men in general. But it is, notwithstanding, inaccurate. The true discount of any sum for any given time is such a sum as will in that time amount to the interest of the sum to be discounted Thus, if interest be five per cent., the proper discount to be received for the immediate advance of $100 due 12 months hence is not $5, but $4.76, for this sum will, at the end of the year, amount to $5, which is what the $100 would have produced. Those, therefore, who employ their money in discounting, make somewhat more than the ordinary rate of interest upon it.
—The rule for calculating discount on correct principles is as follows: As the amount of $100 for the given rate and time is to the given sum or debt, so is $100 to the present worth, or so is the interest of $100 for the given time to the discount of the given sum.
—Bills in the highest credit are discounted on the lowest terms; the discount increasing according to the suspicions entertained of the punctuality or solvency of the parties subscribing the bills. During the continental war the rate of interest, or, which is the same thing, of discount, was in England comparatively high; for some time afterward it was seldom above 4, and often as low as 3 and even 2½ per cent.
—During the ten years 1856-65 the average rate of discount in England was 4 8/4 per cent.
—Discount on merchandise takes place, when, after making a purchase of goods at a fixed term of credit, the buyer finds means to make his payment before the expiration of that term, receiving from the seller a discount or allowance, which is commonly a good deal above the current rate of interest. The discount on goods varies, of course, according to the interest of money. During the late war the loans to government were so large, and the facility of investing money was such, that the discount on goods was often as high as 5 per cent for six and 10 per cent. for 12 months. Now, however, the discount on goods has fallen, with the fall in the rate of interest to 7 or 7½ per cent. for 12 months; being about double the current interest arising from funded property, or the discount of good mercantile bills.
—Long credits and discounts upon goods have for a lengthened period, been usual in England. This arose from a variety of causes, but principally, perhaps, from the magnitude of the exports to the United States, Russia and other countries, where there is a great demand for capital; but in whatever causes it originated, it has latterly been carried to what seems to be an injurious extent. In France and Germany the manufacturers, in general bare of capital, are obliged to stipulate with the merchants for short credits. In Holland the usage of the exporting merchants has been to pay either in ready money, or at so short a date as to put discounting out of the question, the manufacturer setting at once the lowest price on his goods.
J. R. M'CULLOCH and H. G. REID.
Return to top