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The Use Of Credit Instruments In Payments In The United States

The Operation Of Discount

Every person in this chain of credit is confronted with the problem of
paying his debts as they mature by the use of the amounts due him from
other people. Since it is rarely possible to arrange maturities on
both sides in such a way that the amounts due to be paid him at a
given date shall at least equal those he is due to pay on that date,
some means of transforming claims against other people due in the
future into present means of payment must be found. The one
universally employed is the discount of commercial paper. By this is
meant the exchange at a bank of his own promissory notes due at times
when debts of equal or greater amount due him mature, or of bills of
exchange drawn against his debtors, for cash or credits on a checking
account. These latter are available as means of payment at any time.

As a consideration for this accommodation, the bank charges interest
for the period intervening before the maturity of the paper
discounted. Sometimes this charge is paid at the time the paper is
purchased and sometimes at the date of its maturity. The term
"discount" technically means taking interest in advance by making
available as means of present payment in any of the above mentioned
forms a sum less than the amount the bank expects to collect at the
date of the maturity of the discounted paper. If the interest is paid
when the discounted paper matures, the process is technically called
a loan. However, since the time of collecting interest makes no
essential difference in the nature of the transaction, the process is
commonly described as the discount of commercial paper, regardless of
whether the interest is collected in advance or not.

Next: The Conduct Of Checking Accounts

Previous: Commercial Paper

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