Besides rates of exchange considered in the preceding chapter,

commercial banks are concerned with loan and discount rates.

Rates on deposits, though sometimes employed, have no place in

commercial banking, since commercial deposits are only the credit

balances resulting from loans and discounts or from funds intrusted to

the bank for temporary safekeeping or disbursement in the interest of

the depositor.
In every case they represent a service rendered the

depositor for which the bank must be paid, and, when interest is

allowed, the depositor must repay it in some form with an increment

sufficient to remunerate said service.

Commercial banks may and usually do conduct savings accounts also, for

which an interest payment is not only defensible but in every sense

desirable, but in so doing they are going beyond the sphere of

commercial banking, which alone is under consideration at this point.

Rates charged on loans and discounts are the chief means through which

commercial banks are remunerated for the services they perform. In the

long run these rates are determined by competition, and represent the

current market value of the services performed by bankers. Custom

often affects them temporarily and sometimes for long periods prevents

their response to influences tending to produce change, but in the

long run they yield to economic force and conform to the laws of


Variations in the rate of discount are the most efficient means

employed by commercial banks for the regulation of the volume of their

loans and discounts and for changing the percentage their reserves

bear to deposits and note issues. An increase of these rates tends to

check loans and discounts, to decrease deposits and note issues, to

increase reserves, and consequently to raise the percentage of

reserves to deposits and issues.

It checks loans and discounts by increasing the expense of conducting

business operations on a credit basis, thus diminishing profits and

sometimes causing losses, checking enterprise and decreasing the

volume of commercial transactions. A decrease of loans and discounts

correspondingly diminishes deposits or note issues, or both, since

these are simply the counterpart or representative of such loans and

discounts in the form of credit balances in the checking accounts

conducted by the banks or the equivalent of such balances in a

hand-to-hand money form. An increase in the rate of discount at a

given point tends to attract funds from other points where the rates

are lower and thus to increase reserves. A decrease of rates produces

opposite effects all along the line.