Interest and Discount
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- Date Submitted: 08/22/2011 10:23 AM
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INTEREST AND DISCOUNT and the continental divide between them Antal E. Fekete Gold Standard University aefekete@hotmail.com
Telling apart a bill of exchange and a mortgage Charles Rist writes in his History of Money and Credit from John Law to the Present Day that “identifying the discount rate with the rate of interest, which is frequent among English writers, is an unfortunate source of confusion”. One English writer who is free from that blemish is John Fullarton. In the great debate between the Banking School which he represented, and the Currency School which he opposed, he wrote in 1844:
“It is a great error indeed to imagine that the demand for…a loan of capital is identical with the demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from the other.”
The confusion of which Rist talks about is the thinking that “discount rate” is just another name for short-term rate of interest, and the difference between the two does not go beyond the difference in the manner collecting it, either by charging it at the end of the loan period, or taking it out from the proceeds of the loan in advance. As a matter of fact, the difference goes far deeper than that. The two rates are entirely different conceptually. Their sources are different. Forces formatting them are different. There are two sources of credit, with a continental divide between them. To recognize this fact is especially important for the banker’s profession. As the old aphorism says, there is no easier profession than that of a banker, as long as he can tell apart a bill of exchange and a mortgage. Fixed versus circulating capital According to Adam Smith “there are two different ways in which capital may be employed so as to yield a revenue…to its employer…: circulating capital… and fixed capital.” As a first approximation may we just say that one source of credit has to do...
Telling apart a bill of exchange and a mortgage Charles Rist writes in his History of Money and Credit from John Law to the Present Day that “identifying the discount rate with the rate of interest, which is frequent among English writers, is an unfortunate source of confusion”. One English writer who is free from that blemish is John Fullarton. In the great debate between the Banking School which he represented, and the Currency School which he opposed, he wrote in 1844:
“It is a great error indeed to imagine that the demand for…a loan of capital is identical with the demand for additional means of circulation, or even that the two are frequently associated. Each demand originates in circumstances peculiarly affecting itself, and very distinct from the other.”
The confusion of which Rist talks about is the thinking that “discount rate” is just another name for short-term rate of interest, and the difference between the two does not go beyond the difference in the manner collecting it, either by charging it at the end of the loan period, or taking it out from the proceeds of the loan in advance. As a matter of fact, the difference goes far deeper than that. The two rates are entirely different conceptually. Their sources are different. Forces formatting them are different. There are two sources of credit, with a continental divide between them. To recognize this fact is especially important for the banker’s profession. As the old aphorism says, there is no easier profession than that of a banker, as long as he can tell apart a bill of exchange and a mortgage. Fixed versus circulating capital According to Adam Smith “there are two different ways in which capital may be employed so as to yield a revenue…to its employer…: circulating capital… and fixed capital.” As a first approximation may we just say that one source of credit has to do...