Discounting (finance)

“ Our own selling prices for goods purchased to be resold are based on the prices at which they are billed to us, without considering a possible saving by discounting our bills. Whether or not we discount our bills is largely a question of capital, and such earnings are legitimate profits entirely outside of regular trading profits. Discounts earned should be treated as interest earned and credited to interest account, from which they will find their way into profit and loss account. ”

“ Occasionally a firm, which refuses to pay its debts on open account, will meet its notes and acceptances in an effort to bolster its credit at the local banks. This phase of the question does not usually enter into the discounting operation, where the credit of [Pg 379] the discounter is the determining factor in raising money. Of course, this may be only a temporary expedient if the note is dishonored and charged back to the bank. ”

“ On the one hand, it recognizes that the quantity discount may be utilized arbitrarily and without justification in savings effected by quantity sales, to give a discriminatory advantage to large buyers over small ones. ”

“ Price changes, which may be traced to an increased gold supply and the consequent depreciation of the dollar, react upon the cost of living only as certain reciprocal advantages and disadvantages are shifted among persons whose money incomes rest upon actual or implied contractural relations extending over the period of price change. For this reason, advancing prices are peculiarly advantageous to the debtor class, composed mainly of bonded business corporations, virtually discounting their obligations at an annual rate commensurate with the increase in prices. ”

“ If the note is drawing interest the discount is reckoned on and deducted from the amount due at maturity. Most notes discounted at banks do not draw interest. The time in bank discount is always the number of days from the date of discounting to the date of maturity. ”

“ The evil effects of such convulsions of the discount rate can hardly be exaggerated.129 In an economy in which almost every business man must rely, at certain seasons if not all the year round, on borrowed capital, the margin of profit may be wiped out by a sudden rise or augmented by a sudden fall in the rate of discount leading to under-trading or over-trading. Such fluctuations increase business risks, lead to higher business expenses and a greater cost to the consumer. ”

“ Always make a point of discounting your bills, even if you have to borrow money from the bank to do it. Let me illustrate what this will save you. Suppose that you can take a two per cent. discount by paying a bill in ten days. Now suppose you allow the bill to run to thirty days. You lose that two per cent. for an accommodation of twenty days. That is at the rate of thirty-six per cent. a year. You can borrow money from the bank at the rate of six per cent. a year, and make so much clear saving. ”

“ When the discount has ceased to exist through its absorption against premium on stock or the general surplus, it should no longer be reported because it is then a matter of ancient history with which the present is not concerned. ”

“ Riggs' apparent acceptance of it as the final word on discounts, one may ask if it recognizes all the elements necessarily involved in a discussion of the problems raised by discount financiering. From the literature of the subject one may read the following claims: Discount is a measure of the risk involved in a new enterprise; discount is a market adjustment that reflects the current value of money; discount is a sacrifice of principal for a slightly reduced interest annuity; discount is a dividend declared before the dividend is earned ”

“ The usual method by which money is loaned in the great [Pg 138] industrial centers is called discount, which is the exchange of a certain sum of money for a note or other credit paper of a larger amount, the interest thus being taken out in advance. Much borrowing in the form of discount is for the same purpose as other borrowing—to acquire control of more productive agents, to embark on new enterprises. The peculiarity of the discount money-market is that an unusual number of loans are made to meet contracts that have already been made. ”

“ If the discount exceeds such costs, it cannot be justified as a functional discount, particularly where, as here, the excess has a negative effect on competition.↑ In their brief filed as amici curiae, the United States and the Federal Trade Commission suggest the following definition of "functional discount," which is adequate for our discussion: "A functional discount is one given to a purchaser based on its role in the supplier's distributive system, reflecting, at least in a generalized sense, the services performed by the purchaser for the supplier." ”

“ A favorite method of charging the discount on stock to organization expense is not approved, not because it is a misnomer, for discount may well be looked upon as one of the expenses of organization, but because it is an item of sufficient importance and interest to require separate record. Charging the discount to some asset account, when payment of stock is made by property instead of by cash, is to be severely condemned. Inflation of asset values to cover up such an item cannot be justified. ”

“ It may continue for a while if the discounting process has not been complete, or if there remains a wide disparity between interest rates for money and net returns on securities; or if the independent resources of the city banks are large enough to furnish comfortable interest rates even after the westward drain has commenced, but, generally speaking, “the move is over,” to quote the vernacular, by the time business men want their money. ”

“ Instead of getting discounts that add to their profits, they are constantly suffering discounts of the other kind; and, too often, these, and the accumulating stock of unsaleable goods—the consequence of credit temptations in purchasing—reduce the fifteen per cent. you speak of down to ten, and even five per cent. A large business makes large store-expenses; and these eat away a serious amount of small profits on large sales. Better sell twenty thousand dollars' worth of goods at twenty per cent. profit, than eighty thousand at five per cent. ”

“ To the existence of banks of discount for cash, as on the continent of Europe, there can be no objection, because there can be no danger of abuse, and they are a convenience both to merchants and individuals. I think they should even be encouraged, by allowing them a larger than legal, interest on short discounts, and tapering thence, in proportion as the term of discount is lengthened, down to legal interest on those of a year or more. ”

“ Under almost any sensible banking system the rate of discount is one of the regulators of the volume of credit relatively to reserve. If there is undue expansion of credit relatively to the reserve, the rate of discount is raised to curb it. If, on the other hand, there is a plethora of reserve, the rate of discount is lowered to stimulate an increase of credit. As the expansion and contraction of credit are directly related to the price level, the rate of bank discount is thus concerned very vitally with the price level. ”

“ Justice Story said: 'Nothing can be clearer than that, by the language of the commercial world and the settled practice of banks, a discount by a bank means, ex vi termini, a deduction or drawback made upon its advances or loans of money, upon negotiable paper or other evidences of debt, payable at a future day, which are transferred to the bank;' and he added, that if the transaction could properly be called a sale, 'it is a purchase by way of discount.'
Discount, as we have seen, is the difference between the price and the amount of the debt, the evidence of which is transferred. ”

“ We buy with the understanding that we are to realize what we pay in goods. As I have said, sometimes for a certain article, or in a good market, a good deal more may be realized; but then we have the risk of loss, and we have a heavy discount; and therefore we have to live by the profit on the goods we sell. If we were to pay in cash, then of course we must buy at a lower rate, so as to give us some profit on the shawl, and consequently if a woman were to come in with a shawl, and to agree that the price was to be 20s. ”

“ It seems to me that a discount which gives a lowered cost to so large a proportion of respondent's customers and is withheld only from those whose conditions of delivery obviously impose greater handling costs, does not permit the same inferences of effect on competition as the quota discounts which reduce costs to the few only and that on a basis which ultimately is their size. ”

“ Discount. Discount is money paid in advance for the use of money. It is interest paid in advance. One of the primary functions of banks is to discount negotiable paper. The states generally have laws fixing the legal and maximum rates of interest. If banks or individuals charge interest in excess of these rules, they subject themselves to the fixed penalties. In connection with usury laws, some confusion has arisen as to what constitutes a purchase and what constitutes a discount. A person is permitted to make contracts and make as large a profit as possible, if no fraud is used. ”

“ If discounts be confined to commercial paper, the demand obligations they create will be met for the most part by transfers of credits on the banks' books or by the return of the notes issued, and, as foreign experience has demonstrated, the adjustment of cash resources to needs can safely be left to the judgment of the bankers themselves, who, through variations in the discount rate, rediscounts, and other means, can regulate it with ease. ”

“ With respect to any sales transaction, any discount not in excess of 5 per centum offered by the seller for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card shall not constitute a finance charge as determined under section 106, if such discount is offered to all prospective buyers and its availability is disclosed to all prospective buyers clearly and conspicuously in accordance with regulations of the Board. ”

“ Inasmuch as the sale or purchase, under this method, must be booked on a cash option basis, this treatment seems to result in a departure from true cost or in the mistake of booking only some of the elements which enter into the cost of merchandise. The price at which a merchant can sell his product must include all direct and indirect costs and provide a margin for profit. The sales discount offered is simply one of these indirect costs. It cannot be more accurately estimated than can the salesman’s salary which is a part of the sale price. ”

“ Because if you did give the cash discount yourself it would be so trifling that the people would not realize it was of any advantage to them. If somebody comes in and spends a dollar with you, and you give them two cents discount, what is it to them? It is nothing at all! But if you give them trading stamps, those have a real value in their eyes. ”

“ Similarly, earned original issue discount cannot be regarded as 'typically involving the realization of appreciation in value accrued over a substantial period of time * * * (given capital gains treatment) to ameliorate the hardship of taxation of the entire gain in one year.'
Earned original issue discount serves the same function as stated interest, concededly ordinary income and not a capital asset ”

“ Consequently, on either of these two theories, cash discount would have to be shown in the trading section of the profit and loss statement, in the one case as a direct deduction from sales, in the other as a selling cost.
Correct Method of Showing Cash Discount.—Other accountants maintain that cash discount is a financial management item; that a manager, in order to secure ready funds with which to take advantage of the discounts offered him on his own purchases, extends to his customers sufficient inducement to secure the early and prompt payment of their bills. ”

“ If, however, in the city in question, the rate of interest were at a very high point, it is evident that the price of long bills would not rise in the same proportion as that of short; for the purchaser must bear the discount, which has to be deducted from the long bill before it can become equally available with the short bill ”

“ Fortunately the development of a broad discount market does not require open market operations on their part. A broad discount market is one to which many borrowers resort with full assurance that they will find many lenders. Even under past banking arrangements, many borrowers and lenders have been brought together through note brokers; but owing [Pg 749] to the lack of an available supply of cash and credit with which to meet emergencies, this market has been subject to violent perturbations, and at times dealings have been almost entirely discontinued. ”

“ But it is always assumed by the bankers that these funds placed in the discount market can be called in readily at any moment. That they can be called in is practically a fact; but it arises chiefly from the ability of the discount houses when pressed for repayment of these loans by the bankers to fill the gap in credit by an appeal to the Bank of England and the production of fresh cash, as it is called, by borrowing from it. The discount houses take security to the Bank of England and raise with it the right to draw cheques. ”

“ Whenever a want of confidence is generated in the country, the merchant and manufacturer are immediately compelled to have recourse to the bank in order to have their bills discounted. The facility of these discounts, of course, depends upon the amount of money in circulation, and also very much upon the rapidity of its return in the shape of deposits or otherwise. A banker cannot, any more than a private person, discount without having money, and where no money is procurable, the ultimate result must be a stoppage. ”