DISCOUNT AND DISCOUNT HOUSES. In trade a deduction from the price of an article, allowed to a buyer who pays cash, is called a discount. In the money market, the word usually means the rate allowed to the buyer for cash of a bill of exchange due at some future date. For example, if the rate of dis count for six months' bills is 4% per annum, the buyer on Jan. I of a bill for f I,000 due on July I will give .98o for it. The market rate of discount is, to a great extent, regulated by the rate officially announced by the Bank of England, or by the central bank in other financial capitals.
Discount houses are companies and firms which specialize on the business of buying and selling the bills drawn on English banks, accepting houses, merchants and others. They make their profit by working with a capital which is small in relation to their total commitments and borrowing large sums from banks and other lenders, employing these sums in the purchase of bills which they either hold until maturity, or, more usually, sell later to the banks or to any other buyer who wants a short and liquid investment. Their rate of profit thus depends on the difference between the rate of interest that they have to pay for the money that they borrow and the rate of discount that they are able to charge to those from whom they buy bills, of which they normally have a large stock in hand. The balance sheet of the National Discount Company, dated Dec. 31, 1927, showed bills discounted—that is, bought—L50,000,000 and bills rediscounted—that is, resold—L24, 000,00o, leaving a net holding of L26,000,000. It also held £5,000, 000 in investments and loans and more than £500,00o in cash. Its paid-up capital was only f 1,000,00o and it had borrowed over L29,000,000 in the form of "deposits and sundry balances." Be fore the war, the bills handled in the money market consisted al most entirely of those created in the course of trade and private financial operations, but now owing to the enormously increased amount of Treasury bills outstanding, and also to the increased extent to which trade is financed by bank advances, an important part of the business of the discount houses is in Treasury bills issued weekly by tender. In other centres, where monetary spe cialization has not been carried so far as in London, discount com panies and firms are generally non-existent or unimportant ; but they have been successfully developed in New York, since the establishment of the Federal Reserve system. (See MONEY MARKET.)