THE DISCOUNT DEPARTMENT General Functions and Organization of the Discount Department The discount department has charge of paper discounted for customers of the bank and commercial paper purchased in the open market. This work includes the calculation of discounts, the physical handling and keeping of the paper and attached collateral and the offering sheets, the collection of bills due, the putting through of credits, and the necessary bookkeeping con cerned. It includes also the preparation of paper for rediscount with the federal reserve bank or for pledge on collateral with the federal reserve bank or for sale in the open market.
The internal organization of the discount department varies widely, of course, with the banks. The head of the department is known as the "discount clerk." The man at the window meets the customer. At one or more desks a group of clerks may have the care of the offerings, the collateral and substitutions, and the putting through of credit; at another desk the collection of bills each day may be handled; at another the earnings book, tickler, etc., may be kept; and recently the large metropolitan banks have found it expedient to have another group of clerks handle only domestic acceptances. But the work of the discount depart ment, like that of the loan department, is very unevenly distrib uted through the day; and for this reason the clerks are freely shifted from one of the above groups to another, according to the pressure of work.
The Nature of Discounting The principle of bank discount is the collection of interest in advance. Such interest is not yet earned. In the case of a loan the borrower makes his note out with interest at an agreed rate from date, and he receives the face amount of the note and pays the interest at maturity or in monthly or quarterly instalments. But if the note is to be discounted it is made without interest and the borrower receives only the proceeds, that is, the face of the note less the interest on that amount for the time the note is to run. At maturity the face amount is paid and the transaction is closed. But commercial negotiable papers, interest or non-inter
est bearing, in the hands of the customer, may also be discounted, such papers possibly coming into the possession of the customer in the course of his daily trade or banking business. In any case discount is computed on the face amount (if it is an interest bearing note the face amount includes principal and interest at the nominal rate for the period of the note) for the period inter vening between the dates of discount and maturity, and the pro ceeds are paid to the borrower.
The practice of discounting offers a slight advantage to the lender in that he collects interest, not on the amount he actually lends, but on the amount he receives at the time the loan is liqui dated. For instance, if a borrower discounts his 6o-day note for $Too,000 at 6 per cent, he receives $99,000; in other words, he pays $i,000 for the use of $99,000, or at the rate of 6.o6 per cent per annum, and in an institution which has constantly outstanding a large amount on bills discounted this extra income may amount to a considerable figure. The following table shows the difference in per cent of return per annum between lending money for a year on simple interest and advancing funds by discount of one year paper.
While strictly speaking this practice may net the lender a little more than the legal rate of interest, the courts have ruled that it is not usury. It is simply a universal banking custom sanctioned by long usage.
In calculating discount, it is customary in most localities to count the actual number of days the money is borrowed, including the day of maturity but not the day on which the discount is made. It is also customary to figure on the basis of 36o days to the year, another practice which favors the lender, but one which has become established on account of the ease and rapidity with which calculations can be made. Discount clerks find that discount can be figured by hand with much greater speed and accuracy than when a table or some of the ingeniously constructed calculating machines are employed.