V INTEREST AND DISCOUNT I. INTEREST Early View of Interest-Interest on Capital-Three Factors in Calculating Interest-Different Methods of Computing TimeVarying Practise of Banks-The Fairest Rule-The Unit Period -Calculating by Months-Interest on Deposits-Five Equitable Rules Rules of the United States Treasury Department-Interest Table. 2. DISCOUNT 1. Bank Discount-Recognized by Law-Discount on BondsAmortization-2. Cash Discount-3. Trade Discount-Differences between Cash and Trade Discount-Factors in Trade Discount(a) Chief Factors—(b) Minor Factors-Debatable Points-Discount a Compensation-Manufacturers and Retailers-Neither a Profit Nor a Loss-Terms of Discount-Principle of Trade Discount-Trade Discount and Profits-The Case of the DealerSome Exceptions-Discount Must be Sufficient. I V INTEREST AND DISCOUNT I. INTEREST NTEREST may be defined as the price paid for the use of money. As used by economists it is the price paid for the use of capital (money or other form of capital). It is identical with the first meaning of the word usury, which originally meant, not, as to-day, exorbitant interest, but any interest at all, usury being what was paid by a debtor to a creditor for the use of money. When the Old Testament forbids usury, it really refers to interest-the taking of any price for the use of money-though the Mosaic law did not forbid one to take it from a stranger. The evil significance of the term in later years arose from the fact that the aristocratic money lenders of Rome, in spite of laws to the contrary, charged exorbitant rates of interest to the provincials. Early View of Interest.-In primitive societies the idea of charging anything for the loan of capital was repugnant, and almost an unknown practise. This repugnance is easily understood when it is remembered that in early stages of civilization loans were employed, not as capital for profitable production, but for consumption, and were consequently desired only by persons in want. It was thought that to take advantage of another's necessity, by asking something more than was given, was shameful. In medieval England the taking of interest existed, though condemned on principle, the chief money lenders being of the Jewish race. In the reign of Edward VI, 1552, a bill forbidding interest was passed, and remained until altered by Queen Elizabeth, who set the rate at 10 per cent. In France interest did not become legal until the Revolution, having been forbidden on commercial loans, though the flourishing city of Lyons was exempt from this rule. Jeremy Bentham, the great political economist of the 18th century, argued that it was justifiable. His celebrated argument was that the effort to condemn and forbid interest simply raised the rate of interest. Men at times must borrow. The lender does a real service to the borrower. Under equity he is entitled to some reward. In Germany, as late as 1880, a new act against usury was passed, and amended and extended in 1893. It is now a criminal offense to obtain a profit by taking advantage of the necessitous condition or inexperience of any person, in reference to loans or other transactions which exceed the usual rate of interest, in such a way that the profit seems out of all proportion to the service rendered, "and all transactions of this nature are null and void." Usury is also a criminal offense. Modern business could not be carried on without the use of interest. Money lending at fair rates is a necessary and legitimate part of our civilization. On the other hand, nearly every State endeavors in some way to suppress the "loan sharks" who prey upon the foolish and unfortunate members of society by lending them money at exorbitant rates. The penalty for the usurer varies in different States, from loss of once, twice, or thrice the interest, to loss of principal, or principal and interest, or even imprisonment. Interest on Capital.-Professor Bullock, discussing capital, says: "The payment of interest for a loan of capital is not explained by simply showing that capital serves to increase production, to improve the quality of the product, and to secure products that would be unobtainable otherwise. If men would be willing, without receiving interest, to accumulate enough capital to carry on the business of the world, then no one could secure interest. But this is something that can not be expected. If a person has $1,000, he can expend it for customers' goods that are available immediately. If he invests it in capital, he can secure a return only after some time has elapsed. When he invests $1,000 in productive capital, he converts a present available income into such a form that it is available only in the future. Now, persons will not exchange a present income of $1,000 for a future income of only $1,000. This is for two principal reasons: First, the future is always more or less uncertain, and ‘a bird in the hand is worth two in the bush.' Second, even when the uncertainty and risk of the future are reduced to a minimum, most persons underestimate or undervalue future pleasures or pains. But many people are willing to invest $1,000 of income in capital so that it will be available for a year, in return for $1,050 at the end of that period. The $50 premium would be interest in this case. It would be a premium added to the principal of the loan, available only at the end of the year, in order to make it equivalent to a present income of $1,000. Interest is paid, therefore, as a premium to equalize future goods or future income with present goods or income, in the estimation of possible investors. Capital formation implies a willingness to invest present income in producers' goods that are available only in the future. Interest is the inducement necessary to insure the formation of enough capital to meet the needs of business. "Capital may be furnished by three classes of persons: First, it may come from rich persons with large incomes, who can easily save large amounts of income and invest them in capital. Second, it may be supplied by persons of moderate means who wish to provide for the future, and would do so even at very low rates of interest. Both of these classes of investors do not require large premiums in order to induce them to convert part of their present incomes into capital. In the third place, we have marginal investors, who will furnish more or less capital according to the inducements offered for its investment. These may be wealthy persons, or may be people of moderate means, who would save and invest a portion of their incomes even at low rates of interest. But they will |