The range of the third may be said to be between 3 and 20% per annum.

In view of the first, a man may make a bad bargain in buying a note having sixty days to run, if he pay for it but 10 cents on a dollar. The United States may perhaps borrow money at 4% per annum, when individual States would have to pay 5 or 6%, and railroad companies 10 or 15%. A corresponding difference is found in promissory notes made by individuals and business firms.

The purchase of a draft on New York, payable in coin, with Illinois paper currency, which is convertible into coin at a cost, say, of 1%, will illustrate the force of the second consideration.

In regard to the third, the market, or ruling rate of interest, depends mainly upon the rate of profit with which capital can otherwise be employed. New countries, rapidly developing, furnish profitable investments, and therefore sustain a high rate of interest. Sudden expansions and contractions of currency temporarily affect the rate, causing it to fall with the expansion and rise with the contraction, but a continued increase in the supply of money stimulates prices, awakens enterprise, and increases the profits in business and speculation, thereby raising the rate of interest proportionably.

The rate of interest does not express the value of money, but only the value of the use of it for a limited time, or rather, it expresses the value of the use of the capital or credit measured by money. Money, from its nature, is always cheap when prices are dear, and vice versa; for as money measures the value of other commodities, so the comparative price of the standard articles of commerce measures the relative value of money. Generally, when money is cheap, interest is high. For many years money has been cheaper in the United States than in England, but during the whole time the rate of interest has ruled higher. In the early history of California money was exceedingly cheap, but the rate of interest remarkably high. The current rate of interest is also made higher from the effect of unwise usury laws, and laws under which

the collection of valid claims can be enforced only after a protracted, uncertain, and expensive prosecution.

There are many other causes that occasion remarkable fluctuations in the market rate of interest, as war, commercial revulsions, &c. Unlimited confidence in business encourages a high rate of interest, while excessive caution and distrust cause it to decline.

As a general rule, the market rate of interest, like the price of exchange, is not subject to arbitrary control, but is the resultant of sundry contributing causes; and whatever legislation is necessary should be expended on the cause rather than on the effect.

BANK DISCOUNT.

ART. 133. The banks of the United States are usually restricted by charter in their rates of discount, but being allowed, in the interior, to deal in time-drafts or bills on New York, payable in coin, and being allowed frequently to pay out paper currency of less value than coin in purchasing such drafts, they are enabled by this and other means to realize more than the nominal, legally restricted rate of interest. It is not proposed in this work to discuss the policy of bank charters with special privileges and special restrictions, nor any other question of policy, but merely to furnish to the student and inexperienced business man the fundamental principles upon which money and negotiable paper do rest and should rest.

It may, however, be taken for granted, that although banks, railroad companies, &c., may have been established for "the accommodation of the people," yet so long as they are controlled by human nature, and the profits go into the pockets of individuals, corporations no more than individuals can be expected to furnish "accommodations" without their being paid for. As a general rule, a business man may expect accommodations from a bank only so far as he makes it for the interest of the bank to grant them.

The interest which is charged on notes discounted at a bank is generally paid in advance, and is computed upon the amount due on the note at maturity. The difference between the interest and face of the note is the proceeds, which is received by the customer.

Thus the proceeds of a note for $2000, having 63 days to run, including grace, would be, at 6% interest, $2000-$21= $1979.

If "business paper," drawing interest, is discounted, the amount due at maturity, including interest, is taken as the face of the note upon which the bank discount is computed. It will be observed that bank discount exceeds the "true discount," as heretofore explained; for while the latter is the interest on the present worth or principal, the former is the interest on the amount of principal and interest, and the excess is equal to the interest on the true discount for the given time. The ratio of this excess will also increase as the time is lengthened, so that, other considerations remaining the same, the longer the time the more profit to the bank. If the note run 16 years, the bank discount, at 6%, would absorb the whole note, and the proceeds would be nothing. Frequent renewals, so far as the matter of interest is concerned, are unfavorable to the bank. The reason for the custom among banks of discounting only "short paper," as it is called, is twofold.

First, A large portion of the capital invested in discounts is based upon deposits, which are subject to "call," and their own "circulation," which must be redeemed on presentation. In case of unusual demands for redemption, or withdrawal of deposits, the early maturity of Bills Discounted is their main reliance.

Secondly, The risk arising from the varying circumstances of the makers and indorsers is lessened by shortening the time. If, however, bills of exchange are discounted, payable in a better currency than that used in the discount, or for which a charge is made for collection, the shorter the time the greater the pecuniary profit.

In considering the percentage of profit in "bank discount" with frequent renewals, there is a partial offset in favor of the banker by his being able to compound the interest at each renewal. But this advantage is very small if we consider its effect for one year only (See Note, page 118), at which time simple interest, if paid, may also be compounded by re-loaning.

Comparing simple interest with "bank discount," including the advantage from compounding the interest, we obtain the following result:

Bank discount at 6% on paper,

Renewed once in 12 mos., is equivalent to 6.383% simple interest.

From the above we see that the excess of bank discount over true discount, as affecting the rate of interest received, when the time is less than a year, can be but trifling, being for 6% always less than 1%.

BANKERS' ACCOUNT CURRENT.

ART. 134. Bankers frequently receive and pay interest on the account current with their correspondents and depositors, paying interest on the deposits and receiving interest on the over-drafts. A settlement occurs once in 3, 6, or 12 months, as custom or special agreement may dictate, at which time the balance of interest is entered to the debit or credit of the account as the case may be, after which it draws interest the same as other items in the account. The principle involved in this kind of interest account forms the basis of the "MERCANTILE RULE" in Partial Payments, as given in this work.

The process of computing the interest on such accounts is made easy by the use of the following

RULE.-Divide the sum of all the daily balances by 6 and

the quotient, after pointing three places for decimals, will be the interest required.

Remark. It is evident that each daily balance draws interest one day. The interest, then, of the sum of daily balances for one day is all that is required.

Note 1st.-If the daily balance remains the same for several days, instead of setting down the amount as many times as there are days, use the product of the balance into the number of days.

Note 2d.-If the balances are sometimes debit and sometimes credit, take the difference between their sums before dividing.

Note 3d.-The above rule gives the interest at 6%. To find the interest at 4% divide by 9 instead of 6. For 3%, divide by 12. In general, the divisor for any rate may be found by dividing 36 by the rate. Or, having found the interest at 6%, the interest for any other rate may be found by aliquot parts. Note 4th.-If a different rate of interest is to be charged on the over-drafts or debit entries, the footings of the daily balances should be divided by their appropriate divisors before subtraction.

The following abbreviated form will serve to illustrate the foregoing rule: