The Colville examiner. [volume] (Colville, Wash.) 1907-1948, 1916-09-02
TALKS ON BANKING.
(By courtesy Of the American Bank
ers Association, Savings Bank Dept
DIsCoUNTING A NOTE

all payments cannot be made IN
cash, for most of the business Is
done on credit in one form or
another. Small purchases and
many of the daily expenditures
are cash transactions; but busl-
ness as a whole moves on credit,
the form depending upon the Gus
toms characteristic of that pc
culiar business. The most com
mon form of credit is the book
account, where goods are sold and
charged" to the purchaser.
When you go into the grocer s
and tell him to "charge it," you
are opening a credit with him in
the form of book account. This
is common to all retailing trans
actions. But in the larger deal
ings, the credit is in the form of
a promissory note, which is mere
ly written promise to pay sum
certain, in money, to designated
person, firm or corporation, at a
stipulated time. Hundreds of
thousands of these notes are made
every day. They are given, mer-
chant to merchant, in payment of
debts resulting from the sale of
goods, and while they settle the
debt they must themselves be paid
in money, in order that the obliga-
ton may be finally discharged,
for promise never liquidates
debt.
If these promises could be treat
ed as money and passed from hand
to hand, they might answer very
well, but they are not of a uni
form denomination, their good
ness is a. matter not commonly
known, and even though the
maker might be as good as the
government" few know it and
few would take the risk.
And if the holder could wait
until maturity, he would get cash
from the promiser. But he does
not want to wait that long-he
wants to turn his evidence of debt
into money at once; for with
money-real money--he can get
better terms, and for certain pur-
poses, such as paying laborers, he
must use cash. There must, there
fore, be some medium through
which he can turn this promise
into money before it is due-for
price-and that medium is the
bank. The process of doing this
is called discounting, which in
other words means buying the
paper. A simple illustration will
explain.
Suppose A sells B bill of
goods on three months credit. A
does not want to wait while b
sells the goods and gets the money
to pay him, and therefore offers
to take BIS note for the amount.
But the note is not money, and
if A would use the money he must
find someone who will give him
money for it. He might find
someone who, for the hope of gain,
would advance the money; but
the logical place to get this done
is the bank, for the bank always
has money. 1t knows men and
their ability to keep their prom
ises, and can judge the quality of
the risk. A therefore offers the
note to his banker, who says in
substance: ~ think B is good for
this amount. If you will endorse
promise to pay if he does not
/ will buy that paper evidence of
debt from you" Let US say it is
for $100 due in three months.
The banker knows that at the end
of three months he will get the
800, and so gives A $3.50 for it,
the $3.50 being interest on the
money for that time at 6 per cent.
Ordinarily the banker would not
give A the cash, but credit his ac-
count with the privilege of check
ing against it, which is virtually
the same thing.
Now, what is the result? A
sold his goods and got his money
at once. B had three months to