The market for bills is a special market, into which the banks pour their surplus funds, so customers will be careful not to confuse the price of a bill with the price of a loan, though, of course, there is a close connexion between the two; for when loanable capital is dear discount rates too are high, and when the former is cheap the latter are low. The London customer, who discounts fine bills with his banker, will naturally take care that he does not pay a higher rate than the bill-brokers would charge him, and when he discounts second-rate trade-bills he will remember that competition is very keen, and that if his credit be good he can generally induce the manager to quote a fine rate.
Coming to provincial banking, we have seen that the large merchants and manufacturers remit some of their best trade-bills to London; but in the great cities, where the banks are numerous, the competition for good paper is considerable; and as the customer usually keeps his current account at the bank with which he discounts his bills, he can generally, if his account be worth retaining and his credit good, get his paper discounted at Bank rate, or even slightly under when the market rate is below it.
In the small country towns, however, the banks’ rates are higher, but then, of course, the paper they discount there is not of the same class; and a capitalist, be he a money-lender or a banker, raises his rate in proportion to the risk he runs, the one thinking a bill so doubtful that 100 per cent. will just tempt him to risk his principal, and the other drawing the line at about 7 per cent.
A, for instance, has an acceptance of C’s for £100, dated the 1st January and drawn for one month, so the bill, allowing the usual three days’ grace, will be due upon the 4th February. A takes this bill on the 5th January, to his banker, by whom it is discounted. From the 5th January exclusive, to the 4th February, inclusive, there are thirty days; and assuming that the discount rate be 5 per cent. per annum, and the rate of commission upon the amount of the bill ⅛ per cent., we get the following:—
| 100 × 5 × 30 | = | 8s. | 2d. | |
| 100 × 365 | ||||
| ⅛ per cent. upon £100 | = | 2s. | 6d. | |
| 10s. | 8d. | |||
A, therefore, has paid about 6½ per cent. per annum for the accommodation. The country banks, when they charge 5 per cent. per annum interest and ¼ per cent. commission upon short bills, obtain something like 8 per cent. per annum upon their capital; but, needless to say, the persons who pay these rates are either out of touch with the market or else their credit is so bad that they are glad to discount their bills with a banker upon almost any terms. And then, again, there is not much paper of this description under discount with the provincial banks.
Country customers, whose credit is above suspicion, make very close bargains when they take good trade-bills to the banks to be discounted, and seldom pay any commission upon the amount of the bill, though, of course, the manager will attempt to exact it if he think that his man will pay without protest. As previously stated the customer almost invariably discounts his bills with the banker with whom he keeps his current account, and he generally pays the same rate on his paper as he does upon his overdraft. Competition for desirable accounts being keen, it follows that a client who discounts largely can always bring pressure to bear upon the manager, should he consider that his rates are excessive and altogether out of touch with the market rates.
Coupons.
Many people leave their coupons with bankers for collection, and here, again, we get an example of making those pay who will. The usual rates are ⅛ per cent. commission on English and ¼ per cent. upon foreign and colonial coupons, but, as a matter of fact, certain managers keep a list of those persons who refuse to pay these charges, while they who do not protest, no matter how large a sum they may keep to their credit upon current account, are made to pay the ordinary rates. It is only fair that a person whose average credit balance does not exceed £50 should pay a rate; but when a man keeps from £250 to £500 and above on the right side, the banker can quite well afford to forego his charge.