In countries where central banking exists there is a central-bank rate, or rediscount rate, which is different from any of the various commercial rates just described and which has an influence upon the market in general that is of a quite special nature. In the United States the central-bank rate, or discount rate, is the rate fixed by the Reserve System. It differs from other rates in that it applies only to a certain very narrowly limited paper, while it is made only in favor of banks, inasmuch as the Reserve banks do not deal with individuals, but only with banking customers.

The question how the rediscount rate is fixed and what it represents is one as to which there is a very considerable difference of opinion. One view of the matter has been that the rediscount rate is a wholesaler's rate. This prevalent theory of interest rates regards the reserve or central bank as a wholesaler of credit, while member or "commercial" banks may be conceived of as retailers. The retail dealer gets his "funds" at, say, 7 per cent. He retails them to customers at a "profit" of, say, about 7 per cent, making his rate 7.49 per cent, or, roughly, 7 1/2 per cent. This view of the case, of course, ignores that what the retailer borrows is not "funds," but a reserve credit which will sustain several times its own amount of "loans" at a commercial bank. Perception of this fact has led some hasty thinkers to suggest that under a central banking system an advance in the rate of rediscount would not affect the commercial rate at all or only in a negligible way, since it would have to be raised several per cent to produce any noticeable change in interest rates among actual loans to customers.

The fact in the case, of course, is that the analogy of wholesaler and retailer is thoroughly false as a reflection of the relation between reserve bank and commercial bank. No bank gets its entire loanable funds by rediscounting; many do not rediscount at all. The normal condition is perhaps that the average bank carries a moderate rediscount line which is far less than its eligible loans and discounts. Accordingly, some have argued that while the average bank pays interest (rediscount rates) on only a part of its operations, these "marginal transactions" determine the cost of the whole to the customer, just as a manufacturer who finds he can get his materials at a rising cost establishes a uniform charge for the goods which, if possible, is based on the "cost of replacement" - the amount he must spend to get additional material at the rising price. The trouble with this theory is that it does not correspond to facts. Many a bank has carried its customers through a high-rate period without raising interest charges at all. New customers are often obliged to pay a rate based on the rediscount figure, although even they are not always so dealt with, especially where the lending bank was not obliged to replenish its reserves by rediscounting such customer's paper.