22. When one Economic Quantity is exchanged for another, each is termed the Value of the other. But when one of the Quantities exchanged is Money, or Credit, the sum of Money, or Credit, receives a peculiar name. It is called the Price of the other. Price is therefore simply the Value of anything expressed in Money or Credit. But as it is invariably the custom in modern times to estimate the Value of every commodity by its Value in Money or Credit only, or its Price, and not by its Value in any other commodities, the words Value and Price have become almost identical and interchangeable expressions, though no doubt we must remember the technical difference between them.

Now as the Value of the Money is the Commodity received in exchange for it, it is manifest that the greater the quantity of the Commodity received for it, the greater is the Value of Money. Or if the quantity of the Commodity be taken as fixed, the Value of Money is greater as less Money is given for the Commodity. Hence it is clear that the Value of Money varies inversely as Price.

The Value of Money, however, with respect to the Property or the Commodity called Debt, or Credit, is estimated in a peculiar way. Debt, or Credit, being an Exchangeable Quantity, Merchandise, or a Commodity, must be divided into certain units in commerce, like other goods. Coals are measured by the ton; other things by the pound; other things by the ounce. The unit of Debt is the Eight to demand 1001. to be paid one year hence. A Debt, then, of 100/. payable one year hence being a saleable commodity, like a quarter of corn, the sum given for it is its Price, just as we speak of the Price of anything else: and the Value of Money increases as the Price given for a Debt diminishes. But in the commerce of Debts it is not the custom to estimate the Value of Money by the Price of the Debt. The Price of the Debt must of course be less than the Debt: and the difference between the Price of the Debt and the Amount of the Debt is called Discount. The Discount is the Profit made by buying the Debt. It is clear that the Price of the Debt together with the Discount equals the Amount of the Debt: and as the Price decreases the Discount increases. In the language of the Money Market it is always the custom to estimate the Value of Money by the Discount or Profit it yields. To buy or purchase a Debt is always in commerce termed to Discount it.

Hence the reader must observe that in commerce the expression "Value of Money" has two meanings, according as it is applied to the purchase of Commodities, or Debts: when applied to the purchase of Commodities, it means the Quantity of the Commodity obtained in exchange for the Money: when applied to the purchase of Debts it is applied to the Profit realised by buying the Debt.

Hence in this latter case the Value of Money varies directly as the Discount or Profit.

And we have this rule -

The Value of Money varies inversely as Price and directly as Discount.

To Discount a Bill of Exchange at 5 per cent, means to give a Price for the Debt in the proportion of 95l. for every 100l. of its amount payable one year hence.

When a person advances money to another and agrees to defer receiving the Profit till the end of the year, the Profit is termed Interest. If he lends, as it is called, 100l for a year at 5 per cent, interest, it is in fact an exchange, or sale, in which he pays 100l. down to buy a Debt of 105l. payable at the end of the year: and the 5l. is the Interest.

This method of making Profits, though not uncommon, is never used in banking, except in charging interest for overdrafts. Bankers invariably subtract the Profit agreed upon at the time of the advance. Thus they always make Profits in advance; and in this case the Profit is termed Discount. Thus if a banker discounts a bill of 100l. for a customer at 5 per cent, he places 95l. to his credit, and retains the 5l. at the time of the advance. In reality he gives Credit for 95l. to buy a Debt of 100l. payable a year after date: and the 5l. or the difference between the Price of the Debt and its amount, is the Discount and his Profit.

It is clear that this latter method of trading is the more profitable, because in the former case he makes 5l. profit on the actual advance of 100l.: in the latter case he makes 5l. profit on the actual advance of 95l.: and besides that, he has the 5l. in his hands to trade with immediately, instead of waiting till the end of the year. In the large amounts of money which banks deal with this makes a very sensible difference in their profits, especially when the Rate of Discount is high.

The Rate of Interest or Discount is the amount of Interest or Discount paid for some given time, as a year.