The discount rate becomes a monetary-policy instrument
After the establishment of the silver standard Danmarks Nationalbank began to use the discount rate to manage lending, whereby the discount rate was raised if it was necessary to ration lending and lowered if there was ample cover for the note circulation.
The word discount dates back to the time when bills of exchange were widely used in trade. A bill of exchange is a debt certificate which the buyer of goods issues to the seller, in return for which payment is postponed for e.g. 3 months. If the seller needs the money immediately, he can sell the bill of exchange to his bank. The bank makes a profit by purchasing the bill of exchange at a discount. The bank is said to discount the bill of exchange, hence the word discount.
Last update: 05/09/2011
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The discount rate becomes a monetary-policy instrument
