Discount Rate Definition

In 1930 the Fed Raised Rates from 6% to 2.5%

No, that’s not a typo.  In October 1929 the discount rate was 6%, and by October 1930 the discount rate was 2.5%.  So how can I say the Fed raised rates?  Because interest rates are the price of credit, determined in the market for credit.  And free market forces depressed the interest rate even more sharply than the 3.5% drop that actually occurred.  Thus in a sense the Fed had to raise rates with a tight money policy, in order to prevent them from being much lower than 2.5% in October 1930.

Of course the discount rate is actually a non-market rate set by the Fed.  But market rates such as T-bill yields fell by a similar amount in 1930.

A commenter of the Austrian persuasion recently argued that the Fed made a mistake by driving rates so low during the Great Contraction, and that if they hadn’t done so, market forces would have weeded out the weaker and less efficient firms, laying the groundwork for a more sustainable recovery (I hope I got that right John.)

But his entire argument is based on a misconception, that the Fed adopted an easy money policy in 1930.  In fact, the Fed did just the opposite.  In October 1929 the monetary base was $7.345 billion, and by October 1930 it was $6.817 billion.  That’s a drop of over 7%, one of the largest declines in the 20th century.  And the monetary base is the type of money directly controlled by the Fed.  When people talk about the government “printing money” they are generally referring to the monetary base.  So by that definition money was very tight.  If money was not tight in October 1930, then the low credit demand of the Great Depression would have meant even lower interest rates; perhaps the 1% we saw in 2003, which prevented another Great Depression.

Now for a curve ball.  So far I’ve assumed the Great Depression just happened for mysterious reasons, and that the Fed responded with tight money, thus preventing interest rates from falling as far as market forces would have taken them (assuming a stable monetary base.)

But why did the Depression happen in the first place?  It’s very likely that the Fed’s decision to reduce the monetary base by 7% was a major cause of the sharp contraction of 1929-30 (after October 1930 the base rose, as the Fed partially accommodated higher currency demand during the bank panics.)  So if tight money caused the Depression, why did rates fall?

Merchant Account “Discount Rate” Definition | Merchant Account ...

Often called the “Merchant Account Discount Rate” or just the “Discount Rate,” the Merchant Discount Rate is one of two fees that merchants experience when they charge a credit card.   For example in a quoted processing rate of 1.79% + $0.25 per transaction, the Merchant Discount Rate is the 1.79% part of the processing fee.  In other words, the Merchant Discount Rate is the percentage half of the processing fee.  You can think of it as the percentage discounted from the money you will receive from the sale.

The Merchant Discount rate comes from Visa and Mastercard’s Interchange fee system and is usually divided into three rate tiers: Qualified (lowest rate), Mid-Qualified (middle rate), and Non-Qualified (highest rate).  The type of credit card used in a sale will dictate at which tier the processing fee will be charged to the merchant.

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