The New York herald., 1920-01-26
AMERICANS PUZZLE
BRITISH BANKERS
Federal Reserve Board Handles
Discount Rates Opposite
to English Way.
! Germ FELT IN LONDON
Financ:er Suggests Reversal of Method
Here Would Promote Lower
Prices.
(specio, Cable to the Herald

tbPcttu' Cdttc ~ tHC II 1tI0iQ.I
LONDON. sunday.-The action of the
United States Federal Reserve Board in
following exactly an opposite course from
British banking in the handling of it's dis
count rates-is puzzling the bankers of
London, and much apprehension has
arisen recently over the matter.
British banking is adhering to the
theory. which II believes to be sound, that
the bank rate should be used as an in
strument to regulate exchange rates and
should not lie used L., any manner in an
attempt TO regulate the Domestic money
market Occasionally, when sterling has
peen at a discount, il has been the practice
TO raise the bank rate to attract funds to
This centre. A demand for sterling is
thereby created and the rate for sterling
brought back to the original level. When
sterling has been above, par the bank rate
mas been lowered to allow an outflow of
money, causing selling Of sterling bills
and a1owering of the exchange rate.
The Federal Reserve Board is pursuing
exactly the opposite course. New York
exchange is at a heavy premium, but the
discount rate is being raised constantly,
with an explanation that it is desira BILE to
curtail speculation and bring about defla-
ton. The result of this policy is plainly
evident, for the dollars which might seek
investment abroad are staying at home,
where they Yield the largest return.
| The theory as to the efficacy of high in
terest rates in preventing speculation and
causing deflation is seriously disputed
here Every fraction added to the interest
rates causes an increase in the cost Of
productions, which causes higher prices.
These higher prices increase earnings,
which. in turn, increase the possibilities of
large speculative profits, either by dis
tribution in the shape of dividends on Sc
curities or by favorable turnover in COM
modties.
A prominent banker here, who realizes
the difficulty of placing foreign loans in
America because of high money and high
income taxes. suggested that the Reserve
Board should reverse its position by foster
ing tax legislation by which the income
| from foreign investments could be- eX-
empted from the surtaX II such u tax re-
duced the yield below certain point. say
three and half Or four per cent. Then,
| by pounding money rates down below this
figure. capital literally would be driven
from the United States, dollars would de-
cline nearer to par, foreigners could afford
to use them to make purchases in the
United States and the latters export trade
would be protected.
II might be objected that this scheme
would result in increased initiation, be-
cause the only method TO drive money
rates down would be to increase currency
and credit, but as the increase in currency
and credit would go abroad there would be
no increase in buying power created at
home. and consequently prices would not
rise. This banker realized that such action
by the Reserve Board would put foreign
loans in competition With domestic tax
exempt securities.
But would not that be a good thing?
he asked 'It would drive down money
rates, prices would follow, and the della
ton would begin. If later dollars feli TOO
low the bank rate could be raised ana
ca pital would come back, or better stu,
Congress could vest the Reserve Board
with power To fix the minimum yield OF
foreign securities and the Reserve Board
then would be in possession of power
full weapon to control the international
money market.
ut would have a two-edsed sword; 1t
could hold dollar exchange down II neces-
sary by raising the tax exempt yield OF
foreign securities and lowering the bank
rate. or could support dollars when needed
by Just the opposite action.