The Washington herald., 1921-08-14
Last Cut Not Justified
By Banking Position,
Claimed.
POLICY is REVERSED
Dangers Promised From Re-
commencement of Infia-
tionary Movement.
Q,r>ax, csrr,zponAsncs Of Ths washington
HEaN and Nsv YWk Evening Pest.)
By ARTHUR w. KIDDY.

the correspondent who ventures to
prophesy concerning so uncertain
matter as the future official
value Of money. For confirmation
Of the truth Of this remark II Is
only necessary that your readers
should turn to my dispatch from
London on June %, in which, COM
menting on the reduction in the
bank rate frcm 81 to 6 per cent
I expressed the opinion that a fur
ther reduction in the near future
was improbable.
As you are aware, I was able for
some days before the actual re-
duction to 5h per cent took place
to indicate in my cables the proba-
bilfty of the event but that does
not alter the fact that the present
reduction is at variance with the
view expressed a month ago.
While I know that your readers
will not be greatly concerned with
the fact OF my representation not
having proved correct they will
be very much concerned as to
whether the present movement may
be regarded as an indication OF
some great Improvement in the sit
uation in London Jusufying a fur
ther reduction.
A Reduction Despite Imitation.
As to that point. let the facts
speak for themselves. In the bank
return OF June %, when the official
rate was lowered from 81 to s per
cent, the total of government Sc
curities stood at f5S.495,O00 and
the proportion OF cash to liabili-
ties at 13.9 per cent. In the re-
turn OF July 81, when the rate was
lowered to 513 per cent, govern
ment securities stood at fs2.71S.-
800 and the proportion of cash to
liabilities at ia per cent, while
the reserve itself was actually
lower than the previous month.
The movement in government Sc
curities was, OF course, due to
heavy borrowing by the exchequer
from the Bank OF England on
ways and means advances, and the
artificial ease resulting in the
market was entirely responsible
For the great fall in money rates
IN Lombard Street.
In other words, whereas the pol
Icy of the Bank OF England dur
ing recent years has been to try
to prevent imitation by higher
rates of interest. this latest re-
suction in the official rate has ac-
tuallY, been made in the face OF
.he recommencement of a further
lniationary movement due to gov
.rnment borrowing. In fact, there
has been something like a volte-
face in the monetary policy.
We gather. too, from the cables
that there was a good deal Of sur
prise on your side of the Atlantic
with regard to the fall in the re-
discount rates of your Federal
banks. and there would seem to be
little doubt that on both sides of
the Atlantic political influences
are to be seen once more affecting
:he policy of the Bank of England
and the Federal Reserve banks re-
Ipectively. / am. of course. quite
Unable TO judge as to what truth
there may be in this idea as re-
CARDS matters in your own coun-
try, but 50 far as London is con-
cerned. there can be no doubt that
he strong conflict Of opinion with
regard to the monetary policy is
largely responsible for the incon-
sistencies which have character
lied that policy from time to time
turing recent years.
On the present occasion I should
be inclined to define the influences
operating in the direction of ouI
own low bank rate somewhat as
follows: In the first place. we have
cheap money party irrespective
OF politics. thoroughly prepared to
assert that dear money has been al
most. entirely responsible for the
acute trade depression OF the past
year In the second place, we have
strong political section. also op-
posed to dear money. partly on the
Idea OF its restricting trade and
partly because of its effect upon the
terms which the Government has to
pay for its own loans.
Hope to Thaw Frozen Credits.
Added to these influences there is
also the fact-which believe also
sbtaips on your side of the water
shat frozen credits in the shape of
large positions in commodities car
Ffed by the banks have been liaui-
fating with painful slowness. 1t Is
moro than likely that the idea has
been conceived that to reduce the
bank rate might be to affect, psy-
:hologically. the general atmosphere
here and facilitate the liquidation of
those credits which are frozen in
the sense that II is difficult to OBJ
tain a market for the goods and
commodities represented on almost
any terms. Probably. too, the au-
thorities felt that inasmuch as the
Imitation I have referred to had al
ready caused great break in
money rates in Lombard Street, the
reduction in the bank rate to 5H
per cent would have no effect in
further weakening rates but would
simply reduce the charges on loans
% traders, which are always quoted
st practically 1 per cent above the
bank rate prevailing.
Already, however. we have the
financial press haillng the reduction
In the official minimum as a kind
OF formal "All clear" signal on the
part Of the Bank of England and as
an Indication of some great i'm
provement In the position. 1t is
aothing Of the kind. though whether
;he policy will finally be justified by
It's aiding the liquidation of these
'peculative positions have referred
20, remains to be seen. II il is not,
.hen matters may shape very un-
pleasantly as the autumn an
1rodches and heavy payments have
% be made abroad for goods pur-
chased
Possibly some Of those responsible
Tor the, decline in the bank rate
nay have also felt that SHOULD f.
aancfal Affairs not shape favorably
ind should the frozen credits re-
main frozen it will be no longer