The Washington herald., 1922-08-07
BRITISH VIEWS
ON CHEAP MONEY
BENEFITS DIFFER
Low Bank Rate May
Induce Speculation,
Some Believe.

1ONOON, aug. o.-Ihe latest re-
duction in the Bank Of England rate
Of discount brings us face to face
with q very interesting situation.
whether judged from its purely
financial or from what may be
termed its psychological standpoint.
Before dealing with the inwardness
Of the movement. however, Il 10 In
teresting to note in passing that
we have not had so low O bank rate
as . per, cent since q period well be-
fore the beginning Of the war, and
that circumstance itself is note
worthy.
To give an entirely adequate ex-
PLANTATION OF the extent and COM
parative rapidity Of the successive
declines In bank rate from per cent
last year to the presen low level Of
3 per cent would require more space
than can be allotted to me in a letter
to The Washington Herald, but It
mey be we'll that I should refer to
certain definite points and principles.
which go far to explain the move
ment. In the first place It must be
remembered that the per cent
bank rate was in the main applied
to deal with an unwieldy and un-
healthy speculative position in COM
modities, and your readers will ap-
prehend that situation all the more
closely because II was SO akin to
the conditions experienced on their
eide of the Atlantic.
Cure for Imitation.
Both in Great Britain and in
America the prices Of commodities
had been raised to q dangerously
high level. threatening both fnan-
cial and social catastrophes. The
ever-increasing demand for high
wages. with its inevitable effect
upon the cost of production. was a
most embarrassing element In the
situation, while those who on both
sides of the Atlantic preached q
trade boom found 1t convenient to
overlook the fact that It was most
unlikely that any trade boom could
materialise or could long continue
with prices at their abnormally high
level. and with so many Of the Con-
tinental countries out of action.
financially. by reason of the war.
more restraint in the matter Of
financing this speculation In COM
modities It Is possible that the dras-
tic measure Of a per cent bank
rate might have been avoided. As
IL was. the high rate eventually
pricked the bubble. but as il usu-
ally the case when drastic REM
edies have to be applied, the scon-
sequences were great and far
reaching.
Government Aids Bank.
The next point to remember in
regarding the situation here Is that
at the time of the high bank rate
the Treasury co-operated with the
bank in making its rate more or
less effective. by selling Treasury
bills each day. at a fixed rate. re-
lated to the official bank rate.
Then a little more than a year ago.
when 1t became evidnt that condi-
tions had SO far altered that COM
modify prices were at a much saner
level, a strong opinion grew up
that the taxpayers money should
be saved by Treasury bills being al
lotted on terms more consistent
with the real state of the money
market. Accordingly. in April of
last year the government reverted
to the system of selling Treasury
bills by tender and from that time
down to the present il has been a
case of the abundance of money
driving down the Treasury bill rate,
and with 1t the bank rate itself.
Just before the reduction there
was a margin Of something like
l II per cent between bank rate and
the market rate of discount. and
how the bank met the situation by
reducing its rate to 3 per cent Is
now a matter of history. Never
theless there is a considerable d.
vergence of opinion here as to
whether this reduction in the official
minimum is a wise measure or the
reverse. As a consequence of the
dulness of trade and the cheapness
OF money, gilt-edged securities have,
as you know. been steadily advanc-
ing here for months past. and a
good deal Of the advance has been
based upon speculative operations,
financed by loans from banks. Con-
tiers that a further reduction In the
official value of money may give
an impetus to speculative rather
than to industrial activities.
May Stimulate Speculation.
The stock markets are, SO to
speak. In working order, and the
public is ready for a gamble In
stocks. The Industrial market, on
the other hand. is feeling all the
after effects of reaction from the
abortive trade boom OF two years
ago, while the increasing economic
and financial chaos at many of the
European centers makes It difficult
to see how there can be any. early
return to great Industrial activity
and prosperity
Consequently 1t IL felt that there
is very real danger Of the abnor-
mally low rates for money causing
such an inflow Of liquid resources
into the investment market as to
create conditions unfavorable to the
financing on easy terms of any in
dustrial revival which may come at
a later date. In fact, just as the
trade boom in 1921 was brought to
q halt. partly because banking re-
sources had been lent too freely to
those who were speculating in en-
gineering a further rise in COM
modities. so II Is feared lest history
should repeat itself little later
on. securities in this case occupy
ing the position held by commod-
tiles some two years ago.