The Washington times. [volume] (Washington [D.C.]) 1902-1939, 1928-02-23

emphasize the PROBABLE DuS1n'
rediscount rates.
In making gesture against
speculative excuses, particularly
in the security markets, the Fed.
eral Reserve authorities obviously
intended no check on strictly COM
mercial operations. On the CON.
trary, the central banking Of.
ficials recognized that business
needed a stimulus and 3 tonic,
rather than = note OF caution and
restraint. However, in raising the
rediscount rate from 31z to per
cent, the system put its rate at a
level which is still regarded as
cheap in this country. The 3z
per cent rate was looked upon
as more or less subnormal, and,
with the corresponding open mar
ket policy Of the system, had the
effect of overencouraging specula.
tive maneuvers.
The raising Of the bank rate to
4 per cent served to dampen
speculative ardOr, but is likely to
pansion. As Col. Leonard p.
Ayres, of the Cleveland Trust
Company, has pointed out, most Of
the phenomenal prosperity Of
1926, when corporate profits
reached the highest peak yet at
tanned, was developed with redis-
count rates at present levels, and
with short-tinne interest rates dis
tinctly higher than those now
prevailing.
mixed, there have been signs
since the first OF the year Of
more than q seasonal improve
nent, particularly in the basic
industries. If betterment should
continue, business will seek to
catch UP with speculation, which
Of late has been coming down
to meet it.
Will the new tighter money
policy of the Federal Reserve
system ultimately defeat itself by
attracting fresh gold imports,
which win further ease the do
nestle money market? UnQuestion-
years, q per cent or higher
Il
York rediscount rate has acted
like a magnet. which drew gold
to our shores from all parts Of
the world. The 81 per cent
rate. which was adopted last
August, was intended to repel
gold, and it succeeded in doing
so, enabling the lnarassed Bank Of
England, which maintained q rate
fun point higher, to increase its
gold holdings, and raise It's ratio
on reserves TO the highest level
attained since great Britain re-
turned to q gold standard in May,
1925. The August change be the
Federal Reserve system was to
correct the international situation,
and thus facilitate the marketing
of American crops abroad. BY
January, that policy had achieved
its detectives.
Looking into the immediate fIl-
ture, the economic sages Of the
Harvard economic society thus
forecast the coming events:
Should the inflow Of gold be
resumed, the international finan-
cial situation will be affected adj
versely. The higher level Of in-
terest rates here may force Euro
pean countries to raise their dis
count rates, and higher discount
rates would react unfavorably
upon the markets for international
commodities Chiefly OF the farm
and metals. Obviously such de-
velopments would tend TO de-
crease the demand for the prod
ucts Of American farms and fac
tories.
Under existing conditions, the
Federal Reserve system has much
less freedom of action than is
generally supposed. About half
of the worlds monetary gold has
been concentrated in the United
States; and most countries which
re-estabAshed the gold standard
have done so only on a restricted
basis. In part. their reserves are
dollar balances held in this coun.
try. The reserve system has
sought to prevent our large gold
holdings from Initiating us. and
at the same time has recognized
the Importance of re.establishing
more normal conditions abroad.
But the establishment OF q 81
per cent rate, which stimulates
gold exports and is helpful to
Europe, has meant speculative
excuses in the United States;
while a 4 per cent rediscount
rate has meant a flow of gold
to the United States and a de-
Ginning world price level. Last
summer international considera.
tions dictated a helpful policy
toward Europe, despite the dam
ger that speculative excuses
would occur. Though the steps
then taken have now been re-
traced, this does not mean d
complete undoing of the progress
achieved in Europe during the
latter half of 1927. The con-
trary is the case; and it must
be recognized, furthermore, that
the international situation, no.
tably difficulties arising out of
the transfer of German repara-
tions, again may dictate an easy
money policy before the end
of the year"
BY use of the Controls, the
Federal Reserve authorities can
radically influence conditions tenn
porarily, but over longer periods
fundamental conditions are bound
to assert themselves and leap