Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-10-18
FEDERAL RESERVE
POLICY MODIFIED
Interest Rates Increased, but
Care Is Taken to Not Hurt
Trade.

Adjustment" Of interest rates to a
natural level rather than a trend from
cheap money to high money is the new
policy of the Federal Reserve System.
This development. as outlined au-
thoritatively here yesterday, comedies
with the desire of the Federal Reserve
authorities to aid in the recovery CT
business by making 1t possible on the
one hand to maintain a steady flow Of
credit and at the same time to keep
funds from being unemployed because
OF the low rate Of return.
For many months the cheap money
policy has been maintained on the
theory that the cheaper money became
the more readily it would seek invest
ment, and, Of course, bolster up the
country as reflected in the bond mar
ket. But funds continued to remain
idle just the same or to seek short
term investment The banks Of the
country complained that the Federal
reserve rediscount rates, which act more
or less as a barometer Of interest rates
generally, were too low to give them
a chance to pay anything material on
time deposits, and that it practically
blocked the opportunities Of the banks
to earn money on their lendings.
Several Factors Seen.
During the last week a number Of
Influences combined TO change the
Federal Reserve policy. There was. Of
course, the desire to make it attractive
for foreign interests to retain their
large foreign balances in the United
States to prevent any precipitate out
flow Of gold. and there was, too. the
wish to enable banks to adjust them
70 hatfo Inf
the line.
The move was promptly interpreted
this week as a reversal of Federal Re-
serve policy, with a tendency toward
high money rates. especially for COM
mercial borrowers. Nothing OF the
kind is contemplated and the explana-
ton made in official quarters today Is
that rediscount rates were too low and
required readjustment to a somewhat
higher but not prohib.tive level. There
is, on the contrary, every desire to ease
credit and this Is shown in the ex-
pansion by the Federal Reserve System
of its credit structure, SO that the total
amount of borrowings from the Federal
Reserve and purchases of bankers &C
ceptances and Government securities
has increased substantially. This is an
index Of how the Federal Reserve feels
about credit conditions.
Gold Outflow Anticipated.
There is not the slightest feeling of
anxiety here either about an ultimate
outflow of gold All of Frances hold
tngs in America Of about $500, 100000
could be withdrawn, for example, and
still the American pot of gold would
be in excess of two and half billion
dollars, which is more than necessary
as a gold reserve for the banks OF the
country.
But any disorderly movement or too
rapid exit causes concern. Hence the
authorities here in consultation with
the experts from the Bank of France
may undertake a collaboration which
ray amount to Joint effort on the part
OF France and the United States to
stabilize the gold situation IN both
countries and with respect to the rest OF
the world.
The courses open to France and the
United States are for each to go 1t
alone, with both nations thus compelled
eventually to bear the consequences of
a situation in which all the world
virtually will be off the gold standard,
or for France and America to combine
gold resources so as to redistribute gold
in a way that will at some not far dis
tant date bring the gold standard back
to those countries that have lost 1t.
Isolation Is Feared.
Financial isolation might mean costly
results to American trade with dump
ing Of goods manufactured by payrolls
of cheaper money standards and with
foreign purchasing power less able to
buy American exports.
The next 10 days are certain to bring
a turning point in the gold situation,
for with the experimentation of discount
rates between the Federal Reserve and
the Bank Of France a beginning has
been made toward united front against
depreciating currencies.
(Copyright, 1879