Rediscount Rate

Undoubtedly the principal events of the past week in the world of business was the raising of the rediscount rate of the N. Y. Federal Reserve Bank from 3 to 3 1/2%. The rate had not been changed since Aug. 8, 1924, when it was lowered from 3 1/2 to 3%. Considerable conjecture arose as to the cause for raising the rate, and whether it indicated a move to halt speculation in the stockmarket. Most editorial writers decided to the contrary -a position which the bank's own statement confirms. The New York Bank rate at 3% was below the market rates and also under every other Reserve Bank - Boston, Philadelphia, Cleveland and San Francisco already standing at 3 1/2, and the other seven banks at 4%. As a result, money was leaving New York at a time when heavy foreign loans were drawing our gold abroad rather heavily. For this reason, the ratio of the N. Y. Bank had fallen to 69.6, while (except for Cleveland at 73.9) all the other bank ratios were 75 or higher. The rise of the New York rate is, therefore, rather an internal readjustment than a new departure in policy or attitude to business.

The change in the N. C. Bank rate was noted all over the world, but particularly in London, where it probably caused more stir than in Manhattan itself. If sterling is going to be restored to and maintained upon a gold basis, it is necessary that Manhattan moneyrates remain well below those at London, in order to attract gold to Britain rather than to repel it. When the news of the change arrived in London, the Bank of England at once began to purchase bills in the open market, with the result that market-money rates rose. London financial writers at once took this to mean that the Bank of England would soon raise its rediscount rate from 4 to 5%, in order to keep money rates in London above those in Manhattan.

The U. S. stockmarket held up well, although the change in the rate came as a complete surprise. This was not, however, at all unusual, since an advance in the rate had been long expected, and since the meetings of Reserve officials wherein rate changes are adopted have never yet disclosed any "leaks." Wall Street can usually gain, in one way or another, advance information concerning action by corporations as to dividends, and even moves of individual banks in ordinary business, but the "Reserve crowd" are noted for being a close-mouthed aggregation; and in this last rate change, they very completely lived up to their reputation.