3 1/2%" Money

The Federal Reserve Board in Washington last week established 3 1/2% as the rediscount rate for the Federal Reserve Bank of Chicago, and there was anger in Chicago.

Before the Federal Reserve Act became law in 1913 and was still in discussion, local bankers wanted the rediscount rates fixed by the proposed regional banks. The late William Jennings Bryan and his Democrats opposed that idea vigorously. The rates, said they, should be established by some central in-stitution--the Federal Reserve Board. The compromise: the boards of directors of each of the 12 Federal Reserve Banks were to submit to the Federal Reserve Board at Washington for approval, a rediscount rate for their particular region. The Board was presumed able only to veto, not to initiate rates. By refusing to approve a rate offered by a regional bank, it could make that bank unable to function. The Board had practically full power.

The district banks, however, during the early years of the Federal Reserve Act circumvented the Board by neglecting to offer changed rates of rediscount for Board approval. Then came a ruling requiring each of the banks to submit their rates weekly to the Board for approval. The Board was "on top."

That situation the Harding administration tumbled over, with the re-organization of the Federal Reserve Board. President Harding's Comptroller of the Currency, his good friend & neighbor of Marion, Ohio. Daniel Richard Cris-singer, became Governor of the Federal Reserve Board, and the regional banks were required to submit rediscount rates only for approval of changes.

Until last August the rediscount rates of all 12 Federal Reserve Banks had been, for a relatively long time, 4%. Then in July when chiefs of the English, French and German central banks of issue visited with Governor Benjamin Strong of the Federal Reserve Bank of New York, (TIME, July 11), men came from Manhattan, according to the Chicago Journal of Commerce, asking that Governor James B. McDougal of the Chicago Federal Reserve Bank initiate a movement (which the other banks might ostensibly follow), to reduce the general 4% rate to 3 1/2%. If money could be borrowed cheaply in the U. S., it could be loaned with profit abroad.

Governor McDougal and his directors at Chicago kicked the suggestion into their waste baskets. The suggestion was then made to the Kansas City bank, which put it into effect (TIME, Aug. 8). Other district banks followed, until at the beginning of last week only Chicago, Minneapolis, Philadelphia and San Francisco kept to the 4% rate. All the others offered the 3 1/2% rate. Some money that might have gone to Europe was going to the recalcitrant districts.

Something had to be done, and was done last week. The Federal Reserve Board announced that it was fixing 3 1/2% as the Chicago district's rediscount rate. Chicago bank directors growled, refused to "talk for publication." Said Governor Crissinger: "The Federal Reserve Board established the rate of 3 1/2% for sound reasons. That is all there is to it." The Chicago Journal of Commerce warned: ". . . It would be much easier than eastern bankers know to make a political issue of the Federal Reserve System. . . . Difficult would be the defense of it if an issue were made."