adjust their rates accordingly. Throughout the whole war period the Bank rate was below the market. 102 In October and November of 1917 the difference was as much as 112%. Compare this record with that of the Bank of England. Throughout the war the Bank rate there was maintained, as has CHART XIV: 1918 VARIATIONS IN THE RATE OF ISSUE FOR CERTIFICATES OF INDEBTEDNESS COMPARED WITH THE BANK RATE AT THE FEDERAL RESERVE BANK OF NEW YORK ON ADVANCES COLLATERALLED BY CERTIFICATES OF INDEBTEDNESS. been the policy of the Bank for generations, above market rates.103 The Bank rate in England is applicable of course only to bankers' bills and is not strictly comparable with the Bank rate 102 Source: Hearing before the Joint Commission of Agricultural Inquiry, part 13, p. 562. 103 Ibid. in America. Even though this is true the important thing is, that the Bank of England maintains its rates on the paper it is willing to discount, on the paper which serves as a vehicle for letting its funds out into the market, at rates above those prevailing in the market. Compelled by the Treasury, the Reserve CHART XV: 1918 FLUCTUATIONS IN THE BANK RATE AT THE FEDERAL RESERVE BANK OF NEW YORK COMPARED WITH FLUCTUATIONS IN MARKET RATES. Banks were forced to maintain their rates at figures inordinately low, lower than the Bank rates prevailing at any of the other important central reserve banks.104 104 Source of data: Courtesy of the Reports Department, Federal Reserve Bank of New York. Did the Treasury feel that the Reserve Banks could defy those economic forces which had compelled the central banks in Europe to maintain their rates at higher levels? That the policy of establishing the Bank rate at such low figures was a mistake is now generally admitted even within the System itself. Governor CHART XVI: FLUCTUATIONS IN THE BANK RATE AT THE BANK OF ENGLAND COMPARED WITH FLUCTUATIONS IN THE MARKET RATE. As regards the Bank rates prevalent during the war Professor Cassel has said: "In the whole world the rates of discount have been too low during the war. The real scarcity of capital would have commanded a much higher rate of interest than the 5 or 6 per cent. which have generally prevailed but which have only been the result of a continual falsification of the money market. Even now, after the war, the world's need of capital is so great, in comparison with the scanty supply, that a real equilibrium can be attained only by aid of higher rates of interest than those generally prevailing." Some Leading Propositions for an International Discussion of the World's Monetary Problem, p. 264. Harding in testifying before the Senate and House Committees on Agriculture and Forestry declared: 105 The Federal Reserve Board adopted a policy in order to assist in the war financing which was economically unsound. I say this frankly. Congress authorized certain loans. It authorized the Secretary of the Treasury to determine the rates at which the loans should be issued. The Secretary of the Treasury asked the advice of experts and then fixed the rates of interest to be borne 1915 1916 1917 1918 1914 CHART XVII: VARIATIONS IN BANK RATES IN ENGLAND, JAPAN, ITALY, AND FRANCE, 1914-1918. by the several issues of bonds, notes, and certificates. During the time we were actually at war, something like $18,000,000,000 of bonds were sold to the people, an amount certainly in excess of the normal investment power of the American people in such a short time, and the only way in which those loans could be financed was 105 Reviving the Activities of the War Finance Corporation. Part I, through the instrumentality of the banks. The only way the banks could undertake to do it was to get some assistance from the Federal reserve banks and at a low rate. The low rate of interest borne by these bonds was fixed with a view of holding down the expenses of the Government as far as possible. Anyway, that is something the Federal Reserve Board has no responsibility for. Likewise, in the Sixth Annual Report of the Federal Reserves Board the confession is made that the Bank rates should have been higher than market rates during the war period and that this normally should be the case. The Course of the Bank Rate. After America entered the war the Board took up the question of establishing preferential rates in favor of the short-term notes of member banks collateralled by government obligations.106 As a result of these deliberations the Board announced on May 22, that it would permit Reserve Banks to establish preferential rates of 32% on notes, drafts, and bills of exchange drawn by customers of banks, and indorsed by member banks, having a maturity not in excess of ninety days, and secured by Liberty bonds or by United States certificates of indebtedness. This step, the Board stated, was taken with a view to aiding member banks in placing bonds in the hands of actual investors who might not be able to pay their subscriptions in full at the time of receiving the bonds. The Board advised banks that it was their patriotic duty to avail themselves of the rates then existing on fifteen-day collateral notes which ranged from 3-32%. Money rates, the Board declared, would in this manner be kept "easy." On June 13, a 2-4% rate was established at the New York Federal Reserve Bank on member banks' one-day collateral notes, for the purpose of restoring to the market funds temporarily withdrawn through government loan operations.107 As the war continued changes were made in rates of discount corresponding to changes in the interest rate borne by government obligations. Alterations in discount rates affected primarily the fifteen- and ninety-day rates on war paper since this type of paper constituted about 90% of all the discounts made by the Reserve Banks during the war period. Rates of discount on different classes of paper scarcely varied through this period from one Regional Bank to another. Irre 106 Federal Reserve Bulletin, 1917, p. 425. 107 Fourth Annual Report of Federal Reserve Board, pp. 6, 37, and 256. |