Bank Rate

When the New York Reserve Bank raised its rediscount rate from 3 to 3 1/2 % (TiME, Mar. 9), financial London at once showed something nearly akin to excitement. If the pound sterling is to be put back on a gold basis shortly, gold shipments to the U. S. must be prevented; and the easiest way of doing this is to keep London interest rates higher than those in Manhattan. This, of course, tends to attract capital from the U. S. to the British center, and so support the exchange rate for sterling with U. S. dollars.

At once 'the Bank of England appeared in the London open money market as a borrower, and succeeded in driving up the market rates for funds. On the following Thursday, when the Bank's directors met, the "Old Lady of Threadneedle Street" raised her rediscount rate from 4 to 5%. Obviously the move was occasioned by the earlier action of the New York Reserve Bank, and designed to make London a more profitable centre for lenders than is Manhattan.

Historically, of course, Britain has been the leading creditor nation of the world, and the Bank of England rate has been accustomed to leading rather than following. For the time being, however, this former situation has been exactly reversed; and when the Wall Street money merchants snap the whip, Lombard Street must jump. Britons have the same unquestioning faith in the Bank of England as in the monarchial form of government; and to financiers of the older school this episode of London's setting her money rates by those of the U. S. centre is indeed humiliating. Many indignant gentlemen have protested to the leading newspapers. Yet, until British finance is thoroughly reconstructed, the practise will probably continue.