Bank Rate Cut

The financial sensation of the past week has been the completely unex- pected slash in the rediscount rate of the Bank of England, from 5 to 4 1/2%.

The recent 5% rate was inaugurated Mar. 5 this year, because of the policy of gold resumption in London. Before reassuming a free gold market, the British evidently wished to establish higher interest rates in London, in order to retain as much gold as possible, and draw thither gold from other countries. This aim has evidently been accomplished, and since the spring, gold holdings have advanced some -L-8,500,000.

Meantime, opponents of the Baldwin Government have not hesitated to attribute the current British business depression to this "high money policy." Prof. John Maynard Keynes in particular has assailed the gold resumption as a cause of unemployment and slackness in the British export trade. The cut in the Bank rate may be interpreted as the answer of the Baldwin Government to these charges. Yet undoubtedly the rate reduction has been really due to more serious factors, and has been justified by the strengthened gold position of the Bank of England.

The episode is of unusual interest and importance in this country because of the close connection now existing between the London and Manhattan money markets, and between the Bank of England and the New York Federal Reserve Bank. It is argued that the latter bank will scarcely raise its rate in the near future, since such a step might cause the British institution promptly to reverse itself and raise its rate once more--thus occasioning new trouble for the Baldwin Government and British fiscal operations.