Effect on Money Market

Whatever the old international significance of a rise in the Bank rate, the motive for the recent advance in New York must be sought in this country alone.

In respect to the general money market, the raising of the New York rate has another and even deeper significance. The classical law of rediscount banking is to keep the rediscount rate above the open market rate, in order slightly to penalize rather than subsidize the bank applying for the rediscount.

The Federal Reserve system has followed this principle only occasionally. Now on Feb. 21, while the New York Bank rates still stood at 4, the market for acceptances had risen to 4-4 1/8 and for commercial paper to 4 3/4. This situation was partially remedied by the end of the week; with the rediscount rates at 4 1/2 acceptances stood at 4-4 1/8 and commercial paper at 4 3/4-5. Thus the Bank rate is now slightly higher than the rate for acceptances, but slightly lower than that for paper.

To keep Bank rate above market rate for paper, a 5% rate would be necessary, and so violent an advance has evidently been considered undesirable for the present at least.

The recent advance of the Reserve rate is reassuring proof that the Reserve authorities realize this possibility and are already taking steps to obviate it.