Rates cannot be studied to advantage without also studying the general problem of credit policy. Evidently, if rates were raised or lowered without any reference to credit policy, they would be a minor influence. If the Reserve Bank refused to rediscount, it would make no difference what rate was theoretically in effect. In prewar times, under British practice, the "rate" was the cost of getting a reserve credit which was limited only by the amount of available "eligible" paper that could be presented. During the war the rates then fixed implied a readiness to lend up to any amount on the kind of paper - chiefly government-obligations-collateraled notes - which constituted the staple of bank operations at that time. Since the war there has been an attempt to reduce or "ration" credit, especially those forms of it that were uncertain of maturity or of self-liquidation, and which hence constituted a source of danger in respect to inflation. The real question to-day, in so far as the commercial rate for money is concerned, is whether there has been a relaxation of credit policy - a change in the attitude adopted with respect to rediscounting.

This outline of the general theory and practice of central, or Reserve, bank rates and their relation to commercial rates should, however, be regarded as merely the general statement of the case. In individual instances a member bank which at the time is "loaned up" and which in order to make any further loans to a customer is obliged to rediscount that customer's paper with the Reserve Bank, may say to such customer that it will not lend to him except at a rate fixed by the Federal Reserve Bank plus the banker's own indorsement commission. This, however, is the exceptional case. But, as stated, ordinarily no such direct connection between the reserve rates and those of the rank and file of the banks exists. The reserve rate is presumably fixed at such a figure as will result in maintaining a fair balance between the outstanding liabilities of the reserve, or central bank, and its cash assets. As the rate is lowered the central bank theoretically stands ready to rediscount or purchase any amount of eligible paper that may be offered to it. As the rate is advanced the amount of offerings of paper which would otherwise be presented is cut off because the profit is not large enough. Thus the central bank maintains a balance between the amount of overdue credit available and the cash on hand. This is the theory upon which the Bank of England has worked for many years, and before the war developed the well-known rule that the rediscount rate should always be slightly ahead of the market rate That is to say, if funds were being loaned, say, at 6 per cent in ordinary bank transactions on a given kind of paper, the Bank of England rate would be perhaps 6 1/2 per cent. The bank, however, always reserved the right to make, and did habitually make, a so-called private rate at which it dealt with customers as it saw fit, while it stood ready to take any amount of paper at the official rate. In the United States this plan has been varied and Reserve banks make only one rate on each kind of paper, while they have seldom or never stood ready to take unlimited amounts of such paper, but have kept to the privilege of refusing it or rejecting it on various grounds. The result has been that the market relationship between the rediscount rate and the commercial rate which existed in England before the war has not prevailed in the United States. War finance has established a condition which probably would have made a reproduction of the Bank of England policy in exact terms impossible. As it stands to-day, therefore, the Reserve Bank rate may be described as being simply the rate at which banks may count upon being able, up to a reasonable figure, to rediscount certain narrowly limited kinds of commercial paper with the Reserve Bank, while from the internal standpoint of the Reserve Bank the rediscount rate is looked upon as a rate which comes nearest to establishing a proper balance or relationship between outstanding liabilities and vault cash. It cannot be stated that there is no direct relationship between either market rates for commercial paper or call rates, on the one hand, and those of Reserve banks, on the other. Reserve banks, however, have established rates which vary considerably for the different classes of paper. In a general way they have pursued the principle of making the rates higher as paper grew longer, higher as the nature of the loan was less liquid, and higher according as the paper was or was not thoroughly protected by indorsements. The rate has been made lower for shorter paper, lower for well-indorsed paper, and lower for highly liquid paper. Thus bankers' acceptances have usually been given the lowest going rate, while the highest rate has been paid for long-term agricultural loans of a maximum maturity of one hundred and eighty days. Commercial paper has paid the highest rate for ninety-day accommodation, and the lowest for shorter terms - sixty, thirty, or fifteen days. During the earlier years, after the organization of the Reserve system, the rate policy was highly complicated and resulted in the establishment of many rates, varying oftentimes by almost imperceptible amounts from one another. The coming on of the war and the establishment of special rates designed to facilitate the sale of public bonds tended to make this rate policy still more complex. Since the close of the war the practice has been considerably simplified, and the tendency to-day at most Reserve banks is in the direction of a limitation of the number of rates that are made and toward the classification of paper upon rather broad lines.