The Federal Reserve Rate Controversy

Report Outline
Character of the Federal Reserve System
Economic and Financial Issues

On September 6, 1927, the Federal Reserve Board, by direct order, established a rediscount rate of 3½ per cent for the Federal Reserve Bank of Chicago. This was the first occasion in the history of the Federal Reserve System on which the Board established a rate without a prior application from the Federal reserve bank affected, although it is understood that there have been cases in the past in which a rate change was requested in response to pressure from the Board and against the judgment of the directors of the bank affected.

The action taken by the Board in this case has aroused a great deal of criticism. The most vigorous opposition has been voiced in Chicago but there have been numerous protests in the East as well. The Chicago Journal of Commerce said:

“Feeling among Chicago bankers has reached the boiling point. It is so intense that none dares speak his mind. At five o'clock last night bankers who ordinarily leave their desks at 2.30 were sitting about in little groups discussing the thing.