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Even at a time when high prices throughout the country are tumbling, the profit-slicing which has been going on in Kansas City during the past few days is sensational enough to provoke consideration. Within an incredibly brief space of time the retail values attached to all articles of wearing apparel and shoes have been reduced by amounts equalling in many cases sixty percent. The sudden violence of the movement in this single district is sufficient to cause one to look beyond general conditions for an explanation.
A few weeks ago the Federal Reserve Bank in Kansas City inaugurated an entirely new system of rediscounts. The Reserve Board had come to the conclusion that, despite the prevailing high rates of interest, it was still far too easy for mercantile houses in the district to finance unwarranted expansion. This condition of affairs seemed directly traceable to the fatal facility with which commercial paper could be rediscounted at the Reserve Bank by the national banks, the amount acceptable for rediscount from any individual institution being limited virtually only by that banks' supply of eligible paper. In numerous instances, in order to meet their customers' demands, banks were borrowing sums vastly beyond the normal.
To remedy such a situation, a sliding scale of rediscount rates was adopted, notes beyond a certain amount sent in by member banks for rediscount being charged an advancing rate of interest, reaching even nine and ten percent when the total ran exceptionally large. The banks were thus hindered from increasing unduly the regular lines of credit extended to their customers, and the business firms, in their turn, unable to borrow further except at exorbitant rates, were forced when in need of ready money to realize on their merchandise. A late season, tardy deliveries, a generally slow market, and the necessity of selling brought the situation to a crucial point and the inevitable crash came.
The lesson of the nation-wide price-cutting wave is that under-consumption is as objective in reducing prices as is greater production. The Kansas City experiment reveals another method of bringing values back to normal. As yet the scheme has not been applied in other parts of the country. The plan has been to use Kansas City for an object-lesson, which, if heeded, will serve to prevent an equally dangerous situation from becoming acute in other cities. The warning may be enough--if not, legislation such as has proved so successful in Kansas City may have to be enforced elsewhere.
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