Stable colloidal suspensions of rodlike cellulose crystallites, prepared by acid hydrolysis of cellulose fibers, form a chiral nematic phase above a critical concentration. The direction of the chiral nematic axis may be controlled by applying a strong magnetic field. In the presence of Congo red, a dye with strong affinity for cellulose, the suspensions show induced circular dichroism (ICD) at the dye absorption wavelengths, indicating that the dye molecules are in a chiral environment. The isotropic suspension shows a relatively weak positive ICD peak, while the chiral nematic phase shows a very strong negative ICD peak when viewed along the chiral nematic axis. The peak is weaker for unaligned chiral nematic samples and is very small when viewed at right angles to the chiral nematic axis. Thus the ICD in the chiral nematic phase results from the orientation of the dye molecules in a chiral nematic array. The ICD band intensity increases with chiral nematic pitch.