Spending Abroad, Lending at Home

Both in business and Government last week, money was very much on men's minds. Government policymakers were worried that businessmen are spending too much abroad, were also concerned about signs of tighter money and higher interest rates at home. Businessmen were increasingly disturbed by evidence that the Government--through pressure, persuasion and official guidelines--is intervening deeply in some private realms of the money market.

Reassurance Needed. Business plans this year to increase its overseas spending for plant and equipment by at least 20% (to $7.4 billion or more), which some take as proof that the Administration's vaguely worded appeal for "voluntary" restraint has been a flop. Reports of White House dissatisfaction with this approach, which had been advocated by Commerce Secretary John Connor, were so widespread that Lyndon Johnson had to reassure Connor of his continued confidence. The Secretary did some reassuring too. "Businessmen definitely are not letting me down," said Connor, who once warned that if he failed businessmen would "find a professor sitting in my chair." Connor insisted: "I was for the voluntary program all the way, and I still feel it is the right approach. Mandatory controls are not wise or warranted."

Connor points out that U.S. businessmen have repatriated about $500 million that they previously held abroad, financed much of their overseas expansion by borrowing heavily from foreign banks. Still, Connor's program, which covers 500 major corporations, has been less successful than the Federal Reserve Board's program covering bank lending abroad. The banks have been flatly told not to increase their foreign loans by more than 5%, and they have kept within that limit; last week, at the annual meeting of the American Bankers Association in Chicago, many bankers complained that too much pressure was being put on them and that more ought to be applied to business. The Administration now intends to harden Connor's program, may well put through more explicit though still "voluntary" limits on overseas investment and require that companies report precisely on each planned move abroad.

In a Bind. While constricting the flow of money abroad, the Administration is most anxious not to let money tighten too much at home. The U.S. supply of money has already begun to tighten, largely because of the record demand for credit. Bank loans have risen 16% this year to a total $48 billion; corporate loans and consumer credit are each rising by about $1 billion a month. Worried about the possibility of inflation, the Federal Reserve Board has contributed to the tightening simply by not adding enough to the money supply to keep up with loan demand. The board in the past two weeks has injected $1 billion to ease the situation. But the Administration, which is committed to an easy-money course for the economy, is urging the Federal Reserve to loosen up still further and private bankers to hold down interest rates.

The bankers are in a bind. They pay 4% or more for deposits, but lend money out to prime borrowers at 41%--a spread that hardly pays their handling costs. They are afraid to raise their own prime rate (on which all other lending rates are based) because three banks that tried to do so last year were forced to retreat after President Johnson publicly criticized them. Last week Arthur Okun, a member of the Council of Economic Advisers, pointedly warned against such increases. Treasury Secretary Henry Fowler told the A.B.A. meeting in Chicago that steady interest rates are "an important factor in the greatest and best-balanced period of domestic prosperity in our history." He also privately laid down a new Administration guideline: no across-the-board increases, though some boosts will be tolerated.

Bankers were aggrieved that they could not up all rates, yet relieved that the Government apparently will not muscle down the selective raises they have recently posted. After Manhattan's Chemical Bank two weeks ago increased its rates on loans to finance companies from 4 1/2% to 4 3/4%, other major banks followed. Last week the world's largest lender, California's Bank of America, said that it has been selectively increasing rates to many borrowers, and the Chase Manhattan announced that it will pare down the number of customers eligible for the prime rate. But borrowing will probably continue to increase, if only because businessmen are entering the Christmas buying season when they traditionally borrow enthusiastically to support inventories. Thus, whatever bankers do or the Administration says, the money tightening is likely to increase--and so is the debate.

This file is automatically generated by a robot program, so reader's discretion is required.