The Thaw

Interest rates, the most important regulator of the pace of business and the prosperity of nations, fell abruptly last week at home and abroad. It was the first general drop in the U.S. cost of money in more than six years. As the effects ripple through the economy, this could mean lower borrowing costs for businessmen, home buyers and other consumers, give a nudge to such sluggish segments of the economy as housing, auto and appliance sales.

The tight-money thaw began as the Bank of England cut its lending rate from the crisis level of 7% to 61%, and sent bank messengers sprinting about London's City to spread the news. Within hours, Chase Manhattan Bank, New York City's largest and the second biggest in the U.S., lowered its prime rate --the minimum interest charged for loans to the biggest customers--from 6% to 51%. Explained President David Rockefeller: "While loan demand is still strong, it is less than it was a year ago." Though the British action had been widely anticipated, Chase Manhattan's move struck some sparks.

Pleased. President Johnson, who has been pressuring for a substantial easing in monetary policies, let it be known he was "pleased." But many a moneyman growled that the Chase's rate cut seemed too much, too soon. "A case of acting without regard to supply and demand," insisted President Mills Lane Jr. of Atlanta's Citizens & Southern National Bank. Fitting deeds to the dogma, other commercial banks, led by Manhattan's First National City, next day cut their prime rates only half as much, from 6% to 5 1/2%. If the rate settles across the U.S. at that level, Chase Manhattan could avoid a deluge of loan demand only by conforming.

Still, the bumpy rate cuts dramatically signaled an end to the pressures that last year drove interest in the U.S. to a 45-year peak. When the Federal Reserve Board hiked its discount rate from 4% to 41% in late 1965 to fight inflation, commercial banks lifted their prime rate in tandem from 41% to 5%. As loan demand soared, the prime rate moved up three more times by mid-1966--a 33% increase in eight months. Since September, the squeeze has eased --imperceptibly at first but lately significantly. Yields on 90-day Treasury bills have slipped to 4.54%, compared with 5.49% as recently as November. Interest rates on corporate and municipal bonds have declined as much as a fifth from their summer peaks.

Two weeks ago, most Manhattan banks shaved the rate that is paid to savers on large certificates of deposit from 51% to 51%. Last week that rate fell to 51%. One result is that savings again are flooding into savings and loan associations, the No. 1 source of mortgage money (which is also growing cheaper).

A Call to Disarm. Behind the drop in interest rates both in the U.S. and Britain lay an event of seemingly superficial but potentially vast consequence. Last year interest escalation by major Western powers took on the character of an international rate war, much to the damage of prosperity in Britain and West Germany. Hoping for what he called "a measure of disarmament in interest rates," British Chancellor of the Exchequer James Callaghan met for a Saturday-Sunday session at Chequers, the Buckinghamshire country residence of British Prime Ministers, with U.S. Treasury Secretary Henry Fowler and the finance chiefs of Germany, France and Italy. Their aim: coordinated reduction of interest rates in the U.S. and Europe. They agreed, Callaghan reported last week, that "interest rates are too high and that we aim at a generally lower structure of rates." Despite its apparent desire to ease interest rates further, the U.S. Federal Reserve cannot just turn on the spigot unless there is comparable action abroad. At least $2 billion of interest-sensitive Eurodollars--U.S. dollars on deposit in foreign banks--poured back into the U.S. last year. If falling U.S. rates reverse that flow, it would deepen the already worrisome U.S. balance of payments deficit, putting further strains on the dollar abroad. Similarly, the British dared only a cautious cut in rates to help stagnating industry lest a bigger step put new pressure on the pound. The Chequers "miniSummit" produced a mere gentleman's agreement, but it recognized as never before the growing interdependence of the economies of the U.S. and Europe, and so of the need for policies that mesh.

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