Prime Contest

Ever since the prime rate appeared in the '30s as a measure of what the bluest-chip corporations must pay for a bank loan, commercial banks have agreed about what that interest charge should be. Sometimes it has taken a few days; once, in 1958, it took a week for the pacemaking banks to fall in line with a lower rate. But for a fortnight some 40 of the nation's biggest banks have, to their consternation, found themselves in an unexpected battle over "the prime" with Chase Manhattan, New York City's biggest and the nation's second largest bank.

Chase dropped a bomb on Jan. 26 by cutting its prime rate from 6% to 5 1/2% --the first such drop in six years. Though delighted, even Administration economists were surprised by the size of the slash. "Too much, too soon," chorused other bankers, who next day began cutting their rates half as much, to 5 3/4%, in a half bow yet pointed rebuke to Chase. Then they sat back to watch loan demand swamp Chase with more business than it could handle.

Quiet Pressure. Through last week, no such stampede had arisen. Instead, some companies quietly began feeding deposits into Chase Manhattan, hoping thereby to pressure other banks to slice their prime rate to Chase's 5 1/2% level. At a news conference, Chase Chairman George Champion casually noted that his bank had about $1 billion in cash and other quick assets to meet any surge in loan demand. By week's end, Chase had withstood two weeks of the split-level struggle, and many businessmen were betting that the bank would emerge the victor, thus raising its prestige in a business where prestige counts for a lot.

"Everybody will be down to 5 1/2%," predicted Vice President-Comptroller John W. D. Wright of International Harvester. "It's only a question of time." Said President Mark C. Wheeler of Boston's New England Merchants National Bank: "My own belief is that Chase is going to make 5 1/2% stick. The demand for funds has been a little less and the supply of money a little larger than expected."

That is just how Chase Manhattan saw the trend. "Normally, there is a marked increase in bank loans in December," says Executive Vice President George A. Roeder Jr., "and a marked decrease in January. The December increase did not materialize." Meeting that portentous January day, Chase Manhattan's top officers also noted that interest rates had slipped as much as one percentage point from their 1966 peaks. High-grade corporate bond yields were down from 5.56% to 5%, municipal bonds from 4.26% to 3.50% and 91-day Treasury bills from 5.74% to 4.40%. the slide continued last week. Several banks and finance companies cut the interest charged auto dealers to carry car inventories from 6 1/2% to 6%. New York's Morgan Guaranty Trust Co. reduced its rate on 90-day certificates of deposit from 5 1/2% to a flat 5%.

Expanding Credit. How the prime-rate battle ends depends more than anything else on the Federal Reserve Board. With the economy cooling off, the board allowed bank credit to expand at an annual rate of 9% during December. Preliminary estimates last week put the January expansion at about 15%. With that, Wall Street analysts figured that the board's next move might even be a cut in bank-reserve requirements--which would spread an easing of credit across the nation.

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