Signs of Strain

Is the nation heading toward another tight-money squeeze? Bankers and businessmen hoisted storm warnings last week -- and many of them also pointed an accusing finger at Washington.

"The demand for long-term credit," said Vice President Tilford C. Gaines of the First National Bank of Chicago, "is running well in excess of the available supply of money." As a result, despite Federal Reserve pressure to keep borrowing costs low enough to stimulate the economy, interest rates on corporate and municipal bonds have climbed back to a point close to their 1966 peak. As the money pinch began easing late last year, yields of Aa-rated corporate bonds dropped from September's 6.35% zenith to a low of 5.20% by the end of January. By last week, the rate was back to 5.95% and still going up.

After the Spree. Businessmen had plenty of explanations for the new signs of strain, none of them comforting to would-be borrowers. Many companies, having spent so much to keep up with the economic spree of the past six years, were borrowing to replenish their coffers or pay off short-term bank loans. Says Donald C. Miller, vice president of Continental Illinois Bank & Trust Co.: "The difficulties of the money panic last fall are still so real that companies do not want to go through that again." Guy E. Noyes, senior vice president of Manhattan's Morgan Guaranty Trust Co., blames much of the demand on businessmen's desire to "beat the central bank" by borrowing before the Reserve Board again tightens up on credit to fight inflation.

Some firms also figure that the rising federal deficit will force the Government to pre-empt borrowable funds later in the year. Indeed, Treasury Secretary Henry Fowler admitted to Congress last week that falling corporate tax revenues and climbing Pentagon spending will push this year's deficit to $11 billion, or $1.3 billion more than the Administration forecast only four months ago. Fowler also predicted that the red ink might soar to an inflationary $24 billion in election year 1968 if war costs continue to escalate or if Congress fails to raise taxes. Accordingly, Fowler asked for a $29 billion boost in the U.S. debt limit--to a record $365 billion.

The Real Pressure. The Treasury boss also asked Congress to lift its long-established 41% interest-rate ceiling on Government bonds of more than five years maturity lest there be "a sharp rise in short-term rates." Another upward pressure on interest rates is the U.S. balance-of-payments deficit; last week the Commerce Department reported that the deficit jumped 19% from the fourth quarter of 1966, to $539 million during this year's first quarter.

Unpleasant as that sounds, bankers privy to the Government's own figures insist that it understates the problem by including special "nonrecurring" deals. Without these, the deficit would be double what the Administration admitted. Even on the Commerce Department's basis, the deficit is running at an annual rate of more than $2 billion, compared with $1.4 billion in 1966.

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