Squeeze on the Banks

The cost of borrowing money has been rising rapidly ever since the Federal Reserve Board decided last December to get tough about inflation. Last week the deliberate squeeze on credit pushed many interest rates to the highest levels since 1929, causing considerable anxiety among bankers. Many moneymen fear that one more turn of the Federal Reserve's monetary screws might, as the Bank of America put it, cause "serious disruption in the financial markets and create conditions that would generate a recession."

Banks last week charged government bond dealers as much as 10% a year for loans to finance their holdings of securities. Interest rates on tax-exempt local bonds reached new peaks. Cobb County, Ga., for example, paid 6.49% interest to float an issue. A block of Government-guaranteed local public-housing bonds was offered to investors at a record annual yield of 5.55%. For a person in the 50% federal income-tax bracket, that is the equivalent of an 11% return before taxes on ordinary stocks or bonds.

Commercial bankers were strapped for funds. To discourage borrowing by big corporate customers, the bankers are talking more and more about increasing their 71% prime rate. Roy L. Reierson, senior vice president of Manhattan's Bankers Trust Co., went so far as to suggest that the prime rate ought to be lifted to 10%, if only to "shock" businessmen into holding down spending.

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