INFLATION JITTERS WORRY THE BANKERS

WITH considerable unhappiness, moneymen still vividly recall the episode in the late summer of 1966 that came to be known as "the credit crunch." Restricting the nation's money supply in order to slow a rapid price rise, the Federal Reserve Board acted so decisively that the financial markets reacted with hysteria. Interest rates rose rapidly, the Dow Jones average sank 25%, and many lenders were so short of funds that it became extraordinarily tough for corporations to borrow at all.

The Federal Reserve has been fighting inflation in much the same way so far in 1969, but until now the results have been less severe. Last week the board's policy of "resolute restraint," as Chairman William McChesney Martin describes it, hit home so hard that many bankers concluded that another crisis is imminent. "This is certainly the worst credit squeeze since 1966," said Beryl Sprinkel, chief economist of Chicago's Harris Trust & Savings Bank. "The question is whether it will get as bad as 1966. We're moving very rapidly in that direction."

Back to Rationing. To conserve scarce funds, most banks are turning down new corporate customers and rationing loans to regulars. Some are cutting off finance companies and mortgage-banking firms and generally refusing loans to finance corporate takeovers. The pressure is strongest on banks in the East and on the West Coast because they deal with many large corporations that need money to expand. The cost of borrowing, already at a 40-year peak, continues to rise. Bankers have stepped up their prime rate four times in the past six months, to an alltime high 7 1/2%, and speculation is widespread that they will soon increase it again. That expectation helped to depress the stock market last week. The Dow Jones industrial average fell 10 points to 938.

The most glaring trouble signals came from the jittery bond market, which ordinarily supplies 95% of the capital needed to finance U.S. business expansion. Some bond dealers describe trading conditions as the most disorderly in memory. So many banks are unloading their bond holdings to raise money for loans that underwriters are being forced to offer "shock prices" to sell new issues at all. Southern New England Telephone Co. last week paid 7.723% interest--the highest for any unit of A.T. & T. since 1921--to bring out $65 million in debentures.

All the "crunch" talk--the word was on nearly every banker's and broker's tongue last week--delights the Federal Reserve. The board interprets the commotion as evidence that its tight-money policy is now beginning to force banks to make difficult decisions about what to do with their funds, instead of trying to dodge monetary discipline by scraping up money abroad. So far this year, the Federal Reserve has allowed the U.S. money supply to grow at an annual rate of less than 2%. That is sharply below the inflationary 11% growth allowed in the second half of 1968, when the board followed an expansive policy that Martin now admits was an error. Today's economy is growing far faster than the supply of money available to finance that growth. Ultimately, the resulting collision between the demand and supply of funds is bound to curb bank lending and then business activity.

That Ugly Word. It can hardly happen too soon. Last week the Commerce Department reported that its index of leading indicators, an early-warning guide to the economy's future, rose sharply in April. The Labor Department estimated that wholesale prices jumped at an annual rate of 7.2% during May, up from 2.4% in April. Such figures only sharpen the debate about whether the Federal Reserve and the Nixon Administration are hitting inflation hard enough--or too hard. Also, for the first time in a long while, the ugly word recession is being bandied about in boardrooms. Some moneymen believe that the Government is risking "overkill"; others argue that it has to do just that. The surest way to persuade businessmen --and consumers--to restrain their spending is to convince them that good times are not a certainty, that they should salt away more savings. So there will be much discussion in the near future about the possibility of recession, though the chances of any major downturn occurring seem slim.

The board and the Administration remain convinced that their controls will slow economic expansion without stopping it altogether. The board would like to see industrial production slip from its present 5 1/2%-a-year growth to about 3 or 3 1/2% by autumn. Most bankers foresee no letup on the pressure for loans before June 15, the date by which corporations must pay their next income-tax installment. After that, lenders hope that borrowing will decline and that the long-sought cooling in the economy will become more apparent.

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