Backlash Against the Bankers

Increases in interest rates have usually been tolerated as a necessary evil in the fight against inflation. Last week, after announcing the fifth rise in the prime rate since December, U.S. bankers were greeted by an uncommon backlash. Criticism of the move came not only from the perennial easy-money advocates but from other responsible sources. Their contention was that the bankers have been just too cavalier about the cost of money.

Warning from Treasury. Economist Norman Strunk, executive vice president of the United States Savings and Loan League, faulted the big banks for expanding their lending during May at an annual rate of 17%. "No wonder they ran out of money and had to raise their rate," he said. "While bank presidents have been publicly wringing their hands," added Strunk, "lending officers have been pouring gas on the inflation bonfire."

That view won official seconding from President Nixon's chief economist, Paul McCracken. He told the convention of the American Bankers Association in Copenhagen that bankers had continued "for too long making commitments to lend," when funds were obviously not going to be in limitless supply. Because of their "tardiness" in responsibly allocating credit, McCracken charged, the bankers set back the Government's timetable for slowing down inflation.

In Washington, Treasury Secretary David Kennedy sent a long-distance rebuke to some of the bankers, who had been talking freely in Copenhagen about ordering still another rise in the prime rate. Kennedy defended the latest increase but told bankers that in the future they had better "find other methods to make those difficult credit-allocation decisions." The clear warning from Treasury: No more increases. Meanwhile, the Federal Reserve Board is considering telling U.S. bankers to "voluntarily" limit their loans to the total that they now have outstanding.

Favored Customers. In the face of the obvious need to control inflation by restricting lending, the big banks have been circumventing the Federal Reserve's credit-tightening measures. To keep favored customers happy, they have even been willing to pay more for some funds than they can get by lending them out. Abroad, the banks have paid as high as 13% to borrow and bring home Eurodollars.

The banks lend their scarce funds largely to established corporate clients, and they continue enthusiastic promotions of consumer installment loans, which are enormously profitable. They turn down requests by smaller businesses, which are hurt worst by the credit restraint. Many small merchants are having trouble financing inventories.

Eventually, the cost of money will force managers of large corporations to reconsider some marginal capital-expansion projects. After a survey of 1,000 companies, Martin Gainsbrugh, chief economist of the National Industrial Conference Board, reports some retrenchment in plans to spend on new plant and machinery. Between the last quarter of 1968 and the first quarter of this year, planned spending dipped by 2 1/2 % and in some industries by as much as 10%. Gainsbrugh believes that the long boom in capital spending will level off through the year, as businessmen face up to a squeeze on profits and repeal of the 7% investment tax credit, and that by early 1970 such outlays may begin to contract. There is a rather general belief that the economy as a whole may slow down more quickly. President Nixon last week predicted that the restraining effects of the surtax extension would begin to appear "within a matter of two to three months."

Bleeding in the Markets. Worried about tight money and the economy's future, investors continued to unload stocks last week. The Dow Jones industrial average declined another 19 points to 876. Since it reached the year's high of 969 in mid-May, the market has dropped like a stone.

How much farther can it decline? The long slide is one sign that inflationary psychology is finally being broken--or at least dented. Most analysts agree that the market is oversold. Mutual funds harbor some $4.6 billion--or nearly 9% of their assets--in cash and 30-to-90-day Treasury bills. Brokerage houses hold about $6 billion in uncommitted margin money. That potential purchasing power could provide a lift to the market, but investors are awaiting signs of a loosening of credit. The signs may be a long time coming. Last week Thomas O. Waage, vice president of the New York Federal Reserve Bank, summed up: "Already some participants in financial markets are bleeding, and there will be more."

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