The Wages of Inflation

Testifying before the Senate Finance Committee last week, Treasury Secretary Kennedy defended the recent rise of the prime interest rate as a normal and necessary response to inflation. Said he: "We are paying for past sins."

Maybe so, but those sins are yielding notably handsome wages for banks. Reports last week of banks' first-half earnings emphasize that, whatever else they accomplish, high interest rates produce high profits. Compared with the first half of 1968, net operating earnings at Manhattan's Manufacturers Hanover Corp., parent of the fourth biggest bank in the nation, rose 21% to $40 million.

Operating earnings climbed 13% at BankAmerica Corp. (the Bank of America), 11% at Chemical New York and J. P. Morgan & Co. and 10% at Chase Manhattan and Chicago's Continental Illinois--the Treasury Secretary's old bank. More modest increases were posted by First National City (6%) and Bankers Trust (2%). Some of the smaller banks really soared. Manhattan's Marine Midland Grace increased earnings by 31% to $7.2 million.

Bankers 'are quick to say that the net operating earnings they report are not quite the same as ordinary corporate earnings. "N.O.E." include profits from lending but do not include defaulted loans or losses on securities investments, which most banks have suffered this year. Under any circumstances, N.O.E. figures are somewhat misleading; they tend to overstate profits during times when securities markets are falling--and understate profits when markets are rising. As a result, accounting groups are urging banks to report straight net income as corporations do. Whether they do or not, bank operating earnings are likely to remain strong in forthcoming months.

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