The Big New Bonanza for Savers

Neither a borrower nor a lender be--the real bread is going to the savers.

Thus might a hip Polonius summarize the frenzied rise in U.S. interest rates. Last week the biggest U.S. corporations had to pay a record--and painful--8 3/4% to borrow from banks.* Some banks will raise that "prime" rate further to 9% this week; it could go higher still, perhaps to 9 1/2% in the fall. The banks in turn had to pay as much as 10.3% to get money to lend; that was the highest rate offered last week to depositors who would buy $100,000 certificates of deposit (CDs). While borrowers and lenders alike groaned, savers rejoiced in the highest yields ever offered on even modest accumulations of money.

Early last month, Government agencies raised by a half-point the ceilings on interest for most types of small savings. On ordinary passbook accounts, banks are now permitted to pay 5%, and savings and loan associations 5 1/4%. From there, the bank ceilings rise to 5 1/2% on deposits made from 90 days to one year; 6% on one-to 2 1/2-year money; and 6 1/2% on 2 1/2-to four-year deposits. On CDs running for four years or longer, banks can now pay anything they please; the Federal Reserve Board requires only a minimum deposit of $1,000 and a penalty on the saver who withdraws his money before maturity.

In frantic competition for small deposits, banks and S and Ls are introducing higher-yielding varieties of $1,000, four-year CDs almost daily and touting them in blaring bold-headlined newspaper ads and breathless radio commercials. Last week these CDs generally paid 7 1/2% annual interest, but many banks raised the effective return to 7.79% by compounding interest daily. Manhattan's Union Dime Savings Bank advertised $1,000 CDs at 8 1/4%; daily compounding raises the effective rate to a towering 8.72%.

Some banks are luring deposits by offering CDs with variable rates that could go higher still. First National City in New York, for example, came out with a plan under which $1,000 deposited for four years will earn interest each quarter at a rate of a half-point below what the bank had to pay the previous quarter to attract $100,000 CDs. The rate this quarter is 8.11%; it can go either up or down from there, but never below the 5% passbook rate. Philadelphia's First Pennsylvania Banking and Trust Co. offers an "inflation-proof" $1,000 CD that will pay 7 1/2% to 10% interest, with the exact amount to be determined by how fast the consumer price index rises.

Being Stingy. The Federal Reserve touched off this wild scramble as part of its complex plan to calm the economy's inflationary exuberance. For some time, the Fed has been trying to dampen borrowing by being stingy in doling out reserves to banks, and early in the summer, Board Chairman Arthur Burns abandoned his attempts to hold rates down by jawboning. The board then became worried that depositors would pull their funds out of banks and S and Ls in order to buy higher-yielding Treasury bills or commercial paper, leaving the savings institutions with no money to lend at any price. The interest rate on 13-week Treasury bills has more than doubled in one year, to a record 8.32%. So the board decided to let banks pay whatever they had to in order to attract funds.

In essence, the board is trying to make credit scarcer and costlier without choking it off altogether. Loans are still available for a stiff price, but shortages are beginning to appear, and business borrowing is declining. Some Chicago banks will make loans only to longstanding corporate customers. A would-be new borrower is out of luck unless it happens to be a giant company. In July mortgage interest rates staged the fastest one-month rise ever and are now as high as 9% where state laws permit. Some S and Ls are raising down-payment requirements from 20% to as much as 33% and making mortgage loans for only 20 years instead of 25 or 30 years, in effect pricing that dream house out of reach for millions of Americans.

The dangers of tight money can be seen in Europe, where interest rates are higher than in the U.S. British banks now charge as much as 12% on business loans, and West German banks had to pay interest equal to 35% a year on overnight loans from each other. Unable to borrow, four German real estate developers recently went belly up, and Economics Minister Hans Friderichs coldly said that collapses of "unsoundly financed" firms are "absolutely in the sense of our policy." No one expects the Federal Reserve to go that far; Burns in 1970 proved entirely willing to expand the money supply quickly when a credit crunch threatened to cause many U.S. bankruptcies. There is still a risk, however, that the board will make credit scarce and expensive enough to discourage not only excessive but also necessary borrowing and thus invite a recession. Burns rates that risk low; "as of today, I consider the talk of recession premature," he said last week. Indeed, he warned of even tighter money to come. "If the restrictive actions already taken by the Federal Reserve do not reduce growth of money and credit to an acceptable rate, further measures will be adopted." In order to restrain the boom without killing it, though, Burns and his colleagues will have to exercise exquisite timing and judgment in deciding just how rare and costly to let credit become.

*It is typical of banks to also require borrowers to leave a portion of the loan on deposit, making the real cost of money about 10 1/4%.

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