A Strategic Withdrawal

"I turned on the television set and almost fell out of my chair," said a senior officer of the powerful First National Bank of Boston. What caused such consternation was the news of Lyndon Johnson's admonition to the nation's bankers not to increase their loan interest rates. In response to the rise in the Federal Reserve Board's own discount rate, the big Boston bank had just the day before become the third U.S. bank to hike its own prime rate, but Johnson's pressure changed all that. Said the First National officer: "By the time we got to work the next day, those of us who run this bank knew what we had to do. Our chances of winning this fight were zero." Out went the First National's increase--and with it, at least for the time being, went the hopes of bankers across the U.S. to raise their own rates.

Johnson had not only subdued the bankers but, quite unlike the case of President Kennedy's turnback of the steel price rise in 1962, left few visible scars on the business community. Business leaders, who like to borrow their money as cheaply as possible, were in no mood to complain. Wall Street was cheered by the continuing prospect of easy money; the stock market, which suffered its worst fall of the year (11 points) on the day that the Boston bank raised its rate, promptly recovered most of the lost ground. Such criticism as there was fell less on Johnson than on the backing and forthing of the First National. "Shame on them," growled Atlanta's Mills B. Lane, president of the Citizens & Southern National Bank, which had raised its prime rate and was left out on a limb.

Patriotism over Profit. Just after the Federal Reserve raised the discount rate a fortnight ago, the Administration used its well-tested jawbone tactics on top Manhattan bankers, who usually set the pattern in the national loan market. Treasury Secretary Douglas Dillon telephoned his old friends and, according to Wall Street insiders, Johnson himself got on the horn to some bank chiefs, notably Morgan Guaranty's Henry Clay Alexander. The Administration satisfied itself that the New York bankers would make no immediate increases, partly because their supply of money was well ahead of the loan demand from cash-heavy U.S. corporations. To keep them in that mood, the Federal Reserve last week pumped more than $1 billion into the banking system.

A couple of other banks outside New York did indeed hike their prime rates from 4 1/2 to 4 3/4%, but Johnson was unworried because, as one of his aides said, "hell, they haven't got any prime customers to loan to anyway." When the Boston bank risked a jump, there was cause for alarm. The Administration considers the First National to be one of the few non-New York banks with enough power and prestige to lead a nationwide raise in prime rates, as in fact it had done in 1956. Its president, Roger Damon, 58, is a tough-minded innovator who is much more daring than most bankers and likes to upset what he calls "accepted dogma" in banking. To prevent the nation's 16th largest bank from leading a breakthrough to higher rates, Johnson wrote his plea into a previously prepared speech (see THE NATION). He chose the blue-ribbon Business Council for a declaration that a bank-rate rise was unjustified and "might slow down our economic advance." The Boston bankers felt unable to rebuff the President.

Now to Labor. That was all well and good, but the business community now looks more than ever for Johnson to devote equal time to pressuring labor to keep its costs in line. As the bankers were rescinding their plans to raise rates last week, the United Steelworkers' embattled President David J. McDonald demanded a "substantial" pay raise on top of such fringes as double-time pay for overtime and longer vacations. While McDonald put no price on his package, it surely exceeded the Administration's 3.2% guideline. Did McDonald feel bound by the guideline? "I never have and I never will," he snapped. Pittsburgh reckons that it is closer to a long and bitter strike than at any time since the 116-day walkout of 1959-60. The industry's contracts expire May 1, and Johnson may well have a rougher time with the steelworkers than with the friendly bankers.

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