Battle of Interest

Rarely in recent years had there been such a rush by banks and savings and loan associations to lure deposits from the public. From New York to Los Angeles, financial institutions splurged with big-sized ads offering the average saver a return of 4 1/2%, 4.85%, even 51% . This growing struggle for savings is the most vivid result to date of the Federal Reserve Board's month-old boost in the discount rate and its simultaneous increase (from 4 1/2% to 5 1/2%) in the maximum interest that banks may pay on time deposits of 30 days or more. Some of the combatants seem distinctly unhappy--but the battle is on. Like the reward for saving, the cost of borrowing has shot aloft in response to the Reserve Board's action. The impact has fallen chiefly on businessmen; by last week almost every commercial bank in the U.S. had lifted its minimum rate on commercial loans 1/2%--to 5% or more. Interest rates on home mortgages jumped by at least 0.1% in many areas; in Chicago the typical rate climbed from 5 1/2% to 5 3/4%. Auto buyers will begin to feel the rub next month--not from higher interest rates but from slightly higher prices in some cities. Reason: major finance companies, California's giant Bank of America and several Philadelphia banks boosted from 5% to 5 1/2% the rate that they charge to bankroll stocks of cars in dealers' hands.

The tug of war for consumers' savings spread out spottily across the nation from New York, increasing in complexity as it grew. Most big Manhattan commercial banks lifted their rates from 4 1/4% to 4 1/2% on certificates of deposit--the most popular form of time deposit. They also began offering a wider variety of minimum denominations (generally $1,000 to $2,500) and time limits (six to twelve months) to broaden the appeal of C.D.s from corporations to individuals.

Long Island's $1.5 billion Franklin National Bank, a traditional maverick, offered 4.8% for five-month savings certificates (a form of deposit certificate) as small as $19.69. At least 15 New York savings banks hit back by lifting their savings-account rate to 4 1/2% -- a full 1/2% above the legal limit for rival commercial banks. Last week the 4 1/2% savings rate spread to S. & L.s in Minneapolis, Dallas, Kansas City and parts of Missouri. By week's end, savings and loan men estimated that 250 S. & L.s and at least 100 banks had raised their rates on regular or certificate-of-deposit savings.

Predictably, these pressures produced demands for restraint by lenders and for more federal controls. The New York State Savings Banks Association urged the Federal Reserve to reduce the competition by establishing "guidelines" calling for a $25,000 minimum on commercial-bank certificates of deposit. Reserve Board Member Sherman Maisel cautioned bankers that raising interest rates on savings could prove "inefficient and dangerous." Nonetheless, the temptation seems likely to increase. It will take another three to six months before the full effect of the discount-rate increase filters through the complex U.S. economy.

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