At New Peaks

Two separate but related kinds of financial crises crept closer to reality last week for the non-Communist world. The continuing Washington impasse over higher taxes and lower federal spending--the fiscal antidote for inflation--caused an ominous upward surge of U.S. interest rates. Abroad, the paralysis of France helped to lift gold prices to a new peak, renewing anxieties about the international monetary system. "We're all in the same boat," said Chairman Howard C. Petersen of Philadelphia's Fidelity Bank, "and it's not necessarily only our end of the boat that's leaking."

Interest-rate records toppled like tenpins last week in the Wall Street bond and money markets. At the weekly auction of short-term Government securities, three-month Treasury bills sold at an average discount rate of 5.85%, beating the old peak of 5.59% set during the September 1966 money squeeze. Later in the week, the price of the same bills fell enough to raise their yield to 5.93%. Indianapolis Power & Light Co. paid 7.07% interest to sell $25 million worth of corporate bonds to finance construction; it was the most expensive borrowing of its type in U.S. history.

Dumping the Remnants. Investment bankers and dealers were forced to dump large unsold remnants of several new bond issues at substantial losses. For example, about two-thirds of a $70 million issue of gilt-edged (triple-A) Chesapeake & Potomac Telephone Co. of Maryland bonds was spurned by wary investors when offered at an interest yield of 6.73%. After the underwriting syndicate headed by Morgan Stanley & Co. disbanded, freeing the bonds to the forces of supply and demand, their price fell enough to fatten the yield to 6.92%. Even among income-tax-exempt securities, yields approached an unheard-of 5%. Thirty-nine local housing authorities paid an average 4.75% interest to sell $146 million worth of bonds, highest in public-housing annals. Soaring interest levels prompted New York City Comptroller Mario Procaccino to reject bids on $71 million of notes and City Finance Director Edward J. Martin of Philadelphia called off a $29,375,000 bond sale with a blast at "exorbitant rates."

The cost of borrowing by consumers began to climb as well. New York's First National City Bank, for example, raised its discount on unsecured personal loans of 36 months or less from $5.25 to $5.75 per $100. At its new level, that discount is equal to about 11% true annual interest.

There was growing speculation on Wall Street last week that the Federal Reserve Board would soon feel forced to raise its-discount rate for the fourth time since November, or take some other new credit-tightening step against inflation. With the Reserve Board applying its monetary brakes, the growth rate of bank reserves in 1968 has shrunk to 3.5% a year compared with 9.8% for 1967. But because inflation is still growing, bankers expect even stronger measures. "If deliberate action isn't taken to reduce inflationary pressures and decelerate the wage-price spiral," warned James Duesenberry of the President's Council of Economic Advisers last week, "we risk creating a situation which can only end in recession."

Lately the inflow of bank savings deposits has slackened as well, causing widespread fears that depositors will soon begin taking their rainy-day funds out of institutions to put them into higher-paying bonds and other securities. The banks are unable to raise their bid for savings: almost all of them are al ready paying as much interest as authorities allow (61% for example, for large-sized six to twelve month certificates of deposit in New York).

Testing the Tiers. In the renewed flurry of gold speculation prompted by France's political crisis, the free-market price of the metal rose to a new high of $42.60 per oz. in London last week. That brought out enough sellers to push the price back down to $41.75 at week's end. The drop eased concern that the speculators might wreck the two-tier system of gold prices that has unhitched the gold market from the $35-per-oz. gold price for monetary reserves. Still, the system's durability depends chiefly on how fast the U.S. regains control over its inflation and persistent balance of payments deficit. As last week's rise in interest rates showed, the U.S. is still losing ground in that battle.

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