The Economy: 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.