Back in the mid-1930s, Perpetual Building Association of Washington was the largest savings and loan institution in the United States.

Today, under the name of Perpetual Federal S&L, the thrift institution's ranking is 50th is total assets ($968 million) and 59th in savings deposits ($780 million).

Although still the largest S&L in metropolitan Washington, Perpetual clearly has not been expanding at the rate of thrift institutions in the nation's other markets where population and wealth have exploded.

Of the 10 largest S&Ls today, 9 are based in California and they reported gains in deposits last year that ranged from 14 percent to 19.7 percent. Perpetual deposits advanced only 5.1 percent - a rate of increase exceeded by all but two of the 60 largest institutions.

All things being equal, one might assume that Perpetual has suffered from a sluggish management, one that hasn't sought aggressively to expand its base of savings business and home mortgage loan volume.

That is not the case and things are not equal under government regulations that have prevented Perpetual and other S&Ls based in the city from expanding naturaly into the metropolitan area market, as do thrift institutions elsewhere.

S&Ls based in Baltimore and Annapolis may enter the Washington suburbs under Federal Home Loan Bank Board policies that permit branching within a 100-mile radius of the home office.

But Washington S&Ls cannot expand beyond the 69 square miles of of the District of Columbia, of which only 22 square miles are privately owned. The reason is FHLBB policy allowing states to prohibit branching by out-of-state institutions. Perpetual has been permitted to retain four Maryland branches that were opened before the ban took effect.

To Thomas Owen, the president of Perpetual, the state line prohibition on new expansion adds up to a serious problem not only for the citys S&Ls but also for the welfare of the city itself. He can speak with credibility on the subject because his S&L long has been a lender to all areas of D.C., regardless of race.

Washington's S&Ls largely financed development of the area's suburban communities after World War II, following national government policy. Now, the same federal government is calling on thrift institutions to help finance a rebuilding of the cities - but the S&L asset growth has been in the suburbs, a market which Washington-based institutions cannot tap successfully without branches.

The problem has been evident for some time. A smaller competitor of Perpetual, Columbia Federal, sought two years ago to break out of the city by opening a branch in Montgomery Mall. Reportedly, at least one other city-based institution asked to file an application to branch in the suburbs shortly after Columbia's initiative.

Now, Perpetual has asked to open a branch at the new Lake Forest Mall under construction in Gaithersburg.

All of these proposals were filed initially with the Federal Home Loan Bank of Atlanta, which has jurisdiction over federally-chartered S&Ls in this region.But any decision on the attempts by Washington S&Ls to break across border will be made in Washington by the full bank board.

In both Atlanta and Washington, however, the reaction of federal officials has been quite similar. Reflecting the fact that a true "hot potata" is before the government regulatory officials, the Bank Board people don't want to talk about it. They note that there are other areas in the U.S. where state lines prohibit branching into at least some suburbs.

Bank Board officials have said they don't consider the Washington S&L documents to be formal "applications" because they could not accept applications that propose to violate policy. Their failure to admit that Washington S&L are seeking suburban branches doesn't satisfy Owen, who notes that the D.C. geographic situation is unique in the U.S., with no suburbs in the same jurisdiction.

"Washington needs the help of strong financial institutions for its urban construction and rehabilitation programs . . . however, S&Ls with their principal offices in the District are unable to participate as effectively as they could in this effort. . . They do not draw sufficient resources from their inner city branches alone to meet the city's urban lending needs," Owen said in support of his branch petition, which he calls formal application.

If bank board officials don't want to look at the Perpetual application, they might want to consider some of the information supplied by the S&L in support of its plea:

Of the area population of some 3 million persons, more than two-thirds now live in the Maryland and Virginia suburbs.

Between 1966 and 1977, deposits in S&L offices in Maryland grew at an average rate of 38.8 percent a year while deposits at D.C. S:Ls increased by 7.8 percent a year.

In 1965, Perpetual's D.C. offices accounted for 71 percent of deposits; by 1978, only 32 percent of Perpetual deposits came from city residents, indicating that growth occurred in the subudbs where Perpetual is prohibited from expanding along with suburban S&Ls.

During the first 10 months of 1977, of $260 million in mortgages on D.C. properties originated by S7/8Ls, all but $28 million came from thrift institutions in the city - showing that suburban S&Ls have little interest in aiding the inner cities.

In the best tradition of government-regulated businesses that want to pdevent competition, suburban S&L leaders opposed Columbia Federal and they will oppose Perpetual, too.

Perpetual, naturally, discounts the threats of competition, noting that more than 4,000 of its customers already reside in the Gaithersburg area and that savings deposit growth in Montgomery County is expected to grow by about $75 million over the next three years. - enough for many S&Ls to share.

Indeed, the questions raised by the Washington S&L appear to go beyond the simple issue of new business competition from an "out-of-state" institution in Maryland. If the federal government is to continue its prohibition on branching by the city's S&Ls, will there be some new policy requiring suburban institutions to take a more active role in financing rehabilitation of the District's housing?

Now that is a real hot potato.