In 1886, a strike at the McCormick Harvester Co. plant in Chicago was the catalyst for the infamous Haymarket Square riot, one of the bloodiest labor confrontations in U.S. history.

On Nov. 1, 1979, there was another strike at the company which was founded by American inventor Cyrus McCormick. This 172-day shutdown of International Harvester Co. produced no bloodshed, killings or serious violence.

But in the end, the strike--settled on an inconclusive note--brought the once-proud International Harvester to its knees. It survives today on bank loans.

The company has canceled plans for its 150th anniversary celebration. Instead of pageantry, 1981 has been a year of poverty. Harvester executives have huddled with representatives of 225 banks to find a way to keep the company going until the markets it serves--agricultural equipment, heavy trucks and construction equipment--recover from a severe recession and high interest rates.

If Harvester's bankers accept the company's latest debt proposals, the company may have two more years to work out its problems. If they do not, International Harvester faces the likelihood of bankruptcy.

"This deal has to be done this year," said a banker close to the negotiations. Even if the complicated realignment of Harvester's $3.4 billion debt is renegotiated, the company is not out of the woods. Harvester needs cash to operate on a daily basis and losses will have reduced that working capital to virtually nothing by the end of the year.

Harvester desperately needs to sell more products, but the likelihood of serious improvement in its shrunken markets before late next year is slim, says Eli Lustgarten, of Paine Webber Mitchell Hutchins. Harvester's banks will have to ante up more money, in addition to stretching out repayments on the $3.4 billion the corporation already owes, Lustgarten said.

Harvester remains the dominant company in heavy trucks and the second most important producer of farm equipment behind John Deere & Co. But the truck and farm equipment market has been shrinking rapidly in the last two years. The company would like to sell its construction equipment operations to come up with more cash, but so decimated is the industry that finding a buyer would be difficult.

In retrospect, Harvester's problems are all too clear. It did not have the financial resources to weather a 172-day strike, then face two years of severe recession in the markets it serves.

In its fiscal 1980 (which ended Oct. 31, 1980), International Harvester lost $397.3 million on sales of $6.3 billion. Through July 31 of this year the company lost $74.2 million on sales of $5.3 billion. But the loss is deceptive: It was tempered by a one-time gain of $275 million on the sale of the Solar Turbine division to Caterpillar Tractor. On its continuing operations, Harvester lost $353.8 million, despite layoffs and other stringent cost-cutting maneuvers.

The hemorrhage of losses follows a 1979 in which the company had record sales of $8.4 billion and record profits of $369.6 million. While sales rose about 25 percent in 1979, profits nearly doubled. Analysts attributed the performance to new chairman Archie McCardell's cost-cutting and modernization programs.

The cost-cutting continues apace, but no longer is merely aimed at making Harvester the lowest-cost producer in the world. It is designed to keep a gasping company alive.

Harvester has frozen 30,000 white collar salaries, cut executive salaries 20 percent and realigned its corporate structure to eliminate 2,000 jobs.

Of the 36,000 United Auto Workers at Harvester's plants in the United States and Canada, 10,000 are on permanent layoff and another 20,000 will be out of work from Dec. 14 until at least Jan. 4, when Harvester shuts down virtually all of its North American operations because of slack demand for its products.

So far it has not gone to the United Auto Workers to seek a readjustment of the terms of the contract, which expires next October. "There are some who think they should," said one banker.

Union officials, who will not discuss Harvester on the record, refused to say what they would do if the company made such overtures. There is a huge residue of ill will toward Harvester among many rank-and-file union members.

They feel that McCardell--who left the presidency of Xerox Corp. in 1977 to head a company primarily family directed since its founding--set out to teach labor a lesson that it didn't need to learn. McCardell took the strike in order to eliminate what he said were an extra $1.3 billion in costs caused by work rules.

Both sides claimed victory when the strike was settled in late April of last year. But whoever won, the victory was pyrrhic. By the end of the strike Harvester had lost $400 million in potential profits and its short-term debt climbed from less than $450 million to more than $1 billion. Debt has been climbing ever since.

When the strike ended there was no snap-back for Harvester. The farm equipment, construction equipment and heavy truck markets had withered under near-record interest rates and a recession. Demand is lower today that last year. Harvester's competitors--such as Deere and Caterpillar--have felt the effects, too, but they were not weakened by a 172-day strike.

Harvester's credit subsidiary has lost its bond rating and, as a result, its ability to sell commercial paper (essentially short-term IOUs corporations sell to other companies with spare cash to invest). It has had to turn to banks for short-term loans. Today the credit subsidiary owes its bankers about $1.9 billion, while the parent company owes $1.5 billion. Since last February, Harvester has been paying interest on the loans--at rates of 20 percent or more--but it has not paid back any principal.

The banks and the company seemed to agree last spring on a restructuring of that short-term debt into three-year loans. But the banks were edgy and Harvester realized that its dwindling sales and steady losses prevented it from meeting its own suggested terms.

Last month Harvester and its eight advisory banks--Bank of America, Bank of Montreal, Chase Manhattan, Continental Illinois, Deutsche Bank, Lloyds Bank International, Manufacturers Hanover and Morgan Guaranty--agreed on a new proposal.

The short-term borrowings would be converted to two-year term loans. The maximum amount of cash interest Harvester would have to pay is 11 percent on the $1.9 billion credit subsidiary loans (considered more secure because they are backed by so-called receivables, loans the subsidiary has made to dealers or purchasers) and 16 percent on the $1.5 billiion the parent company owes. Any difference between the cash interest required and the prime lending rate (now 17 percent) would be covered by special notes issued by Harvester.

In order to inject much needed cash into Harvester, 14 percent of the loans to the credit subsidiary would be converted to loans to the parent company--about $240 million. But the company will need much more than $240 million to survive. "It's petty cash," observed Lustgarten.

In order to channel more cash to the credit subsidiary--which will then use the money to finance dealer inventories and customer purchases--the banks would purchase up to $750 million of receivables now held by the credit subsidiary.

For banks that have loans only to the parent company, or even to both the parent and the credit subsidiary, the proposed agreement makes more sense than it does for those banks that have loans only to the credit subsidiary, where the existence of receivables makes the loans less shaky. Having 14 percent of credit subsidiary loans converted to parent company loans makes some banks reluctant to agree to the arrangement.

Nonetheless, as one banker pointed out, the alternative is immediate bankruptcy. "The banks have to go along," said Paine Webber's Lustgarten.

To make the banks' decision easier, Harvester has put up collateral for the parent company loans, a move it was reluctant to make earlier. The collateral is Harvester plants.

The 225 banks either have received, or will shortly, the loan documents approved by the eight advisory banks.

Harvester executives, from McCardell on down, refuse to talk to the press until the banks sign off on the proposed debt realignment. But, through spokesmen, the company talks as if it is poised for the long haul.

Harvester is well-positioned in the agricultural equipment market, where it has a network of 1,800 dealers, and in heavy trucks, where it has 700 dealers. Despite last year's strike, it is the 49th biggest industrial company in the United States (down from 27th in 1979).

While inefficient manufacturing facilities have held down the company's profit margins in the past, the quality of Harvester's products generally has been top flight.

Two months ago the company unveiled a new tractor line that it called "one of the most important new product lines in its 150-year history." Early this year it introduced heavy trucks that boast improved mileage of 10 percent. A spokesman said the trucks "are the most modern on the road."

The company has spent $1 billion over the last three years to upgrade and modernize its facilities, a move that should narrow the cost advantages Harvester's competitors traditionally have had.

"The two-year debt restructuring gives us time to exercise the economies we have in place" and realize increased market share from what the company considers are superior trucks and tractors, a spokesman said. But unless the markets get better, even a sharp increase in market share may not augur profitability. Its interest costs alone will be $35 million to $40 million a month. And losses will eliminate its remaining working capital.

If the banks refuse to go along with the proposed debt realignment, Harvester will have to file for a protected, Chapter 11 bankruptcy. The company has retained bankruptcy specialists. But even a protected bankruptcy, which would permit Harvester to operate as a going concern, is an unacceptable solution to Cyrus McCormick's heirs.

"Who wants to buy a truck or a tractor from a bankrupt company?" asks a union official. "We're praying the bank deal works."