Tiny Delaware, long a favorite tax haven for corporations and wealthy yacht owners, is on its way to becoming the "financial Luxembourg of America."

Gov. Pierre S. du Pont IV (aided by his friend at Chase Manhattan, lobbyist O. Francis Biondi) persuaded the state legislature in 1981 to enact an alluring package of new banking laws.

The key to the program's success was letting new state-chartered subsidiaries of out-of-state banks sell credit and services nationwide under the state's unlimited interest law, while sharply restricting their competition with older established banks within Delaware.

Today, two years and 14 big new banking operations later, du Pont says Delaware stands on the forefront of the revolution in the nation's financial services industry.

It also stands on the wrong side of Federal Reserve Board Chairman Paul A. Volcker, who is opposed to the path Delaware is taking. Volcker voiced his objections to state insurance commissioner David H. Elliott as du Pont was pushing a proposal to give Delaware banks even wider powers.

"I am seriously concerned about the possibility of widely divergent and inconsistent laws governing both banks and thrift powers, with deposit-taking organizations shopping for the most permissive rules, and states competing to pass such laws in order to enhance local employment," Volcker complained.

If such free-wheeling financial practices lead to failure, the Fed chairman added, the federal government will have to pick up the pieces.

Armed with Volcker's objections, Elliott and a lobby for 6,000 angry Delaware insurance agents, backed by national insurance interests, forced du Pont early this month to shelve his Financial Services Development Act, which would have allowed state banks to underwrite and sell insurance and corporate securities, operate mutual funds, act as real estate brokers, and engage in other activities generally closed to banks elsewhere.

While critics questioned the act's legality, Delaware Banking Commissioner John Malarkey said, "It all depends on which lawyer you talk to."

The governor listened to Irving S. Shapiro, lobbyist for Citicorp and former chairman of E. I. du Pont de Nemours & Co., who said, "If Delaware doesn't get it done, the banks will be going to South Dakota."

South Dakota abolished its usury law in 1980 and last March authorized its state-chartered banks to own insurance companies. Citicorp, which had already moved a large credit card operation with 900 employes to Sioux Falls, recently bought control of a small bank in Rapid City as a wedge into the insurance business.

Gov. du Pont's point man in the legislative fight to overtake South Dakota's advantage was his distant cousin, Nathan Hayward, director of the Delaware development office and the man who coined the "Luxembourg" analogy.

Hayward believes Delaware has everythng it needs to rival the nation's big money centers. It has a strategic location in the center of one-third of the nation's population.

It has a separate corporations department to handle the 145,000 corporations on file--including more than half the Fortune 500--and even a separate telephone number to call to reserve a corporate name. It has a Court of Chancery that handles only corporate questions and that has a long history of favorable business rulings.

Firms incorporated in Delaware pay only $10 a year to file a franchise tax report. If they issue stock, they pay corporate taxes of as little as $20 up to a maximum of $110,000, much less than most other states. This system nets Delaware $72 million a year.

Of course, most of these corporations exist only on paper in Delaware and do not do business in the state. Some of them are merely boat owners who incorporate to register their craft in Delaware and avoid sales taxes in states like New York and Connecticut. The point of the new banking laws was to get new financial institutions not only to incorporate in Delaware, but to bring their assets, offices and jobs to do business in the state. Even opponents agree that so far it has been highly successful.

And du Pont argued that the Financial Services Development Act would have brought Delaware 1,500 more banking jobs and millions of dollars in personal income, retail sales and state and local taxes, on top of Delaware's already considerable banking gains.

The defeat of that plan didn't leave du Pont and the banks empty-handed, however. On May 27 they had skillfully pushed through the Consumer Credit Bank Act to let smaller groups of banks in on the benefits of the original 1981 law, and another bill to exempt corporate taxes on foreign financial transactions passing through Delaware banks.

Within 24 hours, the board of directors of Computer Communications of America (formerly the Charge Card Association) voted to move some 70 percent of its credit card portfolio for 200 Midwest banks from Detroit to Delaware. Hayward said many of the banks were expected to follow with new subsidiaries in Delaware.

They will be permitted under the Consumer Credit Bank Act to set up "non-bank" banks to issue credit cards and make consumer loans to clients in other states, but will be prohibited from consumer business in Delaware except to accept large deposits of $100 million or more.

Computer Communications of America will bring some 400 jobs from Detroit to Delaware, Hayward reported.

A few days later, Hayward announced that Bank of New York Co.--holding company of the nation's 18th largest commercial bank--had filed an application to open a bank in Delaware. It will bring its entire portfolio of half a million credit cards with $250 million in receivables, and engage in commercial and consumer lending. That move, under the provisions of the original Financial Center Development Act, is to bring nearly 200 more jobs to Delaware.

Under the new Consumer Credit Bank Act, individual banks will have to guarantee at least 100 new jobs in Delaware within a year and banking associations will have to guarantee 250 jobs. As under the Financial Center Development Act, they will not qualify for tax concessions until profits exceed $20 million a year. After that, the tax rate drops in three stages to 2.7 percent of profits over $30 million.

The newcomers will join the 12 large banks that opened subsidiaries in Delaware in the initial rush under the 1981 law.

The 12 are Morgan Bank, Chemical Bank, Citibank, Chase Manhattan and Manufacturers Hanover from New York; Equitable Bank, Maryland National, Suburban Trust and First National, all of Maryland; and Philadelphia's Provident National, Philadelphia National, and Girard Bank, which took over Farmers Bank of Delaware with its 28 branches.

To qualify, these banks had to pledge to start Delaware subsidiaries with $10 million in capital and increase it to at least $25 million within a year, and have at least 100 employes each within a year.

Even before the recent derailment of the Financial Services Development Act, some legislators were expressing concern about the state's banking policy and worrying about possible retaliation by other states.

"It's the responsibility of Congress to stop this foolishness," said Sen. Harris B. McDowell.

"I felt in a squeeze when the original banking act was presented. I listened to the people from Chase, Morgan Guaranty and Citicorp. I felt something was wrong on a national basis, but I represented a district in Delaware so I voted for it," McDowell said in an interview.

"I said when we passed the Financial Center Development Act in 1981 we might live to regret the day we passed this little cannon."

But the governor's team doesn't see it that way. They point out that the state's unemployment rate is 6.5 percent, well below the national rate of 10.1 percent.

"You get your jobs where you can get them," said du Pont's press secretary, Robert W. Perkins. "Already we have 1,500 new jobs as a direct result of the Financial Center Development Act in just two years. The governor believes that's the name of the game."