THE PRIME RATE - the interest rate at which the big banks lend to their best customers - reached the ripe round figure of 10 percent last week. Mortgage rates are now reaching just about the same level. In the past, extremely high interest rates have led quickly to serious economic trouble. The last time the prime rate was so high, nearly four years ago, the country was sliding rapidly into a dire recession. But circumstances today are different. While nobody would want to see the rate continue very long at the present altitude, for now they are serving a useful purpose.
They are buying time for an administration that has been preoccupied with the final weeks of the congressional session and is having trouble pulling its anti-inflation program together. They are helping to stabilize the international value of the dollar. High rates are less damaging than another slide by the dollar on the foreign-exchange markets.
The first victim of high rates is usually housing. But currently the construction and sales of housing are holding up well in the face of steadily rising mortgage interest. Perhaps people are growing accustomed to high rates. Or perhaps it is more accurate to say that they are becoming experienced in calculating the relationship between interest and inflation. Inflation helps, in effect, to pay off a mortgage. It decreases the value of the dollars in which future mortgage payments will be made. Meanwhile, buyers can deduct the interest payments on their income-tax returns. The years of inflation have taught mortgage borrowers to be a good deal more tolerant of high interest rates than they used to be.
Business investment is the other customary victim of high rates, but the present surge of rates seems to be having little effect. For some years, American business has been buying new equipment less rapidly than is healthy for the economy and its productivity. But if investment has not been up to the ideal, neither has it fallen under the weight of increased interest costs. The explanation here, as in housing, undoubtedly has a lot to do with the effects of inflation on loans.
This new toleration of high interest, on the part of buyers and investors, can be used to a hard-pressed administration. It means that the Federal Reserve Board can lift rates sharply without immediately sending the country into a recession. But this flexibility carries a serious danger with it.
If interest were left high for long periods - for more than a few months - it would begin to create a constituency for continous inflation. There would begin to be a significant number of people who had committed themselves to those high interest rates for years into the future, in the expectation that inflation would keep depreciating the dollars in which they make their payments. At present, the consensus in favor of much lower inflation is all but unanimous in this country. But if the 10 percent mortgage becomes common, that consensus will be very much in jeopardy.