Ronald Piercy is fighting mad. He's a 44-year-old independent lumber wholesaler in Kansas City, Mo. And interest rates are killing him. But Piercy can't hope to borrow money from the banks at the so-called "prime rate." The prime rate is reserved for preferred customers, those whose credit rating puts them in the little-or-no-risk category.
Small businessmen like Piercy must pay a higher interest rate; since 1967, he has been paying, on average, 1.5 percent above the prime rate.
"As long as the prime stays at 15 percent or less, we can fight the odds," Piercy told my associate Tony Capaccio. But the prime rate has consistently been above 15 percent for the past two years. As a result, Piercy has had to let six of his 24 employees go, and the latest hop in the prime may force him to drop two more.
"Until about a year ago, I thought labor was my highest cost," Piercy said. But last year, he realized that his interest costs are now greater.
What really set Piercy's blood boiling, though, was his discovery that the prime rate wasn't what the bankers and the dictionary say it is -- the lowest interest rate charged.
The Federal Reserve Board's internal data show that Piercy is absolutely right. Bankers have been giving their preferred customers loans at interest rates several points below the prime.
For example, in the second quarter of 1980, the big New York City banks were making 60 percent of their short-term loans below the published prime rate. The average interest rates these privileged borrowers were paying were 4.5 percent below the prime -- an enormous saving in the cost of doing business, especially when smaller competitors are paying a point or two above the prime.
And the Federal Reserve Board's figures show that the under-the-counter, under-the-prime practice is increasing. In the first three months of this year -- while Piercy was trying to decide how many employees he could keep on the payroll -- the big banks in New York were making 78 percent of their loans at less than the announced prime rate.
And bankers all across the country make under-the-prime loans whenever New York does, no matter how much it actually costs them to raise the money they're lending out.
A Federal Reserve Board study of the nation's 48 largest banks showed that in the first quarter of this year, 71 percent of all their short-term business loans were made below the announced prime.
The cruelty of the bankers' deceptive "prime rate" lies in the fact that small businessmen like Piercy enter into short-term loan contracts that are explicitly linked to the published prime. "Many of these loan contracts carry interest rates several points above those charged the biggest and most credit-worthy customers, moving up and down with each prime rate announcement," explains an analysis prepared by economist Robert Auerbach for the House Banking Committee.
Then, going right to the heart of the matter, Auerbach asks: "But if the prime is not the prime, and if the prime customers are receiving a lower rate, just what is the small business person's contract tied to at his or her local bank?" What indeed? What does "prime rate" mean, if anything?
It's clear that when the bankers use the word "prime" it means a rip-off for small, less preferred borrowers. It's also clear that the Federal Reserve Board's over-the-moon interest policy, coupled with loan contracts that tie interest rates to a whimsical prime rate, will push many small businesses into bankruptcy.
To make matters worse for people liked Ronald Piercy, their supposed protector, the Small Business Administration, actually encourages the banks in their unfair lending practices. Loans guaranteed for 10 years by SBA are allowed to carry interest rates as much as 2.75 percentage points above the New York prime rate; those for a term of less than seven years can be 2.25 points above the so-called prime.
Small businessmen are the backbone of the free enterprise system. Yet Washington's economic policies seem to be calculated to harass them.