The Administration acted yesterday to head off a chain letter scheme involving the purchase of Series E Savings Bonds from Harvard Square banks and the promise of a $50,000 return for a $37 investment.

"If this scheme violates postal laws or is otherwise illegal," Dean Watson warned, "it might lead to serious consequences for those involved, including disciplinary action by the Administrative Board."

Watson's action was requested by Cambridge Trust Co. and Harvard Trust Co. in order to avoid repetition of a January, 1960, run on those banks by college students. At that time, both banks were forced to suspend sale of Series E bonds temporarily.

The savings bond chain letter scheme reoccurs from time to time at the University. Under this year's rules, the participant pays $37.50 for a letter bearing a list of 11 names and a $25 savings bond made out to the name at the top of the list. Then he forwards the bond to its beneficiary.

Next the participant makes two copies of the list, leaving out the top name and adding his own to the bottom. He purchases two more $25 bonds for $18.50 apiece, makes them out to the name now at the top, and sells both lists and both bonds in order to recover his original investment of $75.

Eventually, if the participant's name ever reaches the top of the list, over 1000 people will owe him bonds. When the bonds reach maturity, they will be worth over $50,000.

Most Lose Money

Dean Watson warned, however, that such chain letter schemes invariably break down. "The first few students may make money," Watson said, "but the great majority get stuck."

The University is unsure what aspects of the scheme are actually illegal. It is illegal to send chain letters through the mail, but the postal regulations apparently do not cover the saving bonds. The letter itself warns, "Send only the bonds themselves through the mail. Do not mail the list of names."

Watson pointed out yesterday, however, that the sale of savings bonds is regulated by Federal Reserve and Treasury Dept laws. The Treasury Department "strongly disapproves" of the use of savings bonds in games of chance.

It is believed that the present chain letter started at colleges around New York, then spread to the Greater Boston area, and reached Harvard sometime late in October