Slipping into the Red

Britain's newly found boom could turn to bust. That was the clear implication of a series of drastic measures announced last week to the House of Commons by Tory Chancellor of the Exchequer Richard A. Butler. Amid jeers from the Labor benches and gasps from the Tories, Butler warned that Britain, which earned a surplus of $560 million last year, is slipping back into the red. Inflation threatens, the dollar gap is widening, sterling is depressed.

Ordinary Britons were bewildered, for all around were the Austins and Jaguars, the TV sets, and choice cuts of beef that mean tangible prosperity. Tory billboards boasted: "Conservative Freedom Works," and judging by appearances, it did. But though British production and sales are the highest in history, neither hard work nor Tory free enterprise have been enough to free the island from its precarious economic geography. Britain depends for its life on the terms of world trade--on the relative amount of food and raw materials that it can earn from other nations by selling its manufactures and skills.

More Cars for Less Wheat. Of late, the terms of trade have changed to Britain's detriment. A bad harvest in Europe sent the demand for foodstuffs soaring; commodity prices rose, and last January Britain found itself paying 149% more a month for its imports of live animals for food, 145% more for animal feed. "In the last three months," said the London Economist, "[the] adverse movement in the terms of trade has cut Britain's annual rate of real income by -L-100 million."

The British people, meanwhile, were celebrating their deliverance from austerity by indulging in a spending spree that resulted in manufacturers selling goods at home that could have been sold abroad. At the same time, the Tory government added to domestic demand by announcing a whole series of long-term development projects: hundreds of millions of dollars for the coal mines, $3.4 billion for the railroads, $420 million for highways, $840 million for nuclear power stations--in addition to Britain's rearmament program of $4.3 billion a year. Eventually, the Tory projects will pay off in increased productivity. But coming on top of the nation's demand for more houses, more cars, more exports, more arms and more investments in the Commonwealth, they impose a heavy strain on an economy a fraction the size and far less flexible than that of the U.S. Result: inflation at home, waning confidence in the pound sterling abroad.

Back to Austerity? Rab Butler saw the danger when sterling began to fall on the free markets of Zurich and New York. Foreign exporters who could pick up pounds as low as $2.72 began undercutting British firms who were forced to finance their exports at the officially pegged rate of about $2.78. Last week, as sterling grew weaker and "never-never buying" (as the British call installment purchases) sent British consumer indebtedness spiraling to $1.1 billion, Butler reimposed restrictions--and a small dose of austerity.

"What is needed," Butler told the Commons, "are steps to moderate excessive internal demands, and so to match the increase in our imports . . . with an increase in our exports." His three main steps were drastic:

P: An increase in Britain's bank rate from 3 1/2% to 4 1/2%, its highest level since the Depression days of 1931. Effect: higher interest paid by banks on loans from the Bank of England will cut borrowing.

P: A limit on consumer credit, requiring Britons to make a down payment of at least 15% on cars, TV sets, radios, washing machines, balance in two years.

P: Authority to buttress "transferable," i.e., nonpegged, sterling by offering to buy it with dollars on the world's free markets. Effect: a small but significant step in the direction of convertibility, likely to increase confidence.

Iron Chancellor. Butler called his program "precautionary," but its effects were immediate and far-reaching. On the London Stock Exchange, gilt-edged securities dropped as much as $11.20 in a few hours --the sharpest market break ever experienced in a single day. As the hard Butler measures hit home, the market visibly hardened. On the New York Stock Exchange, transferable sterling leaped 2 1/2-c-, to $2.75, exactly as Butler had hoped.

In Britain, Butler's measures gave new pertinence to his nickname, "The Iron Chancellor." Socialists sensed a promising political issue in "Tory austerity," but the consensus was that the Chancellor's courage and toughness would pay off handsomely. To an audience of businessmen and industrialists, he announced at week's end: "The first signs are that sterling has recovered . . . But we must be sensible enough to take our progress at a reasonable rate--it will be all the surer in the end."

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