The Crisis Continues

GREAT BRITAIN

Having barely survived a massive hemorrhage, the patient was still dangerously ill. But Prime Minister Harold Wilson left the bedside of the British economy to fly to Washington for his meeting with President Johnson. In the first week after emergency treatment was applied, through $3 billion in standby financing from eleven nations to halt a panicky run on the pound, Britain's currency rallied on New York exchanges to a high of $2.7929. But that was still below its par strength of $2.80, and for the basic cause of the sickness--Britain's longtime negative trade balance--no cure was in sight.

In London, the Treasury announced that during November reserves dropped another $109.2 million, shrinking Britain's international bank balance to $2,343,600,000, lowest in seven years. There were whispers that even these figures hid the true dimensions of the drain. Last week Britain drew another SI billion in financing, this time from the International Monetary Fund, to pay off short-term loans that had been contracted earlier to support the pound.

London's financial community (see WORLD BUSINESS) was willing to concede that Wilson had inherited many of his troubles from the Tories. But there was also near-unanimous agreement that he had disastrously mishandled the situation.

Shared Skepticism. From its closest neighbors, the patient continued to get little sympathy. At its annual meeting the Organization for Economic Cooperation and Development, a club of 20 Western industrial nations and Japan, listened to Labor's Chancellor of the Exchequer James Callaghan defend Britain's recovery measures as "adequate for the time being." Callaghan was loyally supported by U.S. Under Secretary of State George Ball, but most European countries bitterly attacked Britain's 15% surcharge on most imports.

Strongest blast came from Belgian Minister for External Trade Maurice Brasseur, who declared: "We are not convinced that the British have attacked the real problem, which is the imbalance of their foreign trade. Others share our skepticism." What Britain's trading partners want, among other things, is more deflation to curb domestic spending. They feel that, in effect, the British have been living high on other people's money--the world's sterling deposits with Britain. As one economist put it, the British must "tighten their own belts instead of somebody else's"--even if it means "a little unemployment."

Question of Confidence. International confidence is not helped by some of the figures around Wilson, notably "the Three Cs"--Minister of Technology Frank Cousins, Minister of Housing Richard Crossman and Minister of Overseas Development Barbara Castle--all far left-wingers. Nor is confidence helped by Labor's disturbing tendency to mix its uncertain economic measures and its contradictory morals. Wilson's government, for example, halted sales of arms and aircraft to South Africa, worth millions in hard cash, to protest against apartheid--a policy also invoked by the U.S., which perhaps can better afford it. But Labor has not curbed exports to Australia, whose restrictive immigration laws are based on color, to say nothing of trade with the inhuman rulers of Communist China.

Oddly enough, though Wilson had just nearly wrecked the British economy, in the eyes of many Britons he emerged as something of a hero. Few realized that it was not Wilson but Lord Cromer, Governor of the Bank of England, who had really saved the situation by speedily arranging for the standby funds. A Daily Mirror cartoon depicted one widespread, nonsensical view of the matter: it showed Wilson having bravely knocked out international "speculators." As for his insistence on social welfare programs despite international economic opinion that Britain cannot afford them--a lot of Britons were telling themselves smugly that Harold was just ruffling the feathers of a bunch of foreigners.

Stiffer Measures. Wilson did persuade his party to accept a six-month postponement of Labor's promised hike of old-age pensions. But if Labor fails to achieve increased productivity and more-competitive exports soon, he will probably have to decree stiffer measures, such as higher sales taxes. Already, consumers were beginning to feel the effects of the government's hike in Britain's basic interest rate. Announced last week was a 1/2% increase in interest on new-car loans.

The ultimate disaster would be devaluation of the pound, which might mean the end of the pound as the world's second reserve currency--not to mention the end of the Labor government--and would produce international monetary chaos including grave damage to the dollar. Economists at present don't think it will happen--but it may, unless Britain faces reality.

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