Saga of the Plunging Pound

See billions of pounds of paper threaten to crush an entire civilization! See actual money collapse, then rise from its ashes! See an entire nation tremble before the Gnomes of Zurich! See panic nearly break out! Yes, the British government was back again last week with still another episode of the Saga of the Plunging Pound, and for theatrics alone it was one of the best performances ever. At one point in the drama, Chancellor of the Exchequer Denis Healey headed for the Orient on other business, then changed his mind and rushed back from the airport to his desk. Prime Minister James Callaghan used words for a rescue attempt, but drew only yawns. The British press went berserk with such three-inch headlines as CRISIS! or -L- THAT SINKING FEELING. When it was all over, the British went back to their daily business as if nothing had happened. But they all knew the show would be back whether they liked it or not.

The British pound had been battered by its third serious selling wave in less than a year, and sank to a record low of $1.63 as measured against the U.S. dollar. The decline was climaxed by a precipitous loss of more than 40 in a single trading session--which, apart from formal devaluations, was the greatest drop in one day since sterling was floated in 1972. By week's end, after the government had announced that it would prop up the pound by asking the International Monetary Fund for a standby loan of $3.9 billion, sterling had recovered some of its loss and stood at a shaky $1.67.

The IMF will almost certainly grant the urgent request, but will probably impose stringent conditions under which the Callaghan government will have to run the economy. Earlier this year the Group of Ten (industrial nations) had set up a credit line of $5.3 billion for Britain to be used as a weapon against the rapid deterioration of what was at one time the world's mightiest and proudest currency. About $1.23 billion of that total already borrowed by Britain must be paid back by December. Part of the debt will have to be paid with the new loan applied for last week.

Such juggling will still leave the pound far below its value of $2.58 in the summer of 1973, before the oil crisis and inflation began taking their toll of economies in industrialized nations. During five years of decline, the pound has lost almost half its buying power. The shrunken pound makes needed imports cost more. This drives up domestic prices, undermining the thrust of the government's economic strategy.

Last week's sell-off was attributed mainly to the perception of international bankers and investors that Callaghan's Labor Party government, split between warring radical leftists and moderates, was less serious than it professed to be about applying stringent policies for controlling inflation. Those policies --among them wage and price controls --were effective up to a point; the rate of inflation has been slowed from 23% a year ago to 13.8% now. Also, Healey has announced ambitious plans for even more cuts in the 1977-78 budget.

Shipping Strike. But early in September the National Union of Seamen threatened to strike if its wage demands of 7.4%, to run over a year, were not met --despite current guidelines that allow for no more than a 4.5% yearly increase. Recognizing that a nationwide shipping strike might well deal the final blow to the British economy, the government compromised by offering the union a package of fringe benefits that almost equaled the wage demands. The strike was averted, but bankers feared, perhaps unjustifiably, that the settlement would encourage other unions to seek similar deals.

More than that, it seemed almost certain that the Labor government's target of a 12% inflation rate by December (twice the current U.S. rate) would not be met. Even while the seamen's contract was being negotiated, there were still more indications that Callaghan's economic policies were not working as well as had been projected. Second-quarter figures for domestic growth showed that the economy was expanding at a slower rate than the government had predicted. Labor leaders who had been promised more jobs in the future in exchange for accepting strict wage controls were distressed to find that unemployment was increasing and had actually doubled during the past twelve months. More than 6% of the labor force, or nearly 1.4 million people, are now without jobs in Britain.

As the pressures built, the pound began wavering. In early September, with its level at $1.77, the pound came under heavy selling pressure but was supported by an estimated $200 million in purchases by the Bank of England. Later, when the seamen's settlement was reached, the pound came under attack again. This time the Bank of England was not there to support the pound. The apparent reason: the bank was fearful of spending its reserves too soon. That strategy, in the view of many bankers, was overly cautious. Says one U.S. bank executive: "Even a marginal intervention would have halted the slide."

Economic Chaos. Last week's sell-off occurred so abruptly that Healey began hustling for the IMF loan. Speaking on national television, he warned of "riots in the streets" if Britain did not borrow abroad. Next day, at the Labor Party's annual convention, which opened at the seaside resort of Blackpool just as the pound took its big plunge, Callaghan and Healey spoke bluntly. Declared Callaghan: "If industry cannot retain and generate sufficient funds, you will whistle in vain for investment and we will continue to slide downhill."

Healey came on even stronger, attacking leftists who want to turn Britain into a socialist "siege economy" with controls on imports that would severely restrict what Britain buys from her neighbors. That, he said, "is a recipe for world trade war." He also rejected the leftists' alternative of "selective" import controls, saying that the economic chaos they could cause would be the downfall of Callaghan and the installation of a Conservative government. Its policies, said Healey, would result in more misery for the British -- "massive new cuts in public spending, unemployment in the low millions, a return to a confrontation between a British government and the working people of this country."

There was still another alternative that was beginning to look attractive to some Britons. In the event that the economy comes apart, voters might well turn from one-party rule to a coalition government--an approach that Britain has in the past resorted to during wars and political upheaval.

Callaghan and Healey had put their fingers on the problem, and their leftist adversaries knew it. Despite their catcalls, the Laborites voted overwhelmingly to support Callaghan's policies and the decision to seek the IMF loan.

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