time magazine -1967 britains money crisis

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T H E WORLD

BRITISH CARTOONIST'S VIEW OF WilSONA naughty boy among the gentfemen.

such circles. a nation's currency is itshonor. and Britain's ha ... heen constant-

ly imperiled hy the country's inahilityto earn its own wa\' in the world. Thedecision of the maji)r powers not to de~value works 10 make the British move

more effective. since a me-IOO devallla~tion hv cvervhod\' would largelv cancel

out \\hateve"r benefits Briwi~ ';opes toreap from its drastic move.

Angry Sheiks. Last wee""s lllrmoilhegan wilh the disclosure of Britain .. ..

trade fil!ures for Octoher. which showeda !.!ros...~ deficit of ncarlv $300 million.

th~ worst such monthly gap in the coun~try's history. That in itself was certain-

Iv ominou" cnou!!h. hut the contcxt in. which~ the deficit elllcr.!.!ed

T". r.H'~()L'~ \"~n"~ ~

made the figure •• far worse.

Britain's cndcmic deficitsare usually largest in time,of expansion. whcn HrilOns.fully employed and f lush

with cash. step up their pur-

chases of goods fromahroad. This time. however.Britain is i n t he trough of a government~imposed slow-down now 18 m onths old.

n helt-tightcning period of austerity imposed hy \Vil-son's government after an.

other sterling crisis in 1966.T he tightening clearly

failed to work. partly be-

cause Britons kept right Oil

buying more foreign goodsthan the country could af-ford. There wer~ other rea-

sons for the failure thatI,.\'ere largely beyond Brit.

alll s control. The Arab-Is-

raeli war in June moved angry sheiksto pull more than $100 million out of London banks and deposit it elsewhere.

It a lso closed down the Suez Canal.costing Britain some $600 million ayear in higher shipping costs for its ex-

ports and higher prices for the fueland other raw materials it imports.

\Vildcat dock strikes in London and Liv-

crpool l:ost another S 1RO million inexports not shipped abroad. And \Vil-son's austerity squeeze started ut a timewhen world trade generally was slow-

ing down. making it difficult for Brit-ain to increase exports in the dramatic

'" " '< .IV that was needed tn bring its tr,aleIkClfes into halance.

..The massive trade gap. coming atop

[he long series of sterlinc crises. touched

oIT a tlurry of pound ~seJ1ing. Holdersof ster!in~ h,d,Lce~ rushed to their tele-phone ..• to trade their pounds for gold.

doiia,s cr any other h,lrd currency theyCot! d t,uy. \y'ith the ...L1pply of pounds

so much greater than the demand. theprit:c of slerlillg inevitably was drivendownwards. llntil on f"riduy it slippedII"1dcr thc rover merH-supporl level of

S2.iR25. to S2.7822.In the City. l .on.Jo ; 's financial dis.

trict. bew.;dcl'mel1t ~Ind confusion ran

Fund (to \\ hich it ~i1readv owes S 1.4 hil-

lion) to ask for a fresh :Irawing of $1.4hill ion. but also had to arrange a multi-national loan of Sl.() hillio~ from itspartners. thus creating a ne\\! S.~ hill ion

support package in order to preventthe total collapse of the pound. Tob<lck up its action, the government

rai ...ed the interest rate from 6j% togl:k in order to attract foreign deposits.ordered British hanks to limit their loans

to priority horrowers. issued restrictionson in••tallment huvinl! and credit and an-nounced plans to' cut $240 million from

Britain's 55.3 hill ion lIefense budget. Itorderell all hanks and money marketsin the country to keep their doors closed

on Monday of this week to reduce spec-ulation before final Uv1.F. approval of the new support funds for the pound.

Cheaper Exports. When Clement Alt-lce'~ I.ahor govcrnment last devaluedthe pound in 1949 (from $4.03 to$2J\O). 23 nations followed h\' devalu-ing their own currencies. This time,

several countries-Ireland, Denmark.and Israel-almost immediatel\' fol-lowed Rritain's 1110vehv devaluin'l!. and

others arc sure to follo~ this week. par-ticularlv within the British Commoil-

wealth: The Common f\,.1arket countrie-;immcdiately lkcided not to foll,)w B~il-

Olin's lead. and the U.S. lost no time inannouncing that it has no intention of devaluing thc dollar. In a \Vhite Housestatement. President hhn ...on said that

he could "reallirm unequivocally t:,<:commitment of the U.S. to hm' and

sell gold at the cxi-.ting price of $35 anounce."'

Devaluation will make Britain .... ex-

ports cheaper and IlhH'e aurac.i,e

abroad. thus he!ping: to ks,en its hll~'ebalance-of-payments detlcil. one of c._c

chief cau~cs of the pOllmr-; tro:";llc. In

the arcane. gentlcman!y con]ne:~d

t~eworld's moneY nHn:l~ers. 13,i:ain ha~

long been con~idered ,~ n~:u~hl) hoy. In

BRITAIN

The Agony of the Pound(See Cover)

It was 9;.13 p.m. on .1 cold and fog-

gy Saturday ill Britain when the wordfirst came. J\luch of the countr\' wasspr.l\vlcd in stuffeu chairs v, . :atch(n,g: an

old Doris Dav movie (iHidniR'u Ll/cc)on the BI:K'.' First there \\lns a frag~

menfary bulletin that hrokc into themovie. then a deja\' in the scheduled

10:25 news while ~cript\vritcrs scram*hlt?d to gel together details. In millions

of living rooms up and down the length

of Britain. people watched transfixedwhile a gay Latin American dance

rhythm blared from the box. v,:hichwenl blank except for a slide advising:"The Nev •.'s Is Coming Soon." The nc\vs

can,c all 100 soon for once-proml Brit-ain. Afler a week in which the longagony of t;lC British pound real:hcd awrithing climax. Prime ~linistcr Har-old \Vilson's L abor government an-

nounced a l:ut in the p~l1nd's eXl:hangev Ille from S2.S0 to S2.40-<I 14.3%devaluation.

Despite all the headlines and all the

talk during <Ilong and hard w'cek. Brit.ons-and Illany others in the Westernworld--cxpericnced a deep sensc of shock at thc new ..•. Until the last min-

lite. th'~re were hopes and rumors thatB"ibin \\ould be able to free her . .•c1f.

at le::st temporarily, from the heavyr 'e\Sures on the pound by getting a mas-sive loan frolll its \\'estern allies. After,ill. the pound i\ one of the two interna-

tional rt~...ervc currencies (v.'ith the dol-lar), and its devaluation was bound 10

throw the West into a seven~ monetar\'crisis. Still. there it was. Growingcrowds booed the pol icc outside 1()Downing Street. and London's ne\\spa~

pel's stopped their Sunday editions onthe presses. It wa ... Britain's biggest and

worst ncws in many years."It is a black day for all of us," said

John Davies. director general of the

Confederation of British~lndustry. ufter

emerging from No. In. The Observercalled devaluation "a hrave act," hut

most of the British press lOok off afterHarold \Vilson's scalp. "This is D.day

for Britain without the nags: ' said theSundav Mirror. "The 'D' this timestands" for disaster and disillusion aswell as for devaluation," Since Wilson

had consistent!\; denied thut he wouldever devalue the pound. many Britonsfelt betrayed as well a•• dishc:lrtened. "I

am 4uit~ shocked," said Sir Patrick

Hennessy. chairnnn of Ford ~lotor Co.'" have per~:onall\' told mv businc~sf;'iends abroad that'it would n'ot happen.

I could not believe that the governmentwOl.ld £;0 hack on its statel11~~t .....'

\nd~ there was mo;-e bitter mcdi::ine

It. <:wallm\' than devaluation. In order

to hack lip devaluation wi;h fin:lncialmuscle, Britain not only had to go hm

in hand to the International Monerary

•

T!ME, NOVEMBER 24, 1967 29



STRIKING DOCK WORKERS IN LIVERPOOL

Scarcely a segment of society that ;s not in some way responsible.

~,

I

rampant. Bowler hats bobbled after ev-ery rumor, as wave after wave of mas-

sive selling hit sterling. Exactly how

much gold and f oreign-currency re-serves the government had to use up to

keep the pound afloat was a state se-cret as vital as any kept by Englan d,

but estimates ran as high as half a bil-l ion dollars for the week, half of Brit-ain's expected 1967 payments deficit

and one-sixth of its total reserves. The

scene was much the same on marketsin Paris, Zurich and New York, Aloneand without devaluation, Britain couldnot have saved the pound. In New

York al~me, the Federal Reserve ab-sorb ed an estimated $300 million in

unwanted pounds each day last week,and on frantic Friday the U.S. helping

hand may have reached $5lJO millionor more in a support of the foreign-ex-

change market not seen since the dayof John Kennedy's assassination.

The Economic Dodors. Bank of En-gland Governor Sir Leslie O'Brien had

gone to Basel over the weekend to ne-gotiate a loan from the Bank for Inter-national Settlements. The pound stead-

ied on the news of a new loan, thenweakened when the amount turned outto be o nly 5250 million-ju st enoughto cover an installment on a loan owed

the International Monetary Fund anddue on Dec. 1. The Economist last week tartly referred to this loan as "an horsd'oeuvre." AI midweek the Hue reported

that \Vilson was going to get a loan of

$1 hill ion from the Group of Ten, thefree world's leading financial powers,whose representatives were then meeting

in Paris' elegant Chateau de la Muette.Next day the pound struggled upward,

only to nosedive once more when Chan-cellor of the Exchequer James Calla-ghan, speaking in t he House of Co m-

30

mons, ref used to confirm or deny therumor. As the week drew to a close and

the Group of Ten's delegates disbanded

and went home with nary a publicpromise of help for Britain, the Friday

panic in money markets around theworld inevitably resulted.

Furtively Bruited About. While allthis was goin g on Harold Wilson andhis min isters were bent on a course

that they had tried desperately to avoid

ever since he took over as Prime M inis-ter three years ago. Two weeks before,Chancellor Callaghan had gone to \Vil-

son and reported that the Treasury'squarterly forecast showed that the out-look for 1968's balance of paymentslooked even worse than had heen ex-

pected, and in fact suggested that there

would be no improvement at all overthe current year. In July, Callaghanhad said publicly: "Th ose who ad vo-

cate devaluation are calling for a reduc-

tion in wage standards of every mem-ber of the working class in this country:'Now, he told Wilson, he had conclud-

ed that Britain would have to devalue,that "there's a point at which d eter-

mination becomes obstinacy"-and thathe had now passed that point. Exports

were hardly rising, he told his boss,and yet enough wage increases had crept

past the barrier of the Labor Party'sprice and income squeeze so that risingdemand kept imports growing at ana1<trming rate.

The subject of devaluation began tobe furtively bruited about among small

groups of Wilso n's min isters for thenext several days, but it was not takenup at a formal Cabinet meetin g until

last Thursday. At the meeting the gov-

ernment made its decision to devalue.That afternoon, Callaghan had to go be-

fore the Commons to unswer questions

"bout rumors that Brituin had made 111-

ternational loun arrangements. He did

not confirm that there were such nego-tiation s for a g ood reason: there hud

not yet, in f act, been any. It was notuntil after the Cabinet meeting that the

government went out and started look-ing for loans on the basis of its deci-sion. The Bank of England's O'Brien

went to work calling up his centralbank counterparts in Europe and in

the U.S. The whole deal was finally ar.ranged by Saturday afternoon.

The LM.F . . which must approve de.vnluation of any of its members. was

notified of the plan on Friday n ight.and at 8 a.m. Saturday each of its direc-tors received a telephone call summon-

ing h im to a meeting that morning in \Vashington. The directors gave tenta-

tive approval to Britain's plan (they arcto vote formally on the matter tbis

week), and that approval was receivedin London about 5 p .m. Some four

hours after that, having worked ou t afew more details. Chancellor Callaghanmade his historic announcement.

The Once Proud Workshop. Howdid Britain, where the Industrial Rev-o lution was bor n, fall to such a beg-g ar's estate among the industrial na-

tions of the world? There is scarcely asegment of British society or an cle-ment of Briti~h tradition that is not in

some way responsible for the impov-erishment of the once proud workshopof the world.

The ability of a nation to earn itsway in the world rests primarily on i tsproductivity: its capacity to marshall

i ts human and mechanical resources toproouce goods that can compete with

those of other nations in the world mar-ketplace. Only then does it earn enoughincome to buy the things it imports.For most of the po stwar years, Brit-ain's productivity has f ailed to keep

pace with that of its competitors.

Among the major industrial nations.Britain since 1951 has had the slowestri,e in productivity, the lowest rate of in-

vestment in private enterprise and thelargest rise in i ts export prices. Inits

case. the equation is doubly exacting:

poor in natural resources, Britain Illustimport much of its food and the rawmaterials for the goods it makes.

Both British management and suc-

cessive governments are to blame fornot pumping enough of the right kindof investment into industry to mod-ernize i t or, in spite of all the exportcampaigns, for not really getting out

and hard-selling British goods. The jobof salesman holds l itt le status in Brit-

ain and, for that matter, business itself still tends to b e looked down u pon asthe domain of the hustling parvenu orthe disdainful "gentleman amateur."

Needing Every Penny. Labor, too,with i ts fierce class antagonisms sti llsmoldering and its "I'm all right Jack"attitudes, has stoutly resisted any mod-ernization of British industry that in-

fringed on shop-hardened rituals. Theunions' push for wages, backed by a pro-

clivity for wildcat strikes unmatchc~l

TIME, NOVEMBER 24, 1967

•



any country, sent hourly earnings soar-ing some 40% from 1960 to 1966.While Britain's productivity grew byonly 18%, \Vest Germany's was rising29% and Italy's 40%. The result wasthat British goods were priced out of the market, while Britons used theirmoney to buy more und more foreign,imported goods.

Britain's pretensions to playing therole of a great power added to hertrade-imbalance difficulties. She still

keeps fairly large worldwide defensecommitments. last year gave $630 mil-lion in foreign aid. For most countries,their money is their own, to w.e asthey wish abroad. But the British pound.as a reserve currency, is used muchlike an international money by tradersand central hanks the world over. TheU.S. can afford to let its monev beused by others; Britain, needing everypenny it mints, no longer can, but haslong insisted on continuing to try. Theresult is that when the Bank of En.gland is driven to the wall to defendsterling, it may discover that as much

as 75% of the supply of pounds extantis in the h,lIlds of foreigners-and outof reach.

No Panacea. Only twice before inthe 20th centurv have Britain's econom-ic troubles required a devaluation of the pound, and both times the step wastaken by Labor governments. Britain'sfirst devaluation was in 1931, when itwent off the gold standard in the midstof the Great Depression; that move for-ever tarnished Lahar Prime MinisterRamsey MacDonald's image in his par-ty. The second was Attlee's in 1949,v,'hen none other than Harold Wilson,then head of the Board of Trade. took a major part in planning the devalua-tion. Properly done, a devaluation canturn a nation's trade deficit into a sur.plus practically overnight. It is not, how-ever, a politician's panacea, since itmeans initially a sharp reduction in thestandard of living of the devaluing na.tion's citizenry as manufacturers' prof-its decline and the cost of what a work-ingman buys goes up.

Last week's devaluation forever shat-tered an article of faith. solemnly sWOrnto by governments on both sides of theAtlantic, that unilateral devaluation wasno longer possible, since it would dis.

member the many fragile and intricateinternational monetary mechanisms thathave developed since 1949. Keepingthose mechanisms oiled and balancedis the task of the international bankingcommunity's senior memhers, who areusually referred to as The Club. TheClub works with the International Mon-etary Fund in \Vashington and the Bank for International Settlements in Basel,the official bankers to countries.

No country has kept The Club busieror given it more nightmares than Brit-ain. whose economy has palpitated inmaddeningly regular intervals througha dozen sterling crises in J 8 years. Thepattern soon became all too familiar: aperiod of expansion leading straight tothe brink of bankruptcy for sterling at

TIME, NOVEMBER 24, 1967

$2.80. then a rescue Imm to buy timewhile the government damped downthe economy. Once a spell of austeritybuilt up Britain's reserves anew, govern-ments invariably felt politically im-pelled to relax restrictions and let thewhole expansion-to-the-hrink processbegin again.

"To Save the Pound:' \Vhen PrimeMinister Harold Wilson and the Social-ists took power late in 19114.the poundwas in one of its deeper malaises. Be-

fore he took office \Vilson had warnedthe Commons that ';devaluation wouldbe regarded all over the world as an ac-knowledgment of defeat, a recognitionthat we arc not on a springboard but aslide," Still, there were those whoargued, and last week saw their argu-ments vindicated, that Wilson's first actas Prime Minister should have been de.valuation.' He could justifiably have laidthe blame on 13 years of Tory mis-management and cleared the slate forthe fundamental overhaul of the econo-m\, needed to make his Socialist dreamsor' progress for the country at least

fea'iiblc.Instead, to the profound dismay of Labor's left wing and the trade unions,he set in motion the classic Tory rem-edies for the "stop" part of the stop-gocycle and. moreover, set them in mo-tion awkwardly. First came a 15% sur-charge on imports, a small tax incen-tive to exporters and a vague plan forregulating wage increases. \Vhen thatfailed to stem the run on the pound, \Vil-son raised the bank rate from 5% tothe "crisis Icvel" of 7%. The paniconly increased, so \Vilson appealed tothe Club. Bank of England GovernorLord Cromer and the professionals of the U.S. Federal Reserve Board got onthe transatlantic phones. Working allthrough one night. they secretly ralliedtheir central banker colleagues aroundthe world and came up with $3 billionin pledges to rescue the pound.

The speculators were beaten off. andthe pound gradually recovered, untilthe next expansion.fucled strain on ster-ling's resources. It came in July of lastyear. To meet it. \Vilson took, us hetold President Johnson, "steps that havenot been t.lken by any other demo-cratic government in the world." Hefroze wages and prices for six months,

to be followed by another half-year of "great restraint," Government.invest-ment programs were slashed by 5370million. indirect taxes raised 10% andanother 10% surcharge slapped on high.er income brackets. Wilson told theBritish people that the massive allsteri-ty was rcquircd "to save the pound,"

Hitlerian Mistakes. The pound, as itturned out last week. was not to besaved this time, despite nearly 18months of \Vilsonian deflation that haspushed unemployment lip to 555,000in a work force of 20 million. slowedthe country's industrial growth to a mea-ger 1.5% and created widespread dis-satisfaction with \Vilson's stewardshipas Prime f\.1inister. A Gallup poll pub.lished last week, before devaluation,

found \Vilson's ';the most unpopular of all postwar governments" in Britain. An-other poll a week earlier indicated thatan election now would produce a land-slide Tory victory. installing EdwardHeath as Prime l\linister with a 150-seat majority in the House of Com-mons. In the past 18 months Lahor haslost six of eleven by-elections. as manyas Harold \.-facmillan's troubled Tory re-gime dropped in five years in office.

\Vilson is in ulmost as much trouhle

within his own party. The utopian So-cialists condemn him for sacrificing the-ory to the hard facts of economic life.The leftists and unionists suspect himof endorsing "a permanent pool of un.employment" to encourage holdingwages in check. When National CoalBoard Chairman Lord Robens an-nounced two weeks ago that mine em-

CHANCELLOR OF THE EXCHEQUER CALLAGHAN

More bitter medicine to come.

ployment would drop by 80% in thenext twelve years, angry groups of mine-workers threatened to pull out of Laborand start a new political party. Majorbusiness leaders that \Vilson had drawninto government service have been re-signing. and the predictable fire fromthe Tory business community at a So-cialist Prime .Minister has been heavierthan normal. Imperial Chemical Indus-

tries Chairman Sir Paul Chambers rc-cently accused \Vilson of making thesame economic mistake as Hitler.

Purely Domestic. Having sworn solong to defend the pound against eventhe idea of devaluation. Harold \Vilsongave plenty of new ammunition to theTories when he broke his word. ToryLeader Ted Heath greeted the news hysaying. '" utterly condemn the govern.ment for devaluing the pound:' butQuintin Hogg. the Tories' shadow HomeSecretary. made a more telling thrust:"People are angry and humiliated bythis decision:' he said. "At last theywill realize that the Lahor governmentcannot govern with its financialpolicies."

Still, few feel that Harold Wilson is

31



about to lose his job. Though the To~ries would certainly demand a censure

vote, \Vilson, with Labor's SO-plus seat

majority, would almost as certainly winit. And unlike Attlee, who devalued in1949 with onlv a few months of his

term left, \Vilson has until 1971 beforehe must call a general election. If de-valuation at last begins to set Britainon the road to economic health, \Vil-

son could go to the country by then

wilh less trepidation.The question in Britain. and around

the world. was \vhether the devaluationwould really work. The bankers of TheClub are UIiderstandably a skeptical lotwhere British promises are concerned.

Early last week several dismissed talk of devaluation. "A temporary respite:'said the Deutsche Bank's Hermann Abs."Not a real solution," observed Swiss

Union Bank Chairman Dr. Alfred

Schaefer. "Devaluation alone wouldonly be a temporary measure," saidBank of America President Rudi Peter-son. The British are well aware that

devaluation alone is not enough. Chan-

cellor Callaghan indicated that the gov-ernment would couple it with enoughmuscle at home to ensure a turnabout

into the black in the balance of pay-ments of "$ 1.2 billion a year:' The

giant Trades Union Congress was dueto meet this week to discuss voluntarywage restraints, essential to ensure thata new round of wage and price in-

creases does not quickly nullify the

gains of the devaluation. But the feel-ing abroad was that \Vilson had de-valued as a purely domcstic politicalmove, being unwilling to suffer the po-

litical consequences of imposing the

strict economic reforms that the worldbanking communitv is convinced Brit-ain nceds. .

The Larger Market. The ripples ofthe pound's plunge inevitably reach far

beyond Britain. The U.S. had longpressed massive loans on Wilson in lieuof devaluation because it feared the ef-fect on the dollar. " I f it can happen tosterling:' ohservcd one Treasury con-

sultant, "people arc sure to ask, can't ithappen to the dollar tooT' Some prob-

ing speculation against {he dollar this

week seemed likely.Perhaps the most positive effect of dc-

valuation could be on Britain's applica~tion for Common Market membcrship.~1ost economists believc that Britain'sfinal economic salvation lies in a largermarket. In devaluing. Britain has ful-

filled one of Charles de G<lullc's-andthe Common !\tarket COllllllission',,-

two stated requirements for entry. Theother is the gradual dropping of ster-

ling as a re"erve currency. which Wil~

son's emissaries to Europe have alreadyagreed to consider. Devaluation Ihm.constitutes a major step toward meet-ing Europe's conditions. The real ques-tion, though, is whether Harold \Vilson

will follow it up with the toughncssand lenacity that will be required if Brit-ain is really to reap any lasting benefitfrom last week's disturbing step.

time magazine -1967 britains money crisis

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