The World

The sun may have set on Britain, but remember: the sun also rises

NICK ROY October 18 1976
The World

The sun may have set on Britain, but remember: the sun also rises

NICK ROY October 18 1976

The sun may have set on Britain, but remember: the sun also rises

The World

At the end of George Bernard Shaw’s play, Heartbreak House, the prophetic Captain Shotover is asked his opinion of what will happen to “this ship . . . we call England.” Says Shotover sternly: “The captain is in his bunk drinking bottled ditchwater and the crew is gambling in the forecastle. She will strike and split and sink.”

This autumn, as the once mighty British pound hit an all-time low, accenting the plethora of difficulties besetting the country, the captain’s words sounded unusually appropriate. International currency dealers, frightened by the immediate prospects threatening Britain’s economic recovery and doubting the government’s ability to handle the problems, began selling their holdings of sterling and switching to dollars, West German marks, Swiss francs and Japanese yen. By past standards, the selling wave was not large. The problem was that no one wanted to buy. The pound plunged dizzyingly—losing 10% of its overseas purchasing power in September alone—and when it reached a historic low of$1.63 (U.S.), Prime Minister James Callaghan was forced to turn to the International Monetary Fund for a $3.9 billion loan with which to buy sterling in an effort to bid up its value again. The decline was arrested at least temporarily, but whether the loan would restore world confidence was questionable. The Bank of England’s minimum lending rates were pushed up to an all-time high of 15% to curb the growth in the money supply and to make it more profitable for foreigners to hold sterling. In London, newspapers carried three-inch headlines reading CRISIS and POUND: THAT SINKING FEELING. But as usual, the phlegmatic British maintained their measured pace. One observer, surveying the placid scene, wrote: red-coated cavalry officers trotted lazily down London’s Rotten Row in a centuries-old tradition. Flowery ladies descended on Harrods to buy wildly expensive Scottish salmon, and erudite letters to The Times discussed when, if ever, clergymen are allowed to wear woolen nightcaps.

But the crisis refused to go away. The Economist, a respected and not easily excited weekly, carried a lead article entitled Repainting The Titanic and with it a picture of Callaghan, who had just delivered a blunt speech to the annual Labor Party conference, underscoring the fact that British socialism depends on the healthy survival of British capitalism; that Britain cannot go on borrowing money and that the very freedoms on which society is built are threatened. Speculation was rampant

about the possibility of Callaghan either resorting to massive import controls, with all the disruption that would bring to world trade, or throwing in his hand and forming a coalition government with the opposition Conservatives and Liberals.

In international circles, doubts were raised about whether the British really want to be cured of their “economic disease” or whether they even accept that they have an illness at all. Stories were revived about the “lazy British worker,” using the example of a Welsh coal miner with a long history of absenteeism who was asked by a visiting London dignitary why he persisted in working a four-day week. “Because,” he shot back, “I can’t make enough to live on working a three-day week.”

Ironically, the international uncertainties came at a time when the long-term economic outlook in Britain, despite its immediate difficulties, is brighter than it has been for several years. Inflation, while still high, has been reduced from an annual

rate of more than 20% last year to 13%. The Labor government has struck a voluntary pay restraint deal with the unions, the British hope to become major oil exporters in another year or so when North Sea fields start producing, and there are promising signs of an improvement in the country’s trade deficit with foreign nations. That deficit, many believe, will be turned into a healthy surplus if Britain can bridge its present difficulties until oil is available for export on a large scale later in the decade.

To understand the steady decline in sterling’s value and the latest plunge, analysts were forced more and more to turn to the reference books to reexamine Britain’s colonial and postwar history. The British pound, adorned with bejeweled portraits of the country’s kings and queens, was once the oil of world trade. A century or two ago, Britain’s ubiquitous colonies settled all their trade in sterling. The pound became such a common currency that other nations, too, paid their bills to one another in sterling. By the time the last of the colonies began to get independence in the 1950s, sterling had developed a stature of its own as a solid accessible currency whose amount would remain constant. It was also the currency that other countries borrowed to build their mills and factories, and when those countries sold more goods abroad than they bought they locked their surplus pounds in their national reserves, usually in British government stock.

But in the postwar decades, a metamorphosis swept through Britain, one that saw it change from a capitalist country to a mixed economy with a high priority on badly needed social welfare. Public spending rose to 60% of the country’s gross national product, restricting industry’s ability to find funds for new factories to fuel the country’s growth. The mills and factories that other countries had built with borrowed pounds were more efficient and more productive than Britain’s. British unions demanded whopping wage increases which couldn’t be justified by increased productivity because management, alarmed by labor’s militancy, refused to make the necessary investment. Inflation soared and so did Britain’s balance-of-payments deficit with other countries and its national debt. The discrepancy in inflation rates with other nations meant something had to give.

After the war, the pound was worth four dollars. By 1967, it was down to $2.40. Since then world currencies have been allowed to float to find their own values in relation to one another. The pound’s float has been almost straight down as other countries unloaded it from their reserves rather than hold it and watch the currency be devalued even more by Britain’s persistent inflation.

What happens next in Britain will likely be of immense significance to other Western industria] countries. If the value of the pound can be stabilized and world confidence restored. Britain may emerge from the recession with little lasting damage. Its method of working with unions to keep wage demands low voluntarily (about 4.5% increases each year are considered permissible) may well serve as a model for other countries to emulate as a way of controlling inflation without resorting to mandatory price and income controls. But the next few months are likely to be fraught with dangers. The falling value of the pound means that the goods Britain imports—more than 50% of the food it consumes, for example—become more expensive. This, in turn, may rekindle inflation and will unavoidably reduce real incomes, putting the unions under pressure to break the “social contract” and fight once again for higher incomes.

The likely international reaction to this would be another selling wave against the pound and the choices then facing the Callaghan government would be stark. Veteran politicians at Westminster say that if such an emergency develops the Prime

Minister will either have to cave in to leftwing Labor Party demands and erect a huge set of import controls to conserve and increase foreign reserves or admit defeat and try to form a coalition. Controls would be fiercely resisted by the IMF, whose help Britain needs desperately, by other countries in the European Common Market, and by the United States and Canada (Britain is still Canada’s second largest trading partner). Controls would almost certainly be met by trade retaliation from other Western countries and many experts fear this would lead to a reenactment of the destructive trade wars of the 1930s.

A coalition would raise serious questions about the future of the party system in Britain and about whether any of the existing parties has the ability any longer to govern without the partnership of the others. But it would also enable a future government to take far more effective steps to rectify the economy quickly without fear of being defeated in the Commons. So far, the British, from the cabinet office through boardrooms to the shop floor, seem convinced that a crisis can be averted and that the country will have the time it needs to put its house in order, continuing the slow return to economic stability and paying its own way once again with, among other things, the revenues from oil sales and production from gradually modernized factories.

Historian Arnold Toynbee likens the current state of Britain to a man in a canoe who is close to Niagara Falls but refuses to recognize any danger because he can’t see it. “Are we going, by a thirteenth-hour agonizing effort, to be able to beach our

canoe before it is carried over the edge?” asks Toynbee. But, if Niagara Falls is just ahead, you’d never guess it from Britain. NICK ROY.