Britain: Elusive Miracle

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Precisely a year ago this week, Britain swallowed its pride and cut the exchange value of its tottering pound from $2.80 to $2.40. The third devaluation in 36 years was aimed at giving the country time to repair its foundering economy. The Labor government maintained that the devalued pound would swiftly turn the U.K.'s persistent trade deficit, a major source of sterling's troubles, into a surplus. With British goods much cheaper in the world marketplace, exports would rise while imports declined because foreign products automatically would cost Britons more. Surveying the early results, Prime Minister Harold Wilson exuberantly announced last summer that his country was "on the way to an economic miracle."

The miracle remains elusive. Last week the Board of Trade reported that Britain's trade deficit rose to $158.4 million in October—double the September deficit—as exports dropped sharply and imports climbed to a near-record level. The trade deficit for the whole year is now expected to reach $1.68 billion, the highest figure since 1951. As one consequence, instead of achieving the "substantial surplus" in its overall balance of payments that Wilson foresaw, Britain is heading for a $600 million deficit this year.

Belated Austerity. What went wrong?

With surprising unanimity, economists and bankers in and out of Britain agree that Wilson waited too long to clamp down on domestic consumption. Forewarned that curbs were coming and fearful of higher prices, Britons went on a spending spree. Consumers not only bought up imports but helped to keep British industry from taking much advantage of its opportunities to sell abroad. "We definitely miscalculated by delaying as long as we did," admits Wilfred Brown, the Board of Trade's minister of state for exports. Even after Wilson belatedly imposed austerity measures—heavy new taxes, tight wage controls and a skimpy national budget—the buying binge continued. Instead of falling by about 1½% this year as the government intended, consumer spending seems likely to rise by 2%. Three weeks ago, that prospect prompted the Board of Trade to toughen the country's already stiff controls over installment buying of autos, TV sets, furniture and other durable goods.

The new rules also reflected pressure from Britain's foreign creditors. In return for a $4.9 billion line of credit, without which Britain would be bankrupt, other nations have insisted that the country overcome its chronic habit of living beyond its means. Lately, under prodding from abroad, the British have been pondering whether to rely more on controlling the money supply to regulate the pace of business. During the second quarter of this year, the amount of money in circulation rose at the inflationary rate of 10% a year. Many economists now contend that this was an underlying cause of the worrisome consumer-spending spree. Argues London's influential weekly, the Economist: "The British government's views on money supply are completely out of date."