Elusive Miracle

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 1 1/2% 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."

Harsh Enough. Characteristically, the latest controls on installment purchases nibble at one effect of too much money instead of getting at the root of the problem. Even so, optimism is growing throughout Europe that the British have finally adopted a sufficiently harsh set of domestic policies to make devaluation yield lasting economic gains--in time. "Devaluation has not been a success yet, but it may be shortly," says John Davies, director-general of the Confederation of British Industry. The recent performance of several key industries supports that hope. Auto exports have climbed sharply, foreign orders for aircraft, jet engines and computers are rising, and British shipyards are enjoying their best business in 17 years.

Britain obviously faces many more years of economic hardship, if only to repay its burden of foreign debt. Still, the brisk expansion of world trade (up 8% this year, compared with 5% in 1967) gives the country a brightening chance to escape from its economic morass. There is, however, one constant danger: a serious upheaval in world monetary affairs could easily halt Britain's comeback. For once, the trouble did not originate with sterling (see following story), but last week monetary storm clouds again gathered over Europe. The ever sensitive pound fell to its lowest level in ten months ($2.383), and jittery speculators showed a renewed appetite for gold.

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