The $3 Billion Bail Bond

Harold Wilson came to power seven weeks ago promising that "Britain will have just as much influence in the world as we can earn and deserve"--and gave his Labor government 100 days to make its mark. The financial world passed judgment in less than half that time, and in a crushing vote of no-confidence last week mounted the heaviest attack on the pound that Britain has faced since the early postwar years.

Thanks to a $3 billion, eleven-nation bailing-out operation backed by the U.S., both the pound and the Prime Minister managed to survive. But the lesson of Wilson's first major crisis may be felt for many times 100 days.

The Laborites--as even most Tories now admit--inherited an Augean mess.

The Conservative government had closed its eyes too long to a mounting trade deficit that by year's end seemed certain to top $2 billion, almost equivalent to the gold reserves of the entire sterling bloc (see charts}. Theoretically, few economists quarreled with Wilson's first, stringent measures to close the gap: a "temporary" 15% tax on virtually all imports reaching Britain, plus tax incentives for British industrialists who boost exports. Practically, however, Wilson could hardly have acted more ineptly.

Waiting for Noah. The surcharge on their exports was a jolting setback for the Commonwealth nations and Britain's trading partners in E.F.T.A., Europe's Outer Seven: yet the Prime Minister made no attempt to soften the blow by consulting them in advance.

Too late, British officials scurried across the Continent to plead their government's case--resembling, in former Tory Party Leader Iain Macleod's withering phrase, "doves sent out from the Ark to tell people that Noah's sorry it's raining." Even so, hardheaded foreign bankers might have waited for Noah to reach dry land if there had been any real sign that the government was coming to grips with Britain's basic economic ills. On the contrary, Wilson clearly assigned priority to expanded welfare statism that Britain can patently ill afford. He also insisted on doctrinaire legislation such as renationalization of steel, hinted at new, incentive-stifling corporate and capital-gains taxes. Convinced that Britain's financial position could only worsen, international bankers scrambled to unload their sterling holdings.

Gnomes of Zurich. London's top merchant bankers came to Wilson two weeks ago to warn that he could only avert a full-blown crisis of confidence in the pound by raising the Bank of England's interest rate on borrowed money from 5% to 6%, in , order to damp down domestic consumption and lure international investors back to the sterling bloc. The Prime Minister refused on the dogmatic grounds that he would not resort to the "stop-go" economic policies of the Tories--who nonetheless had never faced a balance-of-payments gap as formidable as that which confronted Wilson. While Labor backbenchers muttered against international financiers--the "gnomes of Zurich"--Wilson warned direly that world bankers would have to "pay the price for their lack of faith in Britain." The price, in fact, was paid by the Bank of England, which was forced to pump in dwindling reserves to support sterling at the minimum official rate of $2.781 to the pound. Finally, after a weekend huddle with his ministers and consultations with the U.S., Wilson hiked Britain's bank rate to 7%, the "crisis" level. As a result, Washington was forced to raise the U.S.

discount rate from 3.5% to 4% (see U. S. BUSINESS). But for the pound, it was already too late. By then the stampede from sterling was in full thunder, whipped on by worldwide speculation that Britain would be forced to devalue.

Telephone Offensive. Only four years ago, that might indeed have been the result. Since then, however, the U.S.

has cemented cooperative agreements with Europe's powerful central banks to bail one another out whenever any nation's currency is under attack. As the world's No. 2 reserve currency, after the dollar, the pound plainly had to be defended. Within minutes of receiving a Save-Our-Sterling message from Whitehall, U.S. monetary officials and Bank of England experts in London's Threadneedle Street embarked on a nightlong telephone offensive that by next day had raised the $3 billion bundle that Britain needed. Said Treasury Under Secretary Robert Roosa: "This was the biggest and quickest monetary rescue job ever seen."

The crisis was a rude shock for Labor, and a sobering reminder that the whole British economy must become drastically more efficient to survive. "Gone is the illusion," wrote the Financial Times, "that more benefits for all could be squeezed from static production. Gone is the illusion that growth can come from talk. Gone is the illusion that planning can ignore finance . . . Labor's ideas have been swept away with almost frightening speed."

The huge sum that rescued the pound must be repaid within six months, and Britain's creditors thus hold a de facto veto power over government policy. In effect they will insist that Britain must regain solvency and international confidence before anything else is undertaken, including further expensive welfare schemes.

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