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A cold indictment has been drawn by Britain's creditors in the world. For the dozenth time since World War II, London finds itself caught in a cruel balance-of-payments squeeze that threatens the value of the pound and Britain's prosperity. Britain has always had to trade to live on the scale to which it has long been accustomed as a world power—and it has been notably unsuccessful in the postwar era in selling more than it buys abroad. No sooner does the economy get going than imports rise, the balance of payments goes sour, and London must clamp down at home through controls and deflation while it borrows abroad to cover its payments debts in the interim. Such is the "stop-go" method resorted to by Tory and Labor governments alike for 20 years.
This time the stop is so serious that Harold Wilson has taken "steps that have not been taken by any other democratic government in the world," as he told President Johnson. The steps: freezing wages and prices throughout Britain for six months, to be followed by another half-year of "great restraint." The wage freeze is the more important in the gimlet eyes of Britain's foreign creditors, who have put up more than $3 billion to defend the pound. For if Wilson cannot hold down wage increases in a period when his other taxation and monetary measures are taking hold, all credibility in the value of the pound will be undercut; British export costs, swollen by excessive wage gains, will rise, slowing foreign sales of everything from cars and gin to razor blades and woolens. Particularly because his is a Labor government, Wilson's ability to rein in wage demands is almost the litmus test of his ability to set his economy in order.
Beneath the immediate international problem of the payments deficit lies the fact that British productivity lags behind that of Europe or the U.S. From 1960 to 1965, U.S. productivity rose by 21%, West Germany's 29%, Italy's 40%—and Britain's only 18%. For each worker needed to produce a ton of steel in the U.S., three are needed in Britain. In manufacturing, it takes 2.52 Britons to equal the output of one Canadian, 1.89 to equal a Swede's. Yet hourly earnings in British industry grew by 33% in 1960-65—plus another 7% in manufacturing during the first three months of 1966. "More people in Britain pushed up their earnings more steeply for less work than any time since 1960," said the Economist. "Nothing exceeds like excess."
The East-of-Suez Factor
Britain's economic sickness has a long history and many causes. British aid to underdeveloped nations and support for troops in Europe and east of Suez are so large—$1.7 billion a year—that eliminating them would have given Britain a rosy surplus in its balance of payments last year. This is the price Britain has chosen to pay to remain one of the world's major powers—a role that many critics argue she can no longer afford. Largely for the same status reasons, London upholds sterling as an international reserve currency financing 40% of world trade, second only to the dollar.