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The tightening clearly failed to work, partly because Britons kept right on buying more foreign goods than the country could afford. There were other reasons for the failure that were largely beyond Britain's control. The Arab-Israeli war in June moved angry sheiks to pull more than $100 million out of London banks and deposit it elsewhere. It also closed down the Suez Canal, costing Britain some $600 million a year in higher shipping costs for its exports and higher prices for the fuel and other raw materials it imports. Wildcat dock strikes in London and Liverpool cost another $180 million in exports not shipped abroad. And Wilson's austerity squeeze started at a time when world trade generally was slowing down, making it difficult for Britain to increase exports in the dramatic way that was needed to bring its trade figures into balance.
The massive trade gap, coming atop the long series of sterling crises, touched off a flurry of pound selling. Holders of sterling balances rushed to their telephones to trade their pounds for gold, dollars or any other hard currency they could buy. With the supply of pounds so much greater than the demand, the price of sterling inevitably was driven downwards, until on Friday it slipped under the government-support level of $2.7825, to $2.7822.
In the City, London's financial district, bewilderment and confusion ran rampant. Bowler hats hobbled after every rumor, as wave after wave of massive selling hit sterling. Exactly how much gold and foreign-currency reserves the government had to use up to keep the pound afloat was a state secret as vital as any kept by England, but estimates ran as high as half a billion dollars for the week, half of Britain's expected 1967 payments deficit and one-sixth of its total reserves. The scene was much the same on markets in Paris, Zurich and New York. Alone and without devaluation, Britain could not have saved the pound. In New York alone, the Federal Reserve absorbed an estimated $300 million in unwanted pounds each day last week, and on frantic Friday the U.S. helping hand may have reached $500 million or more in a support of the foreign-exchange market not seen since the day of John Kennedy's assassination.
The Economic Doctors. Bank of England Governor Sir Leslie O'Brien had gone to Basel over the weekend to negotiate a loan from the Bank for International Settlements. The pound steadied on the news of a new loan, then weakened when the amount turned out to be only $250 million—just enough to cover an installment on a loan owed the International Monetary Fund and due on Dec. 1. The Economist last week tartly referred to this loan as "an hors d'oeuvre." At midweek the BBC reported that Wilson was going to get a loan of $1 billion from the Group of Ten, the free world's leading financial powers, whose representatives were then meeting in Paris' elegant Chateau de la Muette. Next day the pound struggled upward, only to nosedive once more when Chancellor of the Exchequer James Callaghan, speaking in the House of Commons, refused to confirm or deny the rumor. As the week drew to a close and the Group of Ten's delegates disbanded and went home with nary a public promise of help for Britain, the Friday panic in money markets around the world inevitably resulted.