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In Japan, now the world's fourth largest industrial power (after the U.S., the U.S.S.R. and West Germany), the economy expanded by a prodigious 12%, even after discounting the 5% price inflation, and the central bank turned to tight money to cool the boom. The Mideast war crippled the economies of Jordan and Egypt. The resulting closure of the Suez Canal, by adding $600 million a year to British shipping costs, provided another stroke of misfortune amid Britain's already critical economic plight. Even after Harold Wilson devalued the pound 14.3% from $2.80 to $2.40 (thus prompting 22 other countries to devalue their currencies as well), trouble tormented Britain. Many economists figure that devaluation gave the U.K. no more than two years' respite to cure the source of sterling's weakness: its chronic excess of imports over exports. In the weeks right after the devaluation, the gap only widened, and speculation against the pound rose when Aubrey Jones, chairman of the wage-restraining National Prices and Incomes Board, raised the possibility of a second devaluation. If that occurs, he predicted in a London speech, it would also lead to "a devaluation of the dollar, with severe restrictions on world trade."
There is practically no possibility that the dollar will be devalued in the foreseeable future, even though the fall of the pound led speculators to launch the century's most frenzied gold-buying spree. The value of other Western currencies is measured against that of the U.S. dollar. As the key currency in international trade and finance, the dollar is technically backed by the U.S. Treasury's promise to redeem dollars in gold, at $35 per oz., on demand by foreign central banks. The only way the U.S. could devalue would be for Congress to raise that price. With $26 billion worth of gold (including the $12.4 billion U.S. stock) pledged to fight speculators, the seven-nation London gold pool has enough resources to maintain the price for years, provided that its members stick together. Beyond that, the true worth of the dollar depends on what it will buy and thus rests ultimately on the strength of the U.S. economy. The dollar's gold underpinning has diminished, and its economic source of support grows steadily larger.
To maintain its position, the U.S. must take steps to curb its own $2.3 billion-a-year (and rising) balance of payments deficit—the excess of dollars going abroad for war, tourism, investment and foreign aid over those coming home from the now shrinking trade surplus. "We are at a critical juncture," says Raymond Saulnier, former chairman of the White House Council of Economic Advisers. "As long as the federal budget remains deeply in the red, we will be continuously vulnerable to financial crisis that would lead to a recession, potentially to a serious one."
A Better '68