Britain: Defending the Pound

Before flying off to Washington, British Chancellor of the Exchequer James Callaghan had dinner in London with Groucho Marx. What did they talk about? Says Groucho: “We discussed the British financial situation.” Groucho was not kidding: that topic is foremost in many a European conversation these days. Callaghan made his trip to Washington to counter persistent fears on the Continent that Britain faces a major economic crisis in the fall and to show that, even if that should happen, Britain has a powerful financial ally in the U.S. “They are more sympathetic in the U.S.,” said the Chancellor, “than on the Continent.”

The Doubters. Callaghan could use some sympathy. The British Treasury announced last week that Britain’s gold and currency reserves fell by $67 million in June, to $2.8 billion, and that it had exchanged pounds for dollars under its $750 million swap agreement with the U.S. In addition, Britain faces a large seasonal payments deficit later in the year, finds her currency reserves drained each time a bit of poor economic news appears; bad May trade figures, for example, cost the British Treasury $140 million in reserves as holders of sterling sold off their pounds in exchange for gold and other currencies. Many European bankers feel that Britain is failing in her fight to boost export trade. As the respected London Financial Times recently said: “There is a growing tendency for the world at large to take the view that the writing is on the wall as far as devaluation is concerned.”

The Chancellor is determined not to see any such handwriting. He pointedly avoided any mention of devaluation in Washington and shunned the word crisis to describe the pound’s troubles. Callaghan swapped political stories with Lyndon Johnson for 45 minutes, talked about the pound’s situation with Treasury Secretary Henry Fowler, weighed in with Washington’s moneymen in a round of dinners, luncheons and conferences. He also dined privately in Manhattan with 30 financial and business leaders. “Short of something cataclysmic,” he said, “there is no reason why we should be in trouble.”

A Common Cause. Callaghan pointed to an improved payments deficit since last November’s sterling crisis, predicted that last year’s $2.5 billion deficit will be sliced to $850 million and that a surplus will be reached by the fall of 1966. He clearly feels that Britain’s austerity measures have not yet had a chance to work. He stressed the pound’s strong reserve backing: $2.8 billion in gold and currency buttressed by a $1 billion standby credit with the Federal Reserve System and the Export-Import Bank, plus a $1.2 billion Government-owned portfolio of U.S. securities that Britain is gradually converting into bonds and time deposits. Callaghan sought no official commitment of new support from the U.S., but a communique issued by him and Secretary Fowler spoke of the “identity of interests” between the world’s two reserve currencies, a hint to some that the U.S. would provide additional credits to tide the pound over any temporary crisis.