WESTERN EUROPE: Game Without Chips

At noontime one day last week a platoon of brass-buttoned, bowler-and top-hatted runners fanned out from the Bank of England through the rabbit-warren streets of the City of London. When their message reached the stock exchange, there was stunned silence, and for almost half an hour trading was all but suspended. By government decree, the Bank of England interest rate (on which most other British interest rates depend) had been sharply raised from 5% to 7%—its highest level since 1920.

This was Britain’s emphatic answer to an emphatic crisis in Western Europe’s currency, involving Britain, France and West Germany. Two months ago, without whispering the dreaded word devaluation, the French devalued the franc by 20%. After that, word spread that prosperous West Germany, well on her way to cornering Europe’s foreign-exchange reserves, would soon have to do the opposite, and revalue its Deutsche Mark against other currencies. Anxious to get hold of Deutsche Marks while they were still “cheap,” foreign speculators began buying them up at a rate that in September reached $100 million worth a week. To finance their purchases, many of the speculators sold British sterling, thereby creating a run on Britain’s gold and dollar reserves and setting off talk that the pound would soon have to be devalued.

Helpful Erhard. It was a situation nearly as embarrassing to Bonn as to London. Early last week West German Economics Minister Ludwig Erhard moved to make investment in Germany less inviting by lowering the West German central bank rate from 4¢% to 4%. Less than 24 hours later, Britain’s Chancellor Peter Thorneycroft made his drastic change in the Bank of England interest rates. Between them, Erhard and Thorneycroft hoped to halt, if not reverse, the flight from the pound to the Deutsche Mark.

Not the allure of the Deutsche Mark, but steady inflation at home is what does most to injure the value of the British pound. To remedy this, Thorneycroft last week acted with the characteristic talent of the British to accept bad news and get on with it. He abandoned government plans for a 20% increase in public investment next year and asked all private banks to freeze credit at the present level. These actions would put quite a crimp in the Tory electioneering promise of all the delights of the welfare state plus a sound economy. It was apt to mean dearer goods, less industrial expansion and, in all probability, some added unemployment in Britain. Politically unpopular as this was likely to be-“a sudden and savage setback,” cried Liberal Party Leader Jo Grimond—Thorneycroft’s measures were a step toward economic good health for Britain and all Western Europe.

How Many Can Play? Thorneycroft plainly indicated that he thought the next step was up to the U.S. In the first six months of this year, U.S. exports to the sterling area exceeded imports by $396 million, and that hardy old bogey, the dollar gap, was once again casting its specter over Europe. (Even the Germans have an unfavorable balance of trade with the U.S.) At this week’s International Monetary Fund meeting in Washington, Thorneycroft and other European delegates will pose anew the old question: How can Europe play in the poker game of international finance and trade when the U.S. holds the chips? The implied European threat is to set up its own separate game, cutting all the U.S. imports it can.