Time for Miracles

Only three weeks ago, the friendly central banks of eleven countries propped up the faltering pound with $1 billion of aid (TIME, June 24). Last week sterling suffered another sinking spell. At one point it dropped to an exchange rate of $2.7869, its lowest level in 21 months, forcing the Bank of England to dig into the country's slim reserves to shore up the currency.

The 45-day seamen's strike, the government reported, had cost Britain $137 million in gold and dollar reserves during June alone. That meant a four-month drop in reserves of $372 million, forcing London to call on a $750 million line of credit it has with the Federal Reserve Bank of New York.

Beyond that, Prime Minister Harold Wilson angered industry and the financial community by scaling down the amount that the government proposed to spend on nationalizing Britain's 13 largest steel companies.

Rebuff for Restraint. Wilson also had troubles inside the Labor Party. Minister of Technology Frank Cousins (see THE WORLD), a dedicated, emotional trade union leader, resigned in protest against Wilson's aim of holding down wage increases. The dispute hardly bolstered confidence in the British econ omy or the value of the pound.

Foreign problems also gnawed at the pound. Switzerland last week raised its bank discount rate from 2 1/2% to 3 1/2% , thus becoming the fifth European nation to do so in the past ten weeks. The higher rates have helped pull short-term money out of Britain.

All this confronted the Bank of England with a delicate dilemma: Should the bank recommend an increase in Britain's discount rate from 6% to 7%, or perhaps more? Such a move would reduce the sterling drain, but it would make it harder for British businessmen to borrow money, and thus unsettle the economy more. The decision is largely up to Leslie K. O'Brien, who took office last week as the bank's 114th governor.

Up from Envelopes. A white-thatched bank veteran of 58 who came to the Old Lady of Threadneedle Street directly from secondary school in Wands-worth, a lower middle-class section of London, O'Brien worked his way up in 39 years from clerk to chief cashier and deputy governor. Harold Wilson picked him to succeed Lord Cromer, who left at the end of his five-year term to resume his partnership in the famed banking house of Baring Brothers. The O'Brien appointment was calculated to offend neither the financial community of "the City," which would have resented the traditional selection of a Treasury aide, nor Labor's obstreperous left wing, which would have been unhappy with a private banker. O'Brien, who likes to play tennis on weekends at his Wimbledon district home, aimed his first shots toward midcourt. "We are the executants of monetary and exchange policy," he said. "But monetary questions cannot be isolated from the rest of the economy."

Indeed not; and suggestions echoed around London last week that raising the bank rate alone might not be enough. Apart from devaluation, which the government is desperately determined to avoid, there are two possibilities for further action: a politically risky wage freeze and import controls. Clearly, Britain will need Draconian measures--or miracles.

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