Freeze & Squeeze

Prime Minister Harold Wilson has twice led the Labor Party to victory at the polls with promises not to engage in the type of "stop-go" economic policies that he accused the Conservatives of using in their economic crises. Yet last week he held up the biggest stop sign of all. In an effort to bolster the sagging pound, Wilson called for a freeze on all wages, prices and dividends in Britain as well as new taxes to squeeze inflation out of the economy.

All spring long, signs of economic troubles had been piling up. Britain's trade gap had continued to widen--by $67 million in June alone. Gold and hard-currency reserves had fallen by $372 million in four months. Inadvertently, Wilson himself had speeded the crisis. Before leaving for his trip to Moscow fortnight ago, he explained to the House of Commons that the new 7% bank rate had been urgently necessary to defend the pound, then went on to add that other emergency measures would come in ten days' time. The warning unnerved investors and sent the pound plunging to $2.78 11/16--its lowest point in 20 months.

Suez-Size Sessions. By the time he got to Moscow, Wilson realized that he could no longer hold off another prompt round of emergency economic measures. Returning to London one morning last week, he called his ministers together for the longest Cabinet session since the Suez crisis. As they discussed measures, reports circulated that Britain's reserves in July alone had fallen by perhaps $1 billion, reducing reserves near a dangerously low $2 billion. Thus, it was in an atmosphere of extreme urgency that he went before a crowded House of Commons with his suggestions for a cure.

Its aim was to reduce domestic demand by $1.4 billion and substantially trim overseas expenditures. In addition to a voluntary freeze on all wages, prices and dividends for the next six months and for "great restraint" for the half-year after that, Wilson:

P: Raised the purchase tax by 10% on an array of consumer goods, including autos, household appliances, beer, whisky and gasoline.

P: Increased sharply most telephone and postal fees.

P: Limited to $140 the amount of money a British tourist may take out of the country annually.

P: Ordered a $280 million reduction in overseas expenditures for military, diplomatic and foreign-aid activities.

P: Postponed the investment of $420 million in planned government construction projects.

Taking his case to the nation on TV, Wilson said: "All our history proclaims that in the British people there are deep reserves of strength. We are under attack. This is your country and our country. We must work for it."

Too Negative? Wilson will need all the support he can muster, for his own party is badly fractured over his freeze-squeeze plan. As he rose in the House to deliver his economic message amid Tory cries of "Where is George?," the Deputy Prime Minister and Economics Minister, George Brown, was indeed absent from the Labor front bench. He was in fact back at his office trying to make up his mind whether he should resign from the Cabinet. A strong believer in economic expansion, he saw Wilson's plan as too negative. Its deflationary content clearly meant a sharp rise in unemployment. After the speech, Brown called at 10 Downing Street with his resignation. Wilson asked him to sleep on it. Brown mulled it over for a few hours and decided to stay.

Wilson's most serious opposition seemed certain to come from the Labor Party's traditional power base, the trade unions. Frank Cousins, the chief of the powerful Transport and General Workers' Union (1,500,000 members), who only three weeks ago resigned from the Cabinet in protest against any official restraint on wages, vowed that he would support workers who were due for raises under previously agreed contracts. Other unions pledged to push for higher wages--freeze or no freeze.

Conservative Leader Ted Heath introduced a no-confidence motion against Wilson for his handling of the crisis. Wilson had little to fear from the vote. Still, the crisis had changed Wilson's standing in his party and in Britain. For the first time in his 21 months in office, his skills as a political leader were being seriously questioned. "The measures marked the end of an era," said London's leftist New Statesman. "His life as a political superman is over."

Devaluation Dangers. Despite the uproar, sterling recovered in the wake of Wilson's announcement to a healthy $2.79 1/16. Whether it would stay healthy was the question that international bankers were asking. They noted that such reforms as cuts in tourist allowances and overseas spending would take months to have any effect. What worried them most was that the key feature--the wage, price and dividend freeze--was voluntary, and the trade unions seemed reluctant to cooperate.

Many experts feel that Wilson may be forced to push a bill through Commons making the freeze mandatory, even at the risk of temporarily splitting his party. For if he fails in his present attempt to deflate Britain's inflation-ridden economy, he may soon be confronted with a far tougher alternative: devaluation of the pound. That he wants to avoid. Wilson is aware that the Labor government's devaluation of sterling in 1949 was a major reason for its expulsion from office by British voters two years later.

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