The devaluation of the pound sterling on November 18, 1967, and the announcement on January 16, 1968, of a firm timetable for Britain's withdrawal east of Suez have been widely lamented as marking the "end of an era." Along with such spectacular domestic reversals as the imposition of charges for medical care and the promise of still heavier taxation, the events of the past several months may at least justify the clichés, so often repeated, that Britain is at a "turning point" or has reached a "crossroads." But does all of this necessarily mean continuing deterioration or indicate that Britain's economic base can no longer support her as a major power? Or can those of us looking on from outside reasonably hope that what Labor Ministers have called the "second Battle of Britain,"1 will result in new patterns of economic expansion?

Grounds can be found for predicting either outcome. The attempt here will be to search out some of the more encouraging possibilities. To fit these into perspective, one must first take a closer look at what has been going wrong in Britain during the post-Marshall Plan period, and then at what seems to account for the climax reached near the end of 1967. Indeed, any appraisal of where the British economy is heading must be mainly based on an analysis of where it has been.

II. WHAT HAS BEEN GOING WRONG?

Britain's root problem is that she has been attempting for too long to do more than her own capabilities, as currently mobilized and motivated, could support or afford. The gap between ambition and performance has revealed itself most arrestingly in the succession of balance-of-payrnents deficits, culminating with increasing frequency in balance-of-payments crises, and climaxing at the end of 1967 in the devaluation-in effect, a repudiation of 14.3 percent of Britain's external obligations to unprotected holders of sterling, in a last-resort effort to bring her receipts into line with her outpayments. A diagnosis of what went wrong must clearly begin, therefore, with the balance of payments; but it must then be extended back into the functioning of the British economy itself.

Britain's shortfall of total receipts below total expenditures was not conspicuously large in most of the years following the completion of the Marshall Plan in 1952. Moreover, her current accounts (which in British accounting include merchandise trade, the "invisibles" such as interest and services and all government transactions except those for long-term capital flows) have actually been in a condition of modest surplus more often than in deficit over the fifteen years through 1966, with an average current- account surplus of nearly £50 million per annum. This was far from sufficient, however, to cover both the private capital outflow, short-term as well as long-term, and the Government's long-term capital transfers. That is why Britain had to turn to the International Monetary Fund for borrowings and standby credits in every year from 1958 onward (with the exception of 1960), while also arranging a succession of short-term loans from various central banks over the years from 1961 onward.

Although these various drawings and borrowings were periodically "cleaned up," a residue of increasing dependence upon special credits steadily accumulated. When devaluation came, the cumulative total of the indebtedness incurred by the Bank of England for balance-of-payments purposes was probably larger than the total of Britain's official monetary reserves, which have customarily been between $2.5 and $3 billion. The annual repayment and interest required on these official borrowings may well be more than a billion dollars for several years ahead.

Because the United Kingdom had for so long failed to satisfy Mr. Micawber's rule equating ha'penny surpluses with happiness (and ha'penny shortages with disaster), holders of sterling became nervous whenever events took a turn for the worse. As a result, outflows of capital aggravated any significant increase occurring in the current balance-of-payments deficit. To be sure, this amplification of the swings could have been avoided by following a course that Mr. Micawber would also have readily understood: by increasing the inflow a little, or reducing the outflow a little, or perhaps doing a little of both. While acknowledging self-consciously that the same kind of prospect has long confronted the United States, without our finding an effective answer, one may ask more comfortably from a distance why Britain did not translate Micawber's homilies into effective action.

Part of the difficulty seems to have come in Britain (as it has for some years past in the United States) from focusing on immediate results, as these show up in transactions across the exchanges, without adequately treating those parts of the cause to be found in the action of the domestic economy. Export drives, easier terms for exporter credit, an interval of import surcharges, wage and price and profit limitations, credit squeezes and higher interest rates to attract or hold shiftable funds-all these and more were tried in Britain's attempt to reach a sustainable equilibrium. The emphasis, as it had to be in each specific situation, was upon transfers of goods or capital from one use to another, rather than upon the longer-run potentials for expanding the economy as a whole in ways that would also assure a closing of the balance-of-payments gap. To be sure, the underlying need for greater productivity was often discussed, as well as the desirability of greater growth, but not until after devaluation had occurred was moderate expansion spelled out as the way to grow out of the persistent deficits (for example, in Chancellor Jenkins' speech to the Overseas Bankers Club on February 5).

In so far as generalizations can be permitted in situations of such intricacy, it is probably fair to characterize most of the British approaches over the past fifteen years as "static" rather than "dynamic." The unspoken assumption in Britain has been that a fundamentally sound economy had merely slipped out of balance, with its obligations to pay out funds temporarily running ahead of its receipts. Such an assumption was not simply a case of traditional British complacency; it had some basis in fact. For the recorded accounts of the private sector (taking trade and capital flows together, but excluding balance-sheet changes on the books of the monetary authorities and the banks) were actually in surplus for twelve of the fifteen years from 1952 to 1966 inclusive; for all fifteen years the average annual surplus in the accounts of the private sector was nearly £ 200 million.

What threw the overall accounts out of balance was the uninterrupted and growing deficit on government account for goods, services, transfers and capital flows, aggregating on average some £320 million over these same years. From a magnitude of something under £100 million in 1952, the Government's overseas deficit had grown to a magnitude of £525-550 million in 1964 to 1966. The outposts of the Empire and Commonwealth were absorbing more development capital; the extent of Britain's overseas defense commitments was continuing largely unchanged, and the cost was growing.

On looking further behind these results, however, one finds that the private surplus (as has usually been true since data first became available in 1696) was entirely attributable to the "invisibles"-that is, the earnings from overseas investments and the financial and trading services which Britain had performed with incomparable skill and imagination for so long. Merchandise exports, though growing, rose more slowly than the gross national product, and the size of the gap between imports and exports was almost exactly the same in 1966 as it had been in 1952. In sum, the overall picture was roughly this: with overseas government disbursements rising rapidly, the trade deficit did not improve so as to help cover those costs; private capital outflows fluctuated around moderate levels with little sustained change; and the gains from growing private invisible earnings were not enough to offset all of the other continuing or increasing drains.

The obvious corrective would seem to have been either a reduction of the Government's overseas spending or a reduction of the deficit in merchandise trade. Despite some trimming as the bonds of empire were being loosened, the record of year-by-year rises in government overseas spending continued uninterrupted until 1964, when it was stabilized at the high levels already mentioned. Only now, through the dramatic decision to withdraw militarily from east of Suez within four years, has a major reduction of spending commitments been attempted.

So far as Britain's competitive position in world trade was concerned, the "static economy" approach was again evident; her potential for an aggressive expansion of exports was limited by the influence of the "underemployed economy" mentality, surviving from the thirties and earlier. It was reflected in the thinking of men more concerned to redistribute income than to enlarge the total, or more concerned to protect existing investment or an existing job than to take a chance that redirected investment or rearranged working conditions could soon yield greater rewards. Though certainly not unique to Britain, it is a cast of mind that has led there to providing state assistance for medical care, housing and education-all urgently needed, to be sure-on the unspoken assumption that legislative authorization was enough to assure that the economy could produce the needed resources and transfer them to these worthy ends.

In practice, however, this emphasis on redistribution has also brought about a remarkable leveling of incomes from which, as further noted below, major new influences must eventually begin to flow. Within the decade from 1954-55 to 1964-65, the distribution of incomes had so shifted that by the latter part of it nearly one-half of all after-tax incomes were closely clustered around the national average, whereas at the beginning of the decade the proportion had been only slightly more than one-third. While all money incomes had risen in those years, the proportion of total wage earners in the lower-income brackets had shrunk sharply, as had the proportion in what might be called the "upper-middle" income range.

The result was a social explosion, as millions of people moved out of the settled grooves of centuries and began to take advantage of the opportunities of middle-income living. These people will probably come in time to identify their own interests with the greater growth of the economy as a whole. But thus far a restrictionist and redistributive state of mind has apparently continued to dominate the attitudes of many groups in Britain, including those unions which still insist on featherbedding, for example, and those employers and unions which oppose the introduction of highly productive new investments. While the new middle class is already enjoying greater educational opportunities, which will mean undoubted gains for Britain's future productivity, this has not yet attained the proportions of a decisive change. At the latest count, only 19 percent of the 15-19 age group were in school or university (while in Japan, for example, the figure is over 40 percent).

With public policy emphasizing redistribution of income and welfare programs, the rate of household saving has remained relatively low- considerably below that of the seven principal European countries for which comparable data are available. With business saving also comparatively low, the overall rates of gross saving, as well as gross capital formation, on average from 1958 to 1965, have been lower in Britain than in any of the European countries covered in the OECD's "Capital Markets Study." (Paris, 1967.)

Successive governments have tried, too, to provide special incentives for new investment. But even in these cases, the emphasis has been put largely, for good social reasons, on relocating industry so as to absorb local pools of unemployment, rather than on stimulating generally all constructive investment capable of improving productivity and output. Moreover, when governments have acted to encourage new initiatives, a peculiar insensitivity to the effects of their actions upon incentives has ironically allowed them on several occasions to take other actions almost simultaneously which had offsetting effects upon business confidence. What matters is not the details of particular episodes, of course, but rather the fact that neither government stimulus nor private enterprise had by November 1967 generated a higher level of productive home investment.

The end result in terms of the gross national product has been that over the years 1960-65 (the years covered in the OECD study) the average growth of the United Kingdom at constant prices was only 3.3 percent, while the rates for other reporting OECD countries ranged upward from 4.3 percent, generally averaging better than 5 percent. The implicit orientation of so much of public policy and private objectives toward the premises of a static economy had, perhaps not surprisingly, produced one.

By 1967, other factors, some of them long in the making, also assumed a dominating importance. Among these, perhaps the most significant was the increasing vulnerability of the large volume of outstanding sterling balances. Now let us take a closer look at the events leading up to the November 1967 crisis, before proceeding to appraise the opportunities which it may have opened up.

III. THE CAUSES OF THE CRISIS

Each of Britain's crises, in 1956, 1961, 1964, 1966 and 1967, was characterized by a speculative run on sterling. The proximate cause each time was different, but the underlying preconditions were the same: the weakening balance-of-payments position just described, and, superimposed upon that, the instability of sterling balances.

Total sterling balances in 1967, including both private accounts and those of foreign central banks and governments, were close to £5 billion, not very different from the figure of twenty years earlier. To meet these liabilities, Britain held official gold and dollar reserves equivalent to about £1 billion and unused rights to draw on the International Monetary Fund and temporary central bank credits of perhaps £750 million more. To be sure, in a broader sense, the combined overseas investments of the British Government and its nationals were several times the total of sterling liabilities; there was no question, in banking terms, that Britain as a whole was solvent. But the question asked, not only by holders of sterling balances but also by the bankers and traders entering into contracts payable in sterling, was whether Britain could muster enough current assets to meet whatever part of her current liabilities might reasonably be expected to come in for conversion.

Britain's special vulnerability thus came from the fact that, in addition to questions which any country must face as to its ability to meet its own current payments, she also was exposed to demands amounting to many billions of pounds arising from the current commercial transactions of other countries, denominated in sterling; and in addition she had to cope with the £5 billion of sterling balances, many of which were not involved in these outside commercial transactions but rather represented investments and monetary reserves.

If there was confidence that Britain could always convert sterling into other useable international assets-and this ordinarily meant into U.S. dollars at $2.78-32.82-then there would be no occasion for holders and users of sterling to rush to convert their pounds into something else whenever Britain's ordinary accounts showed an increasing deficit. But as crisis followed crisis, that confidence wavered, and the holders and users of sterling had to take what precautions they could against the risk that Britain would in desperation have to devalue her currency in order to scale down the amount of other foreign exchange which she would have to pay out against the presentation of sterling.

Right up to the eve of devaluation, the British authorities met that risk by contracting to purchase pounds for future delivery, against payment in dollars on agreed later dates, at only a nominal discount from the market rate. This reassurance, combined with the Bank of England's access to sizeable supplies of foreign exchange through swaps with other leading central banks, was effective until the final days in keeping the doubts and pressures from creating a disorderly rout in the markets for sterling. But even the evidence of the Bank's increasing use of these defensive facilities, from 1964 to 1966 and then in 1967, proved in the end a somewhat unsettling factor.

The underlying concern was always, however, with Britain's balance-of- payments position; what happened to sterling externally was only a symptom of this concern. And with respect to the balance of payments, timing played some perverse tricks. Following Britain's courageous and drastic effort in July 1966 to control home inflation and promote exports, the world was waiting for evidence that she could begin to earn enough above her current requirements to start strengthening her own reserves. At first, there was an improvement in her reserves; as in-payments shot ahead toward the end of 1966 and early in 1967 it seemed that a turn might have come. For the twelve months ended June 1967 she had reached an overall balance in her total accounts. And some of the tighter constraints she had imposed were eased, particularly those on wages.

Yet underneath, the trade position as such was worsening. Even though mainly for temporary reasons, related to the slowdown in Europe and particularly in West Germany, exports declined after the fourth quarter of 1966, while imports bounded upward. Then in June came the war in the Middle East, the blockage of the Suez Canal and additional costs or losses for Britain totaling several hundreds of millions of dollars. As a further exacerbation, in mid-September, when reserves had already begun to flow out again, the dock workers in London and Liverpool began a costly two-and-a- half-month strike. This had a peculiarly perverse effect upon Britain's trade, in that it had a heavier impact on exports than on imports. The earlier improvement in reserves was also misleading because it had reflected, in part, another of those short-term shifts of funds between New York and London which had for a long time been distorting the accounts and disturbing the exchanges, despite official efforts to offset them.

The timing of still another set of events occurring in the summer and autumn of 1967 had a perverse impact upon sterling. This was the conclusion of a four-year series of studies and negotiations among the leading industrial countries and within the International Monetary Fund which pointed toward the creation of a new form of multinational reserve asset. Though the long-range implications of the agreement reached at the Annual Meeting of the IMF, held in Rio de Janeiro at the end of September 1967, were reassuring, the very fact of concentrating world attention upon the need for reform had unavoidably also set off new questioning and nervousness about the monetary system and, thus, about its key currencies.

In this environment, against a background of worsening trade figures, speculative elements began to take over. No outsider can know as yet how much Britain had to pay out across the exchanges as the crescendo of sterling sales mounted in the last hectic days before the markets closed for the weekend on Friday afternoon, November 17; nor how much sterling she contracted to buy some months in the future, at prices in line with the pre- devaluation exchange rate. Certainly at the pace then prevailing, she would have consumed all her reserves and all available temporary central bank credits if the run had continued much longer; gold sales through London were close to $1.5 billion in the two-month period, November-December.

Fundamentally, the run was unnecessary. Certainly it was inflamed by a sequence of invidious rumors from one source. But once the run intensified, Britain had little choice left. Then, having devalued, she still faced the same essential problems and the same need for a more dynamic home economy that had been becoming increasingly apparent with each of the preceding crises. She did, however, emerge with two advantages-both of them similar to those enjoyed by France as a result of her 30 percent devaluation nearly a decade earlier.

One advantage was that, apart from a few countries very closely knit within her own currency area, almost no other country devalued. By contrast with Britain's own previous devaluation in 1949, when countries accounting for 50 percent of the industrial world's exports all devalued, this time the countries which did so accounted for only 2 percent. Her other advantage was that she was able to set the pound at a clearly undervalued level, while benefiting from the consistent solidarity of the other leading countries in holding the line on their own exchange rates. Statisticians differ widely in these matters, but those whose calculations indicated a need for devaluation put the figure between 6 and 8 percent. Having cut the pound by 14.3 percent, without suffering any offsetting retaliation from other major countries, Britain acquired a built-in stimulus to her exports and a restraint on her imports. These can prime her entire economy as well as the needed correction in the balance of payments-provided she can hold the domestic line on inflation of wages and prices. That the British Government appears determined to do.

Britain is still going through a strenuous transition as these words are written and will still be suffering from the aftereffects of the November crisis when they appear in print. Immediately, she had to find the means to pay off her huge forward commitments incurred in October and November, 1967. Over a longer period, she will also have to deal with the fact that her central bank borrowings will mature and her drawings on the IMF dating back as far as 1966 will come due. Judging by the performance of the exchange markets and the assurances of her Ministers, these debts are being met. No doubt most of the wherewithal for meeting them comes out of return flows as confidence revives, but also some may be coming out of funds attracted by interest rates that conform to a Bank rate of 8 percent, and perhaps a slight amount may represent the first returns from a rise of export orders.

Both 1968 and 1969 will, none the less, be years of trial. The Government has made it clear that austerity in home consumption will have to continue; a severe budget is anticipated for March 19. There is little doubt, however, that the present Government, chagrined but determined, can by one device or another make ends meet during the remaining three years of its official life-unless combatted again by a speculative fever aroused by fears that there will be another round of devaluation.

Apart from fears that might be created by irascible harassment from outside, which doubtless could be contained by a massive show of coöperation among central banks, there would seem to be only two ways in which new pressures could build up against sterling. One might be through generalized fears about a breakdown of the international monetary system, particularly fears that the United States might run out of gold and thus jeopardize confidence in the $35 price of gold as the fixed base of the system, before the special drawing rights (SDR) had been put into place as a multinational buttress for that price. Against that contingency, there is little that Britain can do on her own. But this threat does underline the crucial significance of the U.S. assurance that all of its gold is available to maintain the gold price, and of the U.S. program to restore a balance in its own accounts promptly. It also emphasizes the need for all countries to work with deliberate speed for the completion of the SDR arrangements.

Other possible incentives to speculation against sterling would be indications that Britain was not making the most of the time gained by devaluation and temporary austerity to establish a basis from which to launch a dynamic expansion of her home economy and create a lasting equilibrium in her balance of payments. Let me now focus on some of the possibilities for success in these directions.

IV. THE PROMISING PROSPECTS

For at least a decade, outside observers have looked to the possibility of Britain "joining Europe." Despite her own myopia in earlier years, and General de Gaulle's periodic rebuffs more recently, she might still join the European Economic Community. In addition, other alternatives to waiting for entry on the present terms may emerge. French efforts to dominate the EEC have annoyed other members and may ultimately persuade them that the Rome Treaty went unrealistically far; that the plan to fuse nationalist motivations will for some time remain an unattainable ideal; and that the more promising course will be to develop workable economic integration rather than risk becoming entangled in the obstacles to political unity. If such a shift occurred, the prospects for joining most of the countries of Western Europe in some kind of economic alliance would improve. There might be room, too, in this kind of evolution, for an economic orientation as broad as the Atlantic community, even defined so loosely in geographic terms as to include Japan, the newest member of the OECD. Whether or not any of these developments begin to appear soon, there is also the possibility, once again being aggressively explored, of a closer trading association among Britain, Canada and the United States.

Without attempting to choose among these possible alternatives, one can see that they offer Britain a wide range of opportunities. None is likely to reach the action stage soon enough, however, to provide the major focus for British efforts during the precious months of 1968, or even 1969. In all cases, however, the prerequisite is the same: that Britain achieve a fundamental equilibrium in her overseas accounts. The shock and humiliation of devaluation may now have given Britain the needed consciousness and motivation to attain it.

The contemplated reduction of the British Government's overseas commitments announced on January 16, significant as this is, also will not produce sizeable results soon. But the scheduled withdrawals and reduced overseas expenditures should provide a reasonable prospect for improved net earnings over the years ahead. That is what the Chancellor needs if, in redesigning the role of sterling, he should wish to fund a substantial part of the shorter-term sterling liabilities, those owing to private and public creditors alike.

There are numerous proposals along these lines, including several outlined in the present writer's "Monetary Reform for the World Economy."2 The details are relatively unimportant; the techniques used can be various; it is the objective that matters-namely to recast the role of sterling in the international monetary system. The aim presumably would be to neutralize the volatile portions of the sterling balances while continuing to service and build upon the considerable volume of sterling accounts that would continue to be used as a "vehicle" currency in international payments.

But curtailment of overseas government commitments, and a funding of some of the overseas sterling liabilities, will still go only part way toward the lasting resolution of Britain's problems. Her most elemental need is for a revival of dynamism in the home economy. If she can make a quantum jump to a higher and steeper growth trend and at the same time hold wages and prices to moderate increases, she should be able to maintain and improve upon the initial export advantage arising from the devaluation. That kind of performance in the home economy should, in turn, give British bankers and traders a further impetus to utilize their incomparable experience in helping to bridge the merchandising and financing gaps that occur throughout the confusing network of world trade and world investment. (Their ingenuity, for example, has already been mainly responsible in the last decade for developing the Euro-dollar and other Euro-currency markets.)

Is there reason to believe that Britain has a real chance of doing any or all of these things? No doubt if the potential exists, it has been there all along. Clearly something has been missing. Perhaps it has simply been the stimulus to break out of established routines, to take greater chances and of course at times to take losses. The stimulus could have come from the jolt of beginning membership in the EEC. It might still come that way. But it is possible that devaluation itself and the national sense of a back- to-the-wall struggle may energize the British effort.

The answer to this question will be found in the spirit of the Government itself, in whether it is essentially defensive, punitive, indeed "static," or whether it can give a dynamic, dashing lead to creative innovation. Evidence of this spirit is already beginning to appear, as the initial state of shock dissolves. Ministers are speaking of profits, incentives and opportunity in tones implying a commitment to the motivations of business enterprise. Massive mergers of business and banking firms are under way. Abroad, new risk investments on a large scale are being explored by British firms with large overseas holdings. And four young lady secretaries have initiated a spreading campaign for greater labor effort-"I'm Backing Britain." There is a spirit moving. It is far from universal; it could vanish quickly before the counterforce of management inertia or labor "rulebooks." Hopefully, it will flourish.

In that event, there is much more that the Government can do, both negatively by smoothing some of the rough edges of the constraints that must remain and positively by providing more encouragement and scope for initiative (and for rewards, even if deferred for a time). The zones for action, already visible through the welter of government statements, are the rationalization of union procedures and of employment practices; the stimulation of savings along with a greater diversion of savings into equities; and a broadening of incentives for constructive domestic investment in order to raise productivity and help hold down prices.

So far as labor practices and procedures for determining wages are concerned, the problems caused by craft restrictionism, rising costs and inflationary bias are universal among nations committed to maintaining full employment. But their implications in a world on the move, where nations must also compete successfully if they are to remain viable, have pushed Britain closer than any other leading country to the edge of national disaster. Perhaps, as labor in Britain approaches a middle-class status, it will come to identify its continuing objectives with the maximizing of productivity in the national interest. To say this may be only grasping at straws, however, and such change will in any case be slow to produce major results. Meanwhile, the disciplines exerted by a responsible Labor Government, itself fully aware of the urgencies, must provide the necessary degree of amelioration.

Perhaps it is more realistic to hope that the same redistribution of incomes which might erode the combative and restrictionist "labor class" attitudes toward productivity, profit and growth will become a source of enlarged saving. The missing link, if there is one, may be an inadequacy in the marketing organization needed to reach new potential savers and show them what an array of investment possibilities exists, with varied returns. To be sure, the insurance companies, pension funds, building societies and unit trusts do, along with the banks, form an impressive aggregation of privately motivated facilities for mobilizing savings, but they need to be revitalized by government encouragement. And to whatever extent greater savings can be mobilized to raise Britain from its position at the bottom of the European scale of savings, this will not only aid development but generate a powerful force in support of price stability.

Britain in the last three years has created a number of attractive inducements to physical investment in producing facilities. More is done, to be sure, to encourage investment in the depressed areas; and much is confined to other priorities established in Whitehall. There may also be a place for something analogous to the more generalized "investment credit" which has been so useful in the United States (with one lamentable lapse) over the past five years, and has more than paid for itself through resulting increases in overall taxable income. In any event, due to the buffeting which Britain has suffered in 1966 and 1967, the various inducements to investment have not yet had an adequate opportunity to work.

If the incentives to investment are to have their full effect, some further response may have to be made to the widespread criticism in Britain that the present corporate tax and the Selective Employment Tax, with its various per-head rebates, need revision in order to give greater encouragement to equity-oriented venture capital. Both the comparatively low rate of business reinvestment of earnings, and the surprisingly low proportion of savings that flow into equity issues argue the need for further attention. And since Britain is second only to the United States in the scope and scale of its scientific research, there should be ample opportunities, if the equity funds become available, for any entrepreneur who can bring together new capital, advanced managerial techniques and the new research.

In addition to whatever Britain may do to revitalize her home economy through labor practices, savings and investment, she has a great resource in the skill and adaptability of her people in providing services of finance and trade wherever these are needed throughout the world. And there will be room, too, when the state of siege can be relaxed, to ease the tight restraints that now inhibit the switching of overseas assets from less attractive into more remunerative uses.

Britain's political or military withdrawal from distant areas need not handicap her business relationships there. Other nations have been able, without exercising political or military control, to maintain worldwide networks of trade, investment and cultural relationships in successful competition with systems based on political and military hegemony. Japan is a case in point. Stripped of her military capabilities, she is effectively using her talents throughout East Asia and beyond. It might be argued, moreover, that because Japan was forcibly relieved of the burdens of maintaining a military establishment, she became able to lead the entire world in the rate of her domestic industrial advance, at the same time that she extended her economic relationships abroad. To be sure, Britain cannot finesse entirely the question of military support for political stability in the world; she must also find ways to avoid any implied dependence upon the United States alone to fill the vacuum (as must Japan also). But that is a vast and different problem, worth studying by a new NATO or its successor.

V. IN CONCLUSION

Enough has already happened to suggest that shock therapy may be at work to remake Britain's economy. She may be casting off the premises of a "static economy" which, implicitly embedded in her economic policies, have made her performance in domestic saving and investment, national income and balance of payments the poorest among the leading countries of Europe since the Marshall Plan ended in 1952. If, as various hints now suggest, she can convert her financial crisis into an economic mutation, if by accepting the principles of a "dynamic economy" she can break through into a new stage of expansion, she may in time securely reëstablish balance-of-payments viability.

Although their material resources at home are not abundant, the British people are equipped by their past experience to fill the growing need for a middleman between the expanding resource capabilities of all of Europe and the investment and service requirements of much of the rest of the world. Britain has been relieved of what were becoming unbearable military burdens of empire; she apparently is now prepared to discard the burdensome aspects of providing a reserve currency for the world. She may thus be ready and able to regain the benefits of her comparative advantage as a world trader, a world capital market, a world banker and insurer, a world shipper and a source of talent to develop resources throughout the world. For all this to come about, entry into the Common Market would surely be a useful catalyst; but it may not be essential. What she must have, however, for success in enlarging her role as middleman is a widening scope for freedom in trade and payments throughout the world.

Britain's potentialities are still, to be sure, only dimly discernible. The seriousness of her present position is still partly obscured by a post- devalution spending spree. If she does not succeed, through a draconian austerity, in bringing her foreign outpayments into balance with her receipts over the next two years, the longer range possibilities may never materialize. Moreover, even when her foreign accounts have been brought into balance through a forced contraction, she must create the domestic environment for dynamic change-energizing management where it has been lethargic, and freeing labor where it has been handcuffed by the constraints of obsolete craft protectionism.

If she fails, the consequences will almost certainly be stagnation at home and eventually a turn toward bilateral balancing of trade and payments with each of the major trading nations. The pound sterling, in which about one- third of world trade was still being conducted in 1967, could fade from use even as a "vehicle" currency. The decline of Britain would inevitably jeopardize the effort to multilateralize trade, investment, production and marketing in the world and the continuation of an international monetary structure capable of supporting the multilateral system that has been evolving with such bountiful results since World War II. That is why, wholly apart from diplomatic or political or sentimental considerations, all countries must have a deep interest in the resurgence of a new Britain.

With her experience and her traditions, Britain may find her greatest new opportunities in quietly exporting her economic and financial talents throughout the world. In losing the panoply of Kipling's Empire and the dominating power of Montagu Norman's sterling area, she may have gained an opportunity to replace these with a role of a different kind-helping to fulfill the potentialities of a world being led by the doctrines of Keynes. 1 This is also the title of an article by Walter Guzzardi, Jr., in Fortune for February, which has a remarkably similar approach to much that is discussed here. 2 New York: Harper and Row, 1965, p. 100-110.

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