Late last fall, Chancellor of the Exchequer Denis Healey of Britain and William Simon, the conservative U.S. Treasury secretary, were locked in a backstage battle over a $3.9 billion loan that Britain thought it desperately needed. London finally got the money from the International Monetary Fund, but it took the intervention of the Secretary of State, Henry Kissinger, to get the funds on terms that Britain's Labor government thought it could afford.
Five months later, it now appears that the titanic struggle need never have happened. Black gold from the North Sea has completely transformed the nation's international balance sheet. Big debts are being turned into surpluses and some monetary authorities here are privately urging that Britain pass up the unused half, or more, of the loan that was won with so much effort.
Top figures in Prime Minister James Callaghan's government dismiss such heady talk as "premature."
"When you have gone to so much trouble to get the money," said one key negotiator," you're a fool not to keep and use it." But even this official acknowledges that if Britain stays on its present course, if the new bulge of black ink in the foreign accounts continues to swell. He might take a different view at the end of the year. By then Britain will have drawn about $2 billion of the loan and could forego the remaining $1.9 billion.
This dramatic turn in Britain's fortunes does not reflect any wise new government policy. It does not mean that British business or working habits have been magically transformed or even that there is any greater mastery here over inflation. The change has come about purely and simply because of the existence of North Sea oil and an exploitation timetable that is bringing the stuff ashore in ever-growing quantities.
To measure the importance of oil for Britain's global balance sheet, consider these figures: Last year, the nation spent on imported goods, tourism abroad and other foreign outlays nearly $2.5 billion more than it earned. That was the deficit on the current account. Oil imports to power industry, run cars and hear homes was the whole story and then some. Britain's net import bill for fuel last year was a huge $6.8 billion.
So far through April this year the overall current account has swung into a surplus of $217 million, implying a balance of $1 billion for the year as a whole. As British oil replaced crude from Saudi Arabia, the fuel import bill for the three months stood at $1.2 billion. This suggests an oil deficit for the year of $4.8 billion, some $2 billion less than last year. In fact, it should be well under this because the British oil is coming home at an increasing pace.
That, moreover, is a continuing trend. No matter how Britain's industrial exporters perform, oil production is to climb steadily until about 1982. Late in 1979, Britain's fuel deficit is scheduled to disappear and the nation plans to export crude in the 1980s. Barring a complete collapse of British industry, the nation will be racking up big surpluses in its dealings abroad.
The same banks, multinational corporations and oil governments that drove the pound down sharply last year have finally awakened to a startling change. They have been pouring money into British banks instead of pulling it out. Reserves of foreign currencies here have leaped from $4.1 billion in December to $10.1 billion in April.
The Bank of England, which ultimately receives the foreign currency, could have played it differently. Instead of building reserves, it might have let the price of the pound rise against other currencies. Indeed, a more expensive pound would cut the cost of imports and thereby slash living costs for the man in the street.
The IMF, which gave Britain the big loan, is said to be against such a plan, however. It reportedly fears that the pound, now about $1.72, is too high for the health of Britain's sluggish exporters. The Fund is said to want an even lower rate to keep Britain's inefficient manufacturers competitive.
Some commentators here, however, note that Britain's exporters did not take advantage of the falling pound last year to cut their prices abroad.Instead they pocketed windfall profits in foreign currencies. So, the argument runs, a rising pound now would not hurt exports but only cut back on the windfall profits.
The central point, however, is this: Six months ago, it would have been unthinkable that Britons could debate letting the pound rise. The big IMF loan was secured to check a drastic fall in confidece and sickening plunge in the pound.
Despite the improved international balance sheet and the mounting flow of oil, nothing fundamental here has changed. Britain still suffers, along with Italy, from the worst inflation in the industralized world. For the last three months, consumer prices have averaged 16.5 per cent more than a year ago and unemployement hovers near a postwar high.
The striking improved payments balance and the stronger pound that comes with it (a strenght that is threatened by the inflation rate) could give the government more freedom of action. If Callaghan and Healey want to cut taxes or enlarge spending to stimulate the economy, they could do so without fear that Britain would be back in the hands of its creditors.