The Economic Diplomacy of the Suez Crisis

Diane B. Kunz, Esq., Diane B. Kunz Esq.

• Publisher: The University of North Carolina Press
• Year: 2000
• Print ISBN: 9780807865583, 9780807819678
• eBook ISBN: 9780807862698
• Topic: Politics & International Relations
• Subtopic: Diplomacy & Treaties
• Index: Politics & International Relations

Diane Kunz describes here how the United States employed economic diplomacy to affect relations among states during the Suez Crisis of 1956–57. Using political and financial archival material from the United States and Great Britain, and drawing from personal interviews with many of the key players, Kunz focuses on how economic diplomacy determined the course of events during the crisis from start to finish. In doing so, she provides both an excellent case study of the role of economic sanctions in international relations and a solid treatment of the American use of such sanctions against a Middle Eastern country.

The crisis was prompted by the Eisenhower administration’s decision not to fund the Aswan High Dam, triggering the takeover of the Suez Canal Company by Egyptian President Gamal Abdel Nasser. Responding to events, the American government imposed economic sanctions against Great Britain, France, Egypt, and Israel, with varying degrees of success.

Because of its weakened financial position and misguided decisions, Kunz says, the government of British Prime Minister Anthony Eden proved most vulnerable to these tactics. Indeed, American economic pressure caused the British government to withdraw its troops ignominiously from Egypt. France, on the other hand, had borrowed sufficiently prior to the crisis to be able to withstand American pressure. For Israel, Kunz says, the threat of sanctions symbolized the Eisenhower administration’s wrath. Israel could forego American funds, but, dependent on the goodwill of a great power for survival, it could not take a stand that would completely alienate the United States. Only Egypt proved immune to financial warfare.

Kunz also illuminates the general diplomacy of the Suez crisis. The American government was determined neither to alienate moderate Arab opinion nor to become too closely intertwined with Israel. As such, this account has significant lessons for American policy.

Originally published in 1991.

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NOTES

ABBREVIATIONS

AW

Dwight D. Eisenhower Papers, Ann Whitman File

B/E

Bank of England

CAB

Cabinet Office

DD

Declassified Documents

EC

Exchange Control

EL

Dwight D. Eisenhower Presidential Library

FO

Foreign Office

FRBNY

Federal Reserve Bank of New York

FRUS

Foreign Relations of the United States, 1955–1957 (citations include volume number followed by document number and page numbers, e.g., FRUS, vol. 17,199:367–79)

G

Governor’s Files

NA

National Archives

NSC

National Security Council

OV

Overseas Finance

PREM

Prime Minister’s Private Office

PRO

Public Record Office

SD

General Records of the Department of State

T

Treasury

TD

General Records of the Department of the Treasury

WHC

Dwight D. Eisenhower Papers, White House Central Files

WHM

White House Memoranda

INTRODUCTION

1. See, e.g., Finer, Dulles over Suez, Love, Suez, and Neff, Warriors at Suez. One of the earliest books written on the Suez crisis, Thomas, Suez, remains the most accurate account of economic diplomacy during the crisis, although it too contains gaps and inaccuracies. Works covering the Suez crisis during the last decade predomi-nandy took the form of biographies of major British leaders, such as James, Anthony Eden; Howard, RAB; and Home, Macmillan, 1894–1956 and Macmillan, 1957–1956. While each of these books adds extensively to our knowledge of the Suez crisis, they present flawed accounts of the American use of its financial clout during 1956–57.

2. This book is based on documents from the 1950s. Consequently the study employs the terminology of the time, most notably the use of the phrase underdeveloped nation.

3. PRO, FO 371/119133, Memorandum by Sir Ivone Kirkpatrick, September 7, 1956.

4. Samuel Johnson, The Adventurer (London, 1753).

CHAPTER ONE

1. Kennan, American Diplomacy (Chicago, 1950,1984), p. 50.

2. Between 1941 and 1945 Britain received a total of £3.8 billion ($15.3 billion) in lend-lease aid (net of its contribution in “reverse lend-lease”—those services and goods Britain rendered to the United States). Concurrently with the execution of the U.S. Agreement, Britain agreed to pay $650 million (£161.29 million) in final settlement of its lend-lease obligation.

3. Pollard, Development of the British Economy, p. 219. In 1945 £1 equaled $403; therefore, British sterling debts equaled $13.52 billion.

4. The sterling area was formed after Britain departed from the gold standard in 1931. Originally it consisted of a loose association of countries that agreed to link their currency with sterling rather than gold. Once World War II began, the system became regularized with the acceptance of British exchange control by those countries wishing to remain in the sterling area. In the postwar period the sterling area (by then formally known as the “scheduled territories”) consisted of Britain, its empire, and most of the Commonwealth (Canada never was a member; its currency was always linked to the dollar). The sterling area steadily shrank—by 1979, when exchange control was ended, it consisted only of Britain, Northern Ireland, the Channel Islands, and Gibraltar.

5. B/E, OV 31/119, J. M. Keynes, “The Problem of Our External Finance in the Transition,” June 12,1944.

6. Morgan, Labour in Power, p. 144.

7. See, e.g., John Morton Blum, V Was for Victory (New York, 1976), pp. 309–13.

8. E. M. Bernstein, interview for “An Ocean Apart,” Public Broadcasting Network, May 1988.

9. See, e.g., Acheson, Present at the Creation, p. 122.

10. The “Ottawa system” referred to the network of trade protection and tariffs fashioned in 1932 by Britain and members of the empire and Commonwealth in Ottawa, Canada. Among other things, it accorded “imperial preference” (i.e., lower tariffs) to products produced in British empire and Commonwealth countries.

11. A currency that is not convertible may not be freely exchanged for another currency. During the Second World War, the British government enacted regulations that prevented holders of pounds from exchanging them for dollars without government permission. Authorization was granted only for products necessary for the war effort that could not be purchased within the sterling area. This procedure severely limited the amount of goods American companies could sell in Britain or in the rest of the sterling area because Commonwealth and empire governments had enacted comparable regulations that allowed London to control their dollar reserves through the so-called dollar pool.

12. Simultaneously the British government was granted a loan of Canadian $1.25 billion (U.S. $1.159 billion) on virtually the same terms and conditions. See Cairn-cross, Tears of Recovery, pp. 115–16.

13. The text of the relevant provisions of the U.S. Agreement is in Appendix A.

14. FRBNY, C261, England 1940–46, Keynes to Sproul, December 21,1945.

15. Morgan, Labour in Power, p. 149.

16. Edmonds, Setting the Mould, p. 102.

17. During the interwar period, the American refusal to cancel World War I loans to European nations earned the government the sobriquet “Uncle Shylock.”

18. The importance of American anticolonialist sentiment that influenced people from Franklin Roosevelt down should not be underestimated. As Life magazine editorialized in an “Open Letter to the People of England,” “One thing we are sure we are not fighting for is to hold the British Empire together.” The best study of American wartime attitudes toward the British Empire is found in Louis, Imperialism at Bay. The above quotation is found on p. 198.

19. For example, nearly one-half of the total United States prewar trade was with countries of the sterling area where Britain obviously played a dominant role.

20. See, e.g., Gardner, Sterling-Dollar Diplomacy, pp. T 236–54.

21. The Tehran Conference Declaration of 1943 provided that the United States, the Soviet Union, and Britain would withdraw all troops from Iran (previously joindy occupied by American, Soviet, and British troops) within six months of the end of the war. American troops left in January, the British forces on March 2,1946. Soviet soldiers remained until a combination of an American show of force and Iranian appeals to the United Nations led to their removal at the end of March.

22. Cairncross, Tears of Recovery, pp. 131–32.

23. Ibid., pp. 139–40.

24. Concerning the 1949 devaluation, see Ibid., pp. 165–211, and Morgan, Labour in Power, pp. 379–88.

25. See, e.g., PRO, T 236/3913, “Note of a Meeting on the Waiver Clause,” February 21,1950; T 236/3916, M. Stevenson, “The Waiver—1952,” October 16,1952; and T 236/3917, O. Franks to Butler, November 15, 1952.

26. The best source on this subject is Kaufman, Trade and Aid.

27. See, e.g., Ambrose: Eisenhower: Soldier, p. 542, where the author states, “The right wing never came out of its room to meet him halfway. But he never stopped trying to educate the Old Guard.”

28. See, e.g., the president’s diary entry of April 1,1953: “The happenings of the past few weeks emphasize again how difficult it is for a party that has been in the minority for twenty years to take up the burdens of responsibility for the operation of the government… . This is especially true because of the fact that for so long a time the Republican Party has been opposed to, and often a deadly enemy of, the individual in the White House” (EL, AW, Eisenhower Diaries, box 9).

29. The Bricker amendment, sponsored by Senator John Bricker of Ohio, grew out of the senator’s anger at the Yalta agreements and American membership in the United Nations. This proposed constitutional amendment, designed to limit the president’s treaty-making power, stated that “a treaty shall become effective as internal law in the United States only through legislation which would be valid in the absence of a treaty.” Among other problems, no one knew what the ramifications of such an amendment would be. Eisenhower spent huge amounts of his time fighting the Bricker amendment through 1956, when it was finally buried.

30. Eisenhower also coddled conservatives over internal security issues such as the instituting of loyalty oaths and the tolerance of Senator Joseph McCarthy’s behavior.

31. See Ambrose, Eisenhower: The President, pp. 78–79,155–56 and 252; and Kaufman, Trade and Aid, pp. 25–26, 223–24,115–20,122–29.

32. In order to pave the way toward the goal of convertibility, the Eisenhower administration sponsored two major financial studies. In July 1953, Lewis Douglas, formerly Roosevelt’s director of the budget and ambassador to Britain, delivered the first one, on the subject of British economic problems. Douglas’s main conclusion was that the economic health of Britain and the rest of the sterling area significandy affected American prosperity. The United States had a vested interest in Britain’s return to convertibility, which could happen only if the United States contributed by expanding trade. Clarence Randall, former chief executive officer of Inland Steel Corporation, chaired the Randall Commission, whose report, delivered in January 1954, was meant to convince Congress that American aid to Europe was on the right track. Thus while the report echoed Douglas by stating that the United States must lower its tariffs, it also insisted that such action should not be unilateral. See FRBNY, Sproul/Cobbold Correspondence, Eisenhower to Randall transmitting report of Lewis Douglas, August 24, 1953; B/E, OV 31/49, “The Report of the Randall Commission,” January 29,1954.

33. “Butskellism” was derived from the combination of the names of R. A. Butler, Conservative chancellor of the Exchequer from 1951 to 1955, and his Labour counterpart and later Labour leader, Hugh Gaitskell. It represented a commitment by both parties to the welfare state and to the continued nationalization of basic British industries and services such as the health system, and the railroad, telephone, and coal industries.

34. The percentage of British imperial trade grew dramatically in the postwar period. Immediately prior to the war the empire had accounted for 39.5 percent of Britain’s imports and 49 percent of its exports. After the war the proportion was much greater: in the 1946–49 period the respective percentages were 48 percent and 57.5 percent, and for the 1950–54 period, 49 percent and 54 percent. Porter, The Lion’s Share, p. 320.

35. The best account of ROBOT is found in Cairncross, Years of Recovery, pp. 234–71.

36. These terms refer to the following repetitive cycle that characterized the British economy in the fifties and sixties: When British business was booming, inflation would increase. This jump would frighten foreign investors who would dump sterling in anticipation of a devaluation. In order to attract them back, the Bank of England would raise the bank (base) rate. While foreign deposits would return, the increased cost of money would squelch internal investment and often lead to a recession....

Table of contents

• Cover Page
• THE ECONOMIC DIPLOMACY OF THE SUEZ CRISIS
• Copyright Page
• Dedication
• CONTENTS
• ILLUSTRATIONS
• ACKNOWLEDGMENTS
• INTRODUCTION THE SINEWS OF WAR!
• ONE SPECIAL RELATIONSHIPS 1945–1954
• TWO PLAYING THE GAME
• THREE THE STICK, NOT THE CARROT
• FOUR SAVING THE NATION
• FIVE A FATAL MISTAKE
• SIX USING FORCE
• SEVEN THE AMERICAN WAY
• EIGHT CONCLUSION: THE IMPORTANCE OF HAVING MONEY
• APPENDIX A THE ANGLO-AMERICAN FINANCIAL AGREEMENT
• APPENDIX B THE TRIPARTITE DECLARATION
• APPENDIX C INFORMATION CONCERNING THE SUPPLY OF MIDDLE EASTERN OIL IN 1956
• APPENDIX D PRINCIPAL ASPECTS OF THE ANGLO-AMERICAN OFFERS TO FUND THE ASWAN HIGH DAM
• APPENDIX E STERLING ASSETS
• NOTES
• SELECT BIBLIOGRAPHY
• INDEX