US Dollar Diplomacy Forced British Suez Withdrawal
Translated & summarized from Globes by baba
Seventy years after the Suez War, U.S. financial pressure forced Britain's withdrawal from Egypt. On December 3, 1956, Britain sought dollar aid to defend the pound sterling, which was rapidly depleting reserves. The U.S. conditioned financial assistance on a British troop withdrawal, announced the same day. The IMF approved a $1.3 billion package on December 10, stabilizing the pound and allowing Britain to save face.
The story in 6 lines · by baba
- US dollar aid was conditioned on Britain's withdrawal from Egypt during the Suez Crisis.
- Britain's reserves fell below $2 billion by November 1956 due to defending the pound.
- The IMF approved a $1.3 billion aid package for Britain on December 10, 1956.
- The U.S. linked financial assistance to a visible British and French troop withdrawal.
- Britain announced its troop withdrawal from Egypt on December 3, 1956.
- Israel, unlike Britain, had more time to negotiate its withdrawal from Sinai.
Seventy years after the Suez War, newly revealed details highlight how U.S. financial pressure, specifically the threat of withholding dollar support, compelled Britain to withdraw its troops from Egypt. On December 3, 1956, British diplomats met with U.S. Treasury Secretary George Humphrey to request dollar aid to defend the pound sterling (GBP). Humphrey initially resisted a large bailout but then suggested a substantial sum to "prove to the world beyond any doubt" the pound's stability. On the same day, London announced its troop withdrawal from Egypt, ending a month-long military campaign that had begun in November.
The crisis stemmed from Britain's commitment to maintaining the pound's exchange rate at $2.80 to the pound, a rate set in 1949 as part of the Bretton Woods system. By late 1956, Britain's gold and dollar reserves were dwindling rapidly due to market pressure, exacerbated by the Suez Canal nationalization and subsequent conflict. By the end of November, reserves fell below the critical $2 billion threshold, a figure deliberately obscured by financial maneuvers. Economists Adam Klug and Gregor Smith estimate the actual loss was closer to $400 million in November alone.
Britain faced a dilemma: devaluing the pound would have severe economic and political consequences, potentially damaging the Sterling Area, the Commonwealth, and international trade. Governor of the Bank of England Cameron Cobbold warned Chancellor Harold Macmillan of these risks. Meanwhile, U.S. President Dwight Eisenhower was angered by Britain and France's unilateral military action and initially refused to provide financial assistance, suggesting they "stew in their own oil."
However, the U.S. also had strategic interests in preventing a pound collapse, which could destabilize NATO and the wider Sterling Area. Secret communications revealed that the U.S. saw the impending British withdrawal as a necessary "fig leaf" for London. A deal was struck: dollar aid and oil supply guarantees in exchange for a visible British and French troop withdrawal, presented as London's decision.
On December 10, the International Monetary Fund (IMF), heavily influenced by the U.S., approved a $1.3 billion aid package for Britain, with $561 million disbursed immediately. This infusion stabilized the pound, though the outflow of dollars didn't cease instantly. Britain ultimately did not utilize the remaining credit line, as the visible reserve levels were restored above $2 billion by the end of December, halting the dollar flight in early 1957.
The article contrasts this with Israel's situation, which, despite being much poorer, had more time to negotiate its withdrawal from Sinai. Israel's currency was not an international reserve currency, and its financial dependence was diversified, including private donations and German reparations, making it less vulnerable to immediate dollar flight compared to Britain's reliance on maintaining the pound's international standing.