Friday, June 26, 2009

Unintended Consequences

The 1956 Suez Crisis is one of the most important and controversial events in British history since the Second World War. It has come to be regarded as the end of Britain's role as one of the world powers and as the beginning of the end for the British Empire.

The Suez Canal was opened in 1869, having been financed by the French and Egyptian governments and technically the area surrounding the canal proper was sovereign Egyptian territory. The canal, however, was strategically important to the British and hence to the other European powers.

To Britain, the canal was the ocean link with her colonies in India, the Far East, Australia, and New Zealand.

In 1875, the British government took de facto control of the canal proper, finance and operation. The 1888 Convention of Constantinople declared the canal a neutral zone under British protection.

At the outset of the 1950s, Great Britain was the predominant foreign power in the Middle East. The area’s vast oil reserves prompted Britain to consolidate and strengthen its position there. However, throughout 1955/56 Egypt pursued a number of policies that would frustrate British aims throughout the Middle East, and resulted in increasing hostility between Britain and Egypt.

In the summer of 1956, Egypt nationalized the Suez Canal.

Britain decided to take military intervention against Egypt, however direct action ran the risk of angering Washington and damaging Anglo-Arab relations. Therefore Britain concluded a secret military pact with France and Israel to regain control of the Canal.

At the end of October, British/French/Israeli forces seized control of the Canal.

The US attempted to force a cease-fire on Britain, Israel, and France with a UN Security Council resolution. Britain and France, as permanent members of the Council, vetoed these resolutions.

In response, US President Eisenhower ordered his Secretary of the Treasury to prepare to sell part of the US Government's Sterling Bond holdings. The US held these bonds in part to aid post war Britain’s economy and as partial payment of Britain’s enormous World War II debt to the US Government, American corporations, and individuals.

Britain's Chancellor of the Exchequer advised the Prime Minister that the United States was fully prepared to carry out this threat. He also warned his Prime Minister that Britain's foreign exchange reserves simply could not sustain a devaluation of the Pound that would come after the United States' actions; and that within weeks of such a move, the country would be unable to import the food and energy supplies needed simply to sustain the population on the islands.

In concert with US actions Saudi Arabia started an oil embargo against Britain and France. The U.S. refused to fill the gap until Britain and France agreed to a rapid withdrawal. The other NATO members refused to sell oil they received from Arab nations to Britain or France.

On November 6th, 1956 the British Prime Minister announced a cease fire, warning neither France nor Israel beforehand.

Fast forward to 2009.

America’s Achilles heel is its astonishing level of debt. China, Japan and Russia are the three largest holders of its treasuries and bonds.

Will it be the situation in North Korea, Iraq, Iran, Afganistan, or… ?

And when it comes, will America fold like the British did? Will the USA capitulate to Chinese or Russian foreign policy threats?

Or will a US President, eager to find a way to default on America’s insurmountable debt, provoke an incident to which America will opt to eat the tremendous financial pain and hardship (ie. plunging dollar, massive inflation) the selling of the treasuries would initiate?

History is rife with such unexpected twists and turns. And America finds itself in an unprecedented financial position.

War ended the Depression created by the 1929 crash. It doesn't take a Machiavellian mind to see the possibilities here.

In yesterday's profile of the MacLeans magazine article, the headline was "the U.S. is about to go broke and they’ll take us down with them."

Unfortunately that sentiment is all too true.


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