Was Suez in 1956 the First Financial Crisis of the Twenty-First Century? James M. Boughton The IMF's lending to the four countries directly involved in the 1956 Suez crisis, and particularly to the United Kingdom, raised the institution's profile and established its role in helping member countries cope with international financial crises. N THE past six years, the IMF has Turkey two years later, the accelerating responded to a series of financial crises demands of the coming century on the IMF around the world by providing and began to look daunting. I coordinating large-scale packages of financial assistance while helping the Background affected countries reform their economic In the midst of a whirl of activity, it is easy to policies. When the first of these crises forget history. Nearly forty years before the erupted in Mexico in December 1994, the pre-Christmas speculative attack on the IMF's then Managing Director, Michel Mexican peso, the IMF was drawn into its Camdessus, called it "the first financial crisis first international crisis, one that had many of the twenty-first century." His point was of the same aspects of speed and speculation that the world had changed. The world's that we recognize today as hallmarks of the capital markets were more fully integrated, globalization of financial markets. In this flows of private capital were much bigger sense, did the twenty-first century really and could move more rapidly, and problems begin in 1956? in one part of the world could now have dra- On July 26 of that year, Egypt nationalized matic effects in distant regions. To deal with the Suez Canal Company and unilaterally this new situation, the IMF would have to assumed control of the canal, displacing the respond more rapidly and more forcibly international consortium that had run it for than ever before. When that "tequila crisis" nearly a century. France, Israel, and the was followed by outbreaks across East Asia in United Kingdom almost immediately began 1997, in Russia and Brazil in 1998, and in planning a joint military action to retake 20 Finance & Development / September 2001 ©International Monetary Fund. Not for Redistribution control while seeking to win international ted itself to provide another $738 million support for a diplomatic solution. When "Up until this in credits on a stand-by basis. For Egypt, diplomacy failed, Israel invaded the Sinai point, the IMF France, and Israel, this lending was con- on October 29, and France and the United ventional balance of payments support. It Kingdom used Egypt's counterattack as an had treated the did not push the IMF into new activities, excuse to attack it by air. One week later, and was of interest primarily because of however, Britain undercut the operation current and the political circumstances that precipi- by accepting a United Nations resolution tated it. None of these three countries had for a cease-fire. On December 3, the capital accounts a convertible currency, and speculative British government announced that it financial pressures were unimportant. But would withdraw its troops over the next as essentially the IMF's lending to the United Kingdom few weeks. France and Israel also soon was cut from new cloth, and it had major withdrew, and Egypt reopened the canal separable." implications for the IMF's later role as an under its own control the following April. international crisis manager. Those impli- That this brief flare-up is universally cations stem primarily from the rescue of regarded as a crisis is primarily because of the pound sterling from a speculative the upheavals it engendered in political attack that created the first major financial relations. The economic consequences were more subtle and crisis of the postwar era. temporary and would not by themselves have constituted an international crisis. For the United Kingdom, however, Suez The threat to sterling was also a financial crisis. Throughout 1956 and 1957, the Despite the surplus in the external current account, the Bank United Kingdom had a current account surplus despite the of England faced widespread speculation, during the 1956 disruptions to its international trade, but the value of its cur- crisis, that it would have to abandon the sterling parity, rency came under speculative pressure. The Bank of England which had been set at $2.80 in 1949. Maintaining that rate was forced to deplete its U.S. dollar reserves to defend the was important for several reasons. The government viewed fixed value of the pound sterling against the dollar. Harold $2.80 as appropriate for trade purposes; it feared the infla- Macmillan (Chancellor of the Exchequer and soon to tionary consequences of having to pay expensive dollars for become Prime Minister) and Cameron Cobbold (Governor oil imports while the canal was closed; and it regarded of the Bank of England) put up a brave front in characteriz- exchange rate stability as essential for preserving both the ing the Bank's ability to stave off an attack, but by December sterling area as a preferential trade zone and sterling's the threat of a forced devaluation or float was very real. broader role as a reserve currency. Although the United These events unfolded at a time when the IMF was almost Kingdom had not yet established full external convertibility totally untested in crisis management. From its first financial (it would do so in 1958), its system of capital controls was operations in 1947 to the onset of the Suez crisis, the IMF fragmented and porous, and the pound was widely held as a had lent to member countries only sporadically and in small reserve and investment medium. Since the late 1940s, the amounts (see chart). The concept of stand-by lending sub- Bank of England had sought to maintain a minimum bal- ject to agreed policy conditions was still being developed and ance of $2 billion in official reserves. If they were to fall had been applied in only a few cases. It was not obvious that below that floor, the Bank assumed, this would be inter- the IMF should play any role at all in the resolution of the preted in financial markets as a signal that devaluation or economic or financial difficulties of the countries involved in even floating would have to be seriously considered. Suez. The United Kingdom's first line of defense to protect the Indeed, the United Kingdom did not obviously qualify for reserve floor was intervention in the form of spot purchases IMF assistance in 1956. The IMF's Articles of Agreement of sterling in the foreign exchange market. A second line of prohibit it from lending to finance a "large and sustained" defense was needed. Despite U.S. opposition to the European outflow of capital, which in essence was what the United effort to force Egypt to return control of the canal, Kingdom faced. That provision was intended to preserve the Macmillan hoped to build on the United Kingdom's and his IMF's limited financial resources for lending to promote own "special relationship" with the United States (his mother international trade in goods and services. Moreover, if the was American) to persuade Washington to help him support speculative outflow from sterling was not both large and sus- sterling. If the Americans would not provide bilateral financ- tained, the Bank of England had enough resources of its own ing, Macmillan expected to be able to count on the apolitical and enough access to credit to fend off the outflow without tradition of the IMF to permit the United Kingdom to draw IMF assistance. the modest amounts to which it was virtually entitled. More Nevertheless, the IMF was called upon to help finance the important, though with less than complete logical consis- external payments imbalances of all four combatants. In nine tency, he expected to be able to build on his country's infor- months, it lent $858 million to these countries and commit- mally accepted special status in the IMF—as one of the two ©International Monetary Fund. Not for RedistributionFinance & Development / September 2001 21 major founding countries and the second- could cause "a run on the Monetary Fund, largest member—to draw much larger which might be as serious as a run on ster- amounts and to do so to the fullest possible ling." extent. Success would depend almost The United Kingdom faced a firm deadline entirely on U.S. support. for obtaining approval of a financial support package. On December 4, Macmillan would Seeking U.S. support have to announce that a massive loss of In late September, at the Annual Meetings reserves in November had pushed the bal- of the Boards of Governors of the IMF and ance below the $2 billion floor. Without the World Bank in Washington, Macmillan support, the parity would have to be aban- sounded out his U.S. counterpart, Treasury doned. Humphrey was on a short vacation Secretary George Humphrey, on the and would not return to Washington until prospects for U.S. assistance. Although December 3, the same day that Per Humphrey gave Macmillan no promises, the Jacobsson was to arrive for his first day as chancellor returned home confident that he the IMF's Managing Director. If the pound could count on his American friends to help was to be saved, it would have to be saved James M. Boughton, an him maintain "the strength of sterling." on December 3. Assistant Director in the Macmillan took no further action during Left with no alternative, the British cabi- IMF's Policy Development October, as the Bank of England continued net accepted the second half of the UN res- and Review Department, was to sell off its dollar reserves to maintain the olution and set a deadline of December 22 Historian of the IMF from $2.80 exchange rate and the cabinet contin- for a full troop withdrawal.