Search This Blog

Wednesday, February 10, 2010

A Hostage Problem

On July 26, 1956, Egyptian President Gamal Abdul Nasser, responding to the British and American refusal to finance the proposed Aswan High Dam, nationalized the Suez Canal. On October 29, 1956, the United Kingdom and France, supported by Israel, invaded and, after heavy fighting in both Egypt and the Sinai Peninsula, seized the Canal.

So far, so good. The problem, however, was that the United States had not been consulted and did not approve.

The USA had two major levers.

The first was oil. Following an oil embargo on Britain and France by Saudi Arabia, the United States - then an oil exporting nation - refused to make up the difference. That was uncomfortable but not irresistible.

The second lever was a credible threat to bankrupt the United Kingdom. The United States held a massive position in British bonds as a result of the financing of World War II and funds transferred under the Marshall Plan.

President Eisenhower ordered Treasury Secretary George Humphrey to prepare to sell the bonds. The threat was real and, according to British Chancellor of the Exchequer Harold Macmillan's advice to Prime Minister Anthony Eden, British gold and foreign exchange reserves were insufficient to sustain the enormous devaluation of the pound that would result. The consequence would be an inability to import the food and fuel necessary to support the nation through the coming winter.

Eisenhower's proposition was really simple: we own so much of your debt that we can bankrupt you unless you do as we say.

The British had no choice but to capitulate and the French, with insufficient forces in Egypt to operate on their own, were also forced into a hasty and humiliating departure.

What will be our response if the Chinese, who hold hostage too much of our too large national debt, decide to use Eisenhower's tactic over, say, Taiwan?

If we wish to control our own destiny, then we must get our budget deficit and national debt under control. Starting tomorrow is not too soon.

No comments: